Operator:

Ladies and gentlemen, thank you for standing by and welcome to Teledyne's Second Quarter Earnings Call. [Operator Instructions] 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 VanWees. Please go ahead, sir.

Robert Mehrabian:

Thank you, Jason, and good morning, and thank you for joining our earnings call. In the second quarter, Teledyne achieved all-time record free cash flow allowing us to deploy approximately $852 million through July on debt repayment, acquisitions and stock repurchases. Non-GAAP operating margin increased from last year and increased in each of our three 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 markets, such as industrial automation and electronic test and measurement. Nevertheless, strong defense-related sales at Teledyne FLIR 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 second 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 third consecutive quarter and we ended the period with record backlog. Therefore, we're reasonably confident that quarterly sales will again increase sequentially and with a return to year-over-year sales growth in the second half of 2024. Finally, even with the significant capital deployment in the second quarter, 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 would now turn the call to Edwin who will further comment on the performance of our four segments.

Robert Mehrabian:

Thank you, Edwin. In conclusion, our second 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 remain strong and is supported by our record backlog. 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 billion authorization. I will now turn the call over to Steve.

Robert Mehrabian:

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

Jim Ricchiuti:

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.

Jim Ricchiuti:

Got it. That's helpful, Robert. If we think about the backlog, but 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? And maybe related, what kind of expectations do you have for the short cycle business in the back half? Thank you.

Jim Ricchiuti:

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

Operator:

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

Robert Mehrabian:

Good morning, Andrew.

Robert Mehrabian:

Yes. About that. Not to be picky, but we have 9.9%, which is very close to your 10%. But that's also tailored to cities there. In our test and measurement as you know, Andrew, we have two businesses. One is the oscilloscope business and the other one is our protocol business, which are basically rules for communication between devices and devices on the cloud. 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 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 CNM being weak, partially because our marine is very strong and our environmental businesses are doing okay. So I don't know whether that answers your question fully or not.

Robert Mehrabian:

Two areas. First 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. They are doing really well. 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. 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.

Robert Mehrabian:

For sure.

Conor Walters:

Hi, guys. Thanks so much for taking my questions. Just to start off, any updates of 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 billion 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?

Conor Walters:

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 defense going forward? And any divergence within the exposure and A&D electronics and engineered versus where you are in digital imaging?

Conor Walters:

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

Operator:

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

Robert Mehrabian:

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 partially because comps 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.

Robert Mehrabian:

I think our expectations right now are that they'd be relatively flat, maybe a little better in the second half. 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 bath water 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 and I think flat would be a good word with Q4 picking up.

Robert Mehrabian:

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.

Operator:

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

Robert Mehrabian:

Good morning, Guy.

Robert Mehrabian:

Well, Guy, we think because our free cash flow was so strong in the first 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 million in October time frame. Other than that, our payments start in 2026. 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 two as we go forward right now because of our very serious efforts in 80/20 and ability to generate cash. We think that we're in a really good situation. We just renewed our line of credit for another five years. We haven't touched it. We have about $1.2 billion 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. Right now, focused on buying back stock and looking at the acquisitions as well.

Robert Mehrabian:

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. It's pretty healthy for us. It'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. But if you look at the whole portfolio while margins went down in our DALSA 2B 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.

Robert Mehrabian:

Thank you.

Rob Jamieson:

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

Rob Jamieson:

Perfect. That's helpful. I was actually going to ask about that next. And look, I know this is a pretty small part of your business, but I just wanted to ask a little bit more on the oscilloscope within instrumentation and test and measurement. Just one of your competitors this morning cutting their outlook on delayed R&D spend and government and China related spend. Just curious if there's anything in the 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.

Rob Jamieson:

Absolutely. No, thank you for that. I appreciate you all taking my questions.

Operator:

We have one more in queue. [Operator Instructions] We're going now to Jordan Lyonnais from Bank of America. Go ahead, please.

Robert Mehrabian:

I don't see that impacting as much. We supply product to their customers. I don't want to mention the name, but this is a large customer and this is a U.S. customer and they use ASML equipment, which uses a critical part that we make in our MEMS factories. 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 million, $25 million business, but very profitable.

Robert Mehrabian:

For sure.

Robert Mehrabian:

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

Operator:

Absolutely, ladies and gentlemen. A recorded replay of this conference call be available from today at 10:00 a.m. Pacific through August 24 of this year 2024 at midnight. To access the replay from domestic areas call 866-207-1041. Enter the access code 562-3764. International callers use 402-970-0847 and the same access code, 562-3764. Once again replay available from 10:00 a.m. Pacific today through August 24. Domestic callers use 866-207-1041. International callers use 402-970-0847 and the access code for either is 562-3764. That does conclude your conference call for today. We do thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the Teledyne Q1 2024 Earnings Call. [Operator Instructions] And as a reminder, this conference call is being recorded.

Jason VanWees:

All right. Thank you, and good morning, everyone. This is Jason VanWees, Vice Chairman. I'd like to welcome everyone to Teledyne's First Quarter 2024 Earnings Release Conference Call. We released our earnings earlier this morning before the market opening. Joining me today are Teledyne's Executive Chairman, Robert Mehrabian; CEO, Edwin Roks; President and COO, George Bobb; SVP and CFO, Stephen Blackwood; and Melanie Cibik, EVP General Counsel, Chief Compliance Officer and Secretary.

George Bobb:

Thanks, Edwin. The instrumentation segment consists of our marine, environmental and test and measurement businesses, which contributed a little over 24% of sales. So the total segment, overall first quarter sales decreased 0.9% versus last year. Sales of marine instruments increased 15.3% in the quarter, primarily due to both strong offshore energy and subsea defense sales. Sales of environmental instruments decreased 5.8% with greater sales of processed gas emission monitoring systems. In gas and flame safety analyzers, more than offset by lower sales of drug discovery and laboratory [indiscernible].

Robert Mehrabian:

Thanks, George. In conclusion, orders have been strong for two consecutive quarters with the increase almost entirely due to our longer cycle businesses such as defense and energy. However, given the nature of these businesses, converting much of the greater backlog to sales will not begin until the second half of 2024. At the same time, the pace of orders in our short-cycle instrumentation and imaging businesses did have a near-term sales impact in the first quarter and likely will continue to impact total sales in the second quarter of 2024.

Stephen Blackwood:

Robert, and good morning. I'll first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our second quarter and full year 2024 outlook. In the first quarter, cash flow from operating activities was $291 million compared with $203 million in 2023. Free cash flow, that is cash from operating activities less capital expenditures was $275.1 million in the first quarter 2024 compared with $178.6 million in 2023.

Operator:

[Operator Instructions]

James Ricchiuti:

First question, just given the weakness that you're seeing in some of the higher-margin areas of the short-cycle business. I wonder how you're thinking about gross margins over the next couple of quarters.

James Ricchiuti:

All right. Robert, with the shift in and capital allocation. I'm wondering what does this really imply just in terms of the M&A pipeline? Are you still seeing more opportunities for the smaller deals as opposed to the larger M&A. Is that a fair way to characterize the environment right now?

James Ricchiuti:

It helps. I mean, in the past, it was more recently, you've talked about valuations still being a bit on the risk side, do you see -- as you look at the pipeline for some of the larger M&A, have you seen any change in terms of the prices out there that it's going to take to do some of these larger deals?

Operator:

Our next question is going to come from Greg Konrad with Jefferies.

Robert Mehrabian:

Well, two things. First, in the 25 years or so -- we've only had this occasion in 4 earnings call -- So almost 100 earnings calls and releases. We've experienced this 4x, 4%. So it's not something that happens very frequently. The flip side of it is that the economy and the markets are not quite predictable. Some parts of the economy are doing well. Like our marine businesses are devising the ball out of the park.

Greg Konrad:

And then -- I appreciate that. And maybe just kind of a follow-up to that. I mean, just thinking back to what Teledyne did out of the oil and gas downturn and there was the sequester before that and impacted Defense. I mean if I remember back, I mean you took pretty aggressive actions, and we saw with margins and growth out of those two downturns. I mean is there similar actions that you're undertaking on the short cycle side, does that offer opportunity maybe to examine the margins where you have an even better kind of trajectory coming out of market recovery?

Joseph Giordano:

Maybe I'll start on [indiscernible] as well. Just curious on the timing of this, right? Because if you look at some of the pure players within vision they had huge declines last year and you guys did okay relative to them last year. And now this year, it seems like we may yet to report largely, but it sounds like they're going to be sequentially improving offload levels starting right now. And it seems like now is when you guys are starting to see declines. So I'm just curious your thoughts on that timing mismatch is because it's pretty short cycle stuff.

Robert Mehrabian:

Well, I mean you're right in one respect. And I'll kind of paraphrase, but it is that the estimating the short cycle businesses actually always been inherently challenging. The flip side is the part that you mentioned, we have a lot of businesses, et cetera. That part is actually a help to us rather than a hindrance because it opens up the platform from which you can make acquisitions. And that is true and it will remain true. So we will accelerate that. The only we don't want to do is make stupid acquisitions with very high prices that are not going to be accretive. But the acquisitions we will do -- we had a larger platform to do that with.

Andrew Buscaglia:

So I wanted to get a sense of how much this guidance is really derisked. Maybe number one, are you assuming buybacks in the guidance. And then secondly, why should we have confidence given the low visibility that there's not another step down here in some of the shorter-cycle areas?

Robert Mehrabian:

Sure. First, let's start with the machine vision specifically. Approximately $600 million in 2023. We projecting a decline of about $120 million of debt. So -- the reason it's affecting other things is that the highest margin businesses that we have in digital imaging. And overall, there are -- when you put the two parts together, which is DALSA e2v, [indiscernible] and FLIR, our total revenue there is going to be down about by year-end, about 1.5%. So it's not a big number, right? 1.5% but that's 1.5% with something like over $2.1 billion. So It's meaningful only because the top line $2.1 billion is significant. And it's our highest margin business. By year-end, we're projecting that basically, the declines would be 1.5% overall. With FlIR up and DALSA e2v down because of that. I don't know if that answers your question. The numbers when you look at them look large, but in retrospect, it's not huge, it's 1.5% of the total.

Robert Mehrabian:

Well, the only other one that I would say is out of favor. I wouldn't call it out of favor. I would say it's decline. It's test and measurement. Test and measurement is the oscilloscopes and protocol solutions that we have. Last year, we had $340 million of revenue there. We expect right now that in January, we thought it remained flat. Now we expecting it to go down about 10%. So that's $30 million in revenue.

Robert Mehrabian:

Thank you very much. Great question. The supply chain improved in 2023 significantly versus 2022. It has improved further this year. Just to give you exact number, we -- when we buy from brokers, we pay higher percentages of price. Last year in the first quarter, we bought about $10 billion for electronic buyers broker. This year, first quarter, we only bought a little over $2 million. So I think there's been significant improvement.

Operator:

Our next question is going to come from Noah Poponak from Goldman Sachs.

Robert Mehrabian:

Right now, we're anticipating that it will be flat only because -- the answer is yes, only because we don't think our -- where we have really good backlog, it's got to kick in until the third quarter. The decline about, 4.5% from last year year-over-year in second quarter, yes.

Robert Mehrabian:

I think primarily, it's what we have in the long cycle, the majority of that recovery is in what we have in our back maybe 3.5% to 4% improvement in revenue in the second half. There is a little bit of positivity in some of our short type of businesses only because our larger customers or platforms on which we serve like semiconductors. The data shows that it's better than it was last year and improving its up. So we have a little of that in mind. That -- so I think that's there but we're not counting on industrial automation, other things to improve significantly because frankly, we have no visibility.

Robert Mehrabian:

Yes. What happens in that business is that, as you well know, we're obligated to do [indiscernible] accounting. As you estimate your cost and completion timing. When went back and looked pretty hard, we saw that some of the costs were higher than we had anticipated.

Noah Poponak:

Do you know the size of in front of you guys there on how much of a markdown you took in the quarter?

Noah Poponak:

Okay.

Noah Poponak:

Got it. That's helpful. That's helpful. Last one, I guess, given how much you've now delevered balance sheet, net debt-to-EBITDA post FLIR integration. You're still going to have pretty healthy free cash flow despite tweaks you're making here today. If you're coming out with a share repurchase, I guess the number you're talking about is kind of small relative to your forward annual free cash flow generation, how much balance sheet firepower you have if you were to take leverage a little higher, a little bit of like if you're going to layup, layup type of thing.

Robert Mehrabian:

Well, two ways. First, we'll put out the case about our authorization. And if you look at that, we have authorization to go from what we said was $200 million to $250 million to $300 million. We can go up to $1.25 billion in buybacks.

Robert Mehrabian:

Thank you very much. We would like now to conclude the conference operator, I will now ask Jason to do so.

Operator:

As we mentioned, this conference has been recorded for replay, which will be available for one month starting at 10:00 a.m. Pacific Time today and ending May 24, 2024 midnight. To access and listen to the replay at any time, you can call (866) 207-1041 and use access code 832-7266 International callers, you can use the number (402) 970-0847 and again, for domestic, that is (866) 207-1041 and international (402) 970-0847 and the access code to use is 832-7266. And that does conclude your conference call for today. We do thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.

Operator:

Ladies and gentlemen, good morning, thank you for standing by. Welcome to the Teledyne Fourth Quarter Earnings Call. [Operator Instructions]. As a reminder, today's conference is being recorded. At this time, it's my pleasure to turn the conference over to our host, Mr. Jason VanWees. Please go ahead.

Robert Mehrabian :

Thank you, Jason, and good morning, and thank you for joining our earnings call. In the fourth quarter, we achieved all-time record sales and GAAP and non-GAAP earnings per share. Sales increased primarily due to the performance of our Marine medical and aerospace businesses, which were more than able to compensate for the previously announced headwind in the industrial automation and laboratory instrumentation market. Furthermore, Overall, record orders exceeded sales in every business segment but were particularly strong in our Marine and Defense businesses. Leverage declined further to 1.9% and our balance sheet remains healthy. Finally, we continue to acquire complementary businesses, as shown by the acquisition of Zeno Networks in the fourth quarter. Compared with last year, fourth quarter and full year non-GAAP operating margin increased 27 and 57 basis points, respectively. Our broad-based strength in orders was encouraging, especially in the uncertain global macro environment today. Nevertheless, it's worth noting that most of the increase in orders was in our backlog-driven longer-cycle businesses. So converting the orders to sales will take a little time. In terms of 2024 outlook, we, therefore, think the quarterly sales and earnings ramp will be a bit greater than in recent years. So while we see annual 2024 sales growth of about 4%, we believe that typically seasonally low first quarter will be slightly under $1.4 billion or roughly flat with last year. I will now turn the call over to Edwin and George, who will further comment on the performance of our 4 business segments.

George Bobb :

Thanks, Evan. The instrumentation segment consists of our Marine, test and measurement and environmental businesses, which contributed a little over 23% of sales. For the total segment, overall fourth quarter sales increased 2.8% versus last year. Sales of marine instruments increased 14.7% in the quarter, primarily due to strong offshore energy sales, but also continued growth in global defense and ocean science markets. Sales of electronic test and measurement systems, which include oscilloscopes, digitizers and protocol analyzers were flat year-over-year. We continue to see some softness in sales of analyzers for electronic storage and data center applications. But this was largely offset by continued strong sales of oscilloscopes and a small amount of incremental sales from the Zeno acquisition. Sales of environmental instruments decreased 7.3% and with greater sales of air quality and gas and flame safety analyzers more than offset by lower sales of drug discovery and laboratory instruments. Overall, Instrumentation segment operating profit increased over 14% in the fourth quarter, with GAAP operating margin increasing 284 basis points to 27.1%, and 278 basis points on a non-GAAP basis to 28.1%, both all-time records for the segments. In the Aerospace and Defense Electronics segment, which represents 13% of Teledyne sales, Fourth quarter sales increased 3.4%, primarily driven by growth of commercial aerospace products. GAAP and non-GAAP segment operating profit decreased approximately 5% year-over-year primarily due to a tough comparison with last year's all-time record segment margin. For the Engineered Systems segment, which contributes 8% to overall sales, fourth quarter revenue decreased 3.8%. But operating profit increased with margin up 325 basis points. I will now pass the call back to Robert.

Steve Blackwood :

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 first quarter and full year 2024 outlook. In the fourth quarter, cash flow from operating activities was $164.4 million compared with $237.7 million in 2022. Free cash flow, that is cash from operating activities less capital expenditures was $124.2 million in the fourth quarter of 2023 compared with $203.6 million in 2022. Cash flow declined in the fourth quarter since we made $139 million of additional tax payments, which we were allowed to defer from the second and third quarter of 2023, due to IRS disaster relief. Without these catch-up tax payments, quarterly cash flow have been at an all-time record. Capital expenditures were $40.2 million in the fourth quarter of 2023 and compared with $34.1 million in 2022. Depreciation and amortization expense was $77.4 million for the fourth quarter of 2023, compared with $81.8 million in 2022. We ended the quarter with approximately $2.60 billion of net debt. That is approximately $3.24 billion of debt less cash of $48.3 million. Now turning to our outlook. Management currently believes that GAAP earnings per share in the first quarter of 2024 and will be in the range of $3.73 to $3.86 with non-GAAP earnings in the range of $4.55 to $4.65 per share. And for the full year of 2024, our GAAP earnings per share outlook is $17.15 to $17.53. And on a non-GAAP basis, $20.35 to $20.68. The 2024 full year estimated tax rate, excluding discrete items, is expected to be 22.5%. I will now pass the call back to Robert.

Operator:

[Operator Instructions] We'll begin today with a question from Jim Ricchiuti representing Needham & Company.

Robert Mehrabian :

Alright. Yes. We're right now expecting uptick in those businesses in the second half of the year. We think that what will happen is that we will have a linear ramp in sales and earnings throughout the year with about average revenue increase of about 4% and earnings as we've outlined up to $20.68, which would reflect also an improvement in margin from this year to next year of another almost 50 to 60 basis points. So yes, we're anticipating that. On the other hand, we're also adjusting our cost structure and if necessary, we'll do more. So that our earnings remain healthy.

Robert Mehrabian :

Sure. Jim, we are expecting margin improvement in every segment. A little lower in instruments, maybe 25 basis points. We already have very healthy margins there. On the other hand, in Digital Imaging, about 80 basis points. In Aerospace and Defense, we think we'll have 80 to 90 basis points. And engineered systems around 50 basis points. So overall, Jim, in the segment, we anticipate about 70 basis points margin improvement. And overall, for the company between 50 and 60 basis points. In a way, it's kind of similar to what we achieved this year. Which was about 60 basis points over last year.

Greg Konrad:

Maybe just to follow up with the last question, but on the revenue side, given the commentary around book to bail, 4% growth for the year. Can you maybe talk about the assumptions between long and short cycle or from a segment basis for growth in 2024?

Greg Konrad:

And then maybe if we can just dig into digital imaging a little bit more. I mean the commentary and the release around product lines on the call was helpful. But is there any way just for Q4 in 2023 to kind of level set or put some numbers behind growth in space in health care versus maybe the declines you've seen in other parts of the portfolio?

Operator:

We'll go to the line of Ron Epstein with Bank of America.

Robert Mehrabian :

Well, Sure. Obviously, CR is always an unpleasant occurrence for us. The way we're looking at it is we're only right now considering the orders that we have in house. We're not really looking at future orders. So book-to-bill has been healthy. These are longer-term programs. And frankly, we have some exciting new products coming out, which are being now tested. For example, if you look at our Black Hornet, we -- Black Hornet 3, which is our nano drones. Black Hornet 3 had a really good run over the past 5, 6 years. We've introduced a Black Hornet 4, which is already getting traction. We also have some really nice programs in space development agency, tranche true tracking layer as well as our international sales in that domain are healthy. So in some ways, while CR would be not a pleasant thing to experience. We've done it in the past. We've had CRs in many years. Right now, we're looking at what we have in our backlog, which is healthy.

Robert Mehrabian :

I think basically, it’s tough comps rather than real declines. We think our drone businesses are healthy. We also have some businesses that our anti-drone or flame detection systems, which we’re selling in Europe, which are very healthy. So I think it’s just a matter of tough comps. Other than that, we feel very good about our drone businesses.

Joe Giordano:

Close enough there. How are you doing?

Joe Giordano:

Can you -- I'll start on free cash flow. I think that at the end of the day, that probably came in a little lighter than you thought for the full year. Can you talk about how you think '24 shapes up and how working capital looks for the year?

Joe Giordano:

That's really helpful color. My last one, we've kind of talked about the a lot, but I just want to -- maybe if you can frame for the full year of '23, like how much down was like the industrial and scientific vision? And what did that do to margins? And then how did FLIR margins for the full year look year-on-year?

Joe Giordano:

And you'd expect FLIR to expand margins again in '24, correct? Just inherent in that margin commentary?

Operator:

Next, let's go to the line of Kristine Liwag representing Morgan Stanley.

Robert Mehrabian :

Yes, Kristine, let me see if I can do this properly. We -- we are in the process, for example, now in terms of space consolidation. What we're doing is we're getting out of leased spaces and moving to owned spaces. For example, in Massachusetts, we have an own space in Bevrica, we're getting out of a lease space there, and that should be effective in March. That will help us say something of $500,000, $600,000, $700,000. The issue that we have whole consolidation overall is helpful. It's the growth of our businesses and the lower costs that we have put in place this year. that should be more helpful. So when Edwin thinks about or talks about margin improvement, he is looking at really a lower cost structure, which we've achieved maintaining that and getting some growth, especially from our longer-cycle businesses. So it's a combination of those. I would say, lower cost and growth trumping just space consolidation.

Robert Mehrabian :

For industrial automation, really is it's a combination of things. We're seeing, for example, some improvement in the semi market now, projections for improved semi market recovery. We'll also seeing some pickup in smartphones now, which is our consumer-related businesses, which affects our Micro Electro Mechanical Systems MEMS programs, in the other markets, especially laboratory instrumentation, we don't have as much visibility, frankly, we haven't seen these kind of declines before. So we think those should come back. But we're not counting on them a lot. We think there's a flip side of our environmental businesses, which is -- that's a part of which is the air quality, water quality monitoring, which have been very healthy. We have a nice backlog and -- we think the combination of those 2 will help us in that part of our instrumentation business.

Robert Mehrabian :

Yes. I have to tell you, valuations on the larger deals have not come down yet as much as we would like. We've looked at some of the prices that our competitors have paid for large ones, those are kind of out of our range of what we would consider. On the flip side, we see some opportunities in smaller bolt-on acquisitions, what we call single pearls, which are available, and we will be pursuing those. If you looked at our '68, '69 acquisitions over our history, the string of pearls are of '68, '69. And they are the easiest to integrate. We can fit them in and we can improve their margins as we go. The larger deals, we have to be a little more patient because right now, prices are still pretty high.

Andrew Buscaglia:

Digital Imaging margin. So I wanted to ask on -- so you're going to start Q1 sounds like in a whole. First off is digital imaging margins, do you expect those down year-over-year and that effectively marks sort of a bottom for that segment as sales start to improve from there?

Andrew Buscaglia:

And you mean up year-over-year or up sequentially?

Andrew Buscaglia:

Yes. Okay. And then in past quarters, you sort of broke out [indiscernible] book-to-bill versus legacy Teledyne book-to-bill. Do you have that? And then wondering your view on potential incremental defense awards as the year progresses?

Andrew Buscaglia:

Okay. And then a question on you're feeling on incremental defense awards throughout the year. Is there still a lot you're tracking?

Operator:

[Operator Instructions] And let's go to the line of Noah Poponak with Goldman Sachs.

Robert Mehrabian :

Yes, about 4%.

Robert Mehrabian :

Yes. I think it'd be above 1.4 or a little under, if that's going to be our lowest quarter. And I'm saying that because of the short-cycle businesses that we're seeing. We have orders on long-cycle businesses. But we -- our short-cycle businesses -- we're assuming that will not recover much in Q1 and so it should be flat year-over-year in terms of revenue and then pick up.

Robert Mehrabian :

That's very good. We look at our pipeline, as necessarily say that we have better orders at this time. But we're talking to our customers, we're looking at that inventory level, but they're sharing that with us. And we see that inventories are going down. As a consequence, we expect that we will start getting the orders. long cycle, of course, you understand that's much easier because we already have the orders, and we feel good about that. So the other thing that we do on the short cycle is we look at the generator trends that people are talking about in terms of what happened in the semi industry in the past number of quarters. And what's expected -- what people are projecting. We'd be thinking that environmental and test and measurement will eventually pick up. But we're also seeing some pickup in MEMS already in flame infrared as well as our maritime businesses. So that's what's encouraging. We see some lowering of inventories for our customers as well as some pickup in certain unique businesses of ours.

Robert Mehrabian :

Yes. You said it better than I could. We're always a little conservative. The other -- there's one other thing that I should mention. When we look at our segment, per se. And we look at increases in segment margins. We have to be cognizant of the fact that the new management, which is Edwin and George are now going to be their costs or their pay is going to reflect in the corporate portion. And we're also seeing a little higher medical and insurance premiums. So corporate, we expect would go up. That's why while the margins in the segment look much higher, the corporate margins are -- we're assuming they're going to be increasing about 50 to 60 basis points.

Robert Mehrabian :

Yes. Let me just say that the confusion may have reason because I was answering 2 questions at the same time. The first part was larger acquisitions because we -- our leverage ratio is obviously going down and it go down faster this year. The larger acquisitions right now that we look at are pretty expensive. People are paying prices that we are not going to. On the other hand, smaller acquisitions are available, and we expect to make some this year. So I think we'd be patient for the larger ones like we always have been and -- but we will make some smaller acquisitions this year. So we have a reasonable product line.

Robert Jamieson:

Very helpful. Just one kind of smaller one on A&D electronics. Strong growth, like expected for next year and another 80 to 90 basis points of margin expansion. Just curious how you're thinking about the growth split within commercial aerospace between new builds and then MRO? And then how should we think about the puts and takes on margin there, maybe if like MRO is a little bit pressured next year?

Robert Jamieson:

That's great. And then this is kind of more of a random question, but just -- we talked a little bit about capital allocation. You got a full funnel, probably going to look to do some smaller acquisitions. Absent anything large, and I know this would be a deviation for what we've seen over the last several years. But would you have any interest in buying back stock? And then I guess one other kind of thought or questions that random would be given like the float, would you ever consider a stock split to maybe make it a little bit easier to trade like tighten the bid-ask spread? And could that ever maybe make it easier for you to buy back stock?

Operator:

[Operator Instructions] We have a follow-up from Joe Giordano, he's representing TD Cohen.

Robert Mehrabian :

First point, backwards, in '23, we had some nice price increases. I'm going to say broadly 2% to 3%, let's say, 3%. We expect the same in '24. In some areas, obviously, we were able to increase price more than 3%. But in some areas like government contracts that are not peak [indiscernible] the cost plus then you can increase prices as such. So I think 2% to 3% is what we're looking at for '24.

Steve Blackwood :

Thank you very much, Tom. I'll just have -- I'll ask Jason to please conclude our call.

Operator:

One moment here. I pull that up -- sorry about that. Ladies and gentlemen, this will be available for replay, if you can make one moment. It will be available for replay in an hour, and it will run through February 24 at midnight. You may access the AT&T replay service at any time by dialing (866) 207-1041 866-207-1041 and entering the access code of (459-0647)45-90647. And we thank you for your participation and using the AT&T Event Services. You may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to Teledyne's Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Mr. Jason VanWees. Please go ahead.

Robert Mehrabian:

Thank you, Jason, and good morning and thank you for joining our earnings call. These are exciting times for Teledyne. We have new leadership coming in, but we also have continuity and resilience in our programs, in our operations and our ability to meet what we say we would do in our earnings. In the third quarter, as example, we achieved record operating margin and earnings per share. GAAP operating margin of 18.8% was a third quarter record. On a non-GAAP basis, the operating margin was 22.8%, which was an all time record for any quarter. Likewise, GAAP earnings per share of $14.15 (sic) [$4.15] was a third quarter record and non-GAAP earnings per share of $5.05 was an all-time record for Teledyne. Compared to last year, GAAP and non-GAAP operating margins increased 119 and 86 basis points, respectively, and both GAAP and non-GAAP earnings per share increased approximately 11%. Our overall third quarter performance was led by growth in our marine, medical, aerospace and certain defense businesses, coupled with vigilant cost control. There was, however, some deterioration in certain end markets such as industrial automation and laboratory instrumentation. Nevertheless, given our focus on operational excellence, operating margins increased, both sequentially and year-over-year in Digital Imaging and Instrumentation segments, helping generate record earnings. Given continued debt repayment through September, which totaled about $680 million year-to-date, our consolidated leverage ratio declined to just under 2 times. And finally, we're pleased to have added Xena Networks to our test and measurement businesses which also continued to perform very well in a challenging environment. In terms of our outlook, we now see total sales for 2023 growth of about 4% or a little less than the second half versus our July outlook with the fourth quarter sales being roughly $1.45 billion. Approximately half of this change in incremental -- is due to incremental currency translation headwind from July to now, and the balance being further deterioration in industrial automation and laboratory instrumentation markets mentioned earlier. However, given the strong margin and earnings achieved in the third quarter, we're raising our non-GAAP earnings outlook to $19.25 at the midpoint from a prior outlook of $19.10. I will now further comment on the performance of our four segments. Third quarter sales in our Digital Imaging segment were flat compared to last year. Sales of x-ray products, infrared imaging detectors and surveillance system increased year-over-year but were offset by lower sales of unmanned ground systems, and micro-electro-mechanical systems or MEMS. Sales of commercial marine hardware and software were flat, but declined organically. Finally, cameras and sensors for industrial automation declined compared to last year. Like Teledyne as a whole, the Digital Imaging business portfolio is exceptionally well balanced across market segments and geographies. With the help of bolt-on acquisitions and growth in our medical and defense markets, we were able to offset declines in industrial automation and its -- and the small portion of our overall portfolio that is associated with consumer discretionary spending. Despite of the flat revenue, margins performance improved considerably to record levels with the FLIR businesses collectively slightly higher than segment average margins. Turning to our Instrumentation businesses. This segment consists of marine instruments, test and measurement and environmental instruments. Overall, third quarter sales in Instrumentation segment increased 7.4% versus last year. Sales of marine instruments increased 20.5% in the quarter, primarily due to ongoing recovery in offshore energy markets and also greater sales of acoustic imaging systems. Sales of electronic test and measurement systems, which includes oscilloscopes, digitizers and protocol analyzers, collectively increased 2.5%. We continue to see some softness in sales of analyzers for electronic storage and data center application. But, this was more than offset by sales of devices for wireless and video protocols as well as continued strong sales of oscilloscopes. Demand for high-speed networking customers remains very healthy, and we see the Xena acquisition, enhancing our offerings in this market. Sales of environmental instruments decreased slightly compared to last year, with sales of air quality and gas and flame safety analyzers offsetting some decline in drug discovery and laboratory instruments. Overall, Instrumentation segment operating profit increased over 20% in the third quarter with GAAP operating margins increasing 277 basis points to 26% and 253 basis points on a non-GAAP basis to 27%. These were all-time records for this segment. Third quarter sales in our Aerospace and Defense Electronics segment increased 8.1%, driven by growth both in defense electronics and aerospace -- commercial aerospace products. GAAP and non-GAAP operating profit increased 11.5% with margins 81 basis points greater than last year. Finally, in the Engineering Systems segment, third quarter revenue increased 4.1%, but operating profit declined slightly, given an unfavorable product mix but also a tough comparison with the prior year period. So, in conclusion, we are pleased to continue to do what we know best, grow sales and margin in businesses with favorable markets, while cutting costs and protecting margins in those businesses where market trends are more challenging. At the same time, especially now that our leverage continues to decline, we should acquire and integrate complementary businesses. Before turning the call to Sue, I want to thank her for her more than 34 years of service to Teledyne, and I wish her very, very well-earned retirement. I will greatly miss her. And finally, I want to congratulate our other executives on their well-deserved promotions announced yesterday, and I and the entire Board are delighted that the same talented group of executives will continue to serve Teledyne's leadership. Sue?

Robert Mehrabian:

Thank you, Sue. Operator, we'd now like to take questions. If you're ready to proceed with the questions and answers, please go ahead.

Jim Ricchiuti:

Congratulations, Sue, and congratulations to everyone else, on the new appointments. Robert, maybe a question for you. You talked about the booking strength at FLIR last quarter. And I'm wondering how did that business fare Q3 from a booking standpoint? And what does the near-term outlook look like in the Teledyne FLIR business? And maybe as a follow-up, if you could provide a little bit more color on the overall level of bookings and the various bookings at the segment level. Thank you.

Jim Ricchiuti:

Got it. And can you give an update on the facilities realignment at FLIR and when do you expect to see the meaningful improvement on margins as it relates to these moves or maybe you're already starting to see some of those benefits?

Operator:

Our next question comes from Ron Epstein with Bank of America.

Robert Mehrabian:

We have some background. I think, basically, we expect in the long term to have some orders in our defense businesses from that. We have -- we are a supplier, obviously, and we think that the conflict -- unfortunately, the conflict is what it is. But I think I'm not at liberty to disclose, but we have contributed to some of the defense mechanisms that are used by Israel. The other part is that the first thing that will happen is that there'd be a refreshment of the stockpiles in the defense businesses, both because of the conflict in Israel, but also as well as the conflict in Europe. And these are present themselves as obviously long-term opportunities, both the FLIR defense program, but also our Aerospace and Defense segment that has a lot of components and subsystems that go into various products.

Joe Giordano:

Just curious on the management changes that you articulated for January 1st. Is there any real like change in the org structure internally just in terms of how the businesses are going to roll up? You have a COO now. Like, just curious if there's any kind of like structural changes in how the business is going to report.

Joe Giordano:

I appreciate that color there. If I go over to DI margins, I mean, obviously, that's been a focus area for investors and for you guys. It was pretty substantially higher than maybe what people anticipated this quarter. Curious if there was any kind of one-off type benefits going on this quarter that maybe we have to consider reversing out? And then into next year, we have time before we get there, but I think you guys have been at conferences recently talking about maybe 23% is a good target for next year. Is it early target? You're kind of going to be there now. If you think this year is off of 20 bps, you're kind of going to be almost at 23 for this year. So, does that target not just become that much more conservative? How should we think about that?

Joe Giordano:

If I could just sneak in one last one. If I think about your oscilloscope business, I know that's growing very quickly now on delivery of backlog. But if you think about where orders have been all year, and let's say, we don't -- like absent an inflection in near term in orders, is that a business that likely declines just given where your backlog is and what you're delivering this year, if I think into ‘24?

Operator:

We will go now to Greg Konrad with Jefferies.

Robert Mehrabian:

Yes. The FX that I mentioned is versus what we were looking at in July, and things have tightened and it's costing us about 1%. And it's mostly focused in our Digital Imaging and Instrumentation businesses. Having said that, overall, if you look at year-over-year, we do get a little tailwind. But it tightened significantly from our July meeting to today. We'll deal with it, like we deal with any market softening here and there. I mean, basically focus on getting products up where there's a good market, cut costs where we don't have the market, improve our margins, and if we can do what we just did, beat and raise.

Robert Mehrabian:

Yes. I think what we have been able to do is increase prices successfully in businesses that are doing well, like on our Aerospace and Defense businesses or certain parts of our environmental. And for example, marine where we have a really strong market at the present time, we've increased prices. That offsets prices that we have not been able to increase in the environmental area. So, it changes across our portfolio up and down. But generally, we are successful in raising prices across the board, we have been this year versus let's say last year. And we think that sustainability that's happening for our businesses will allow us to increase prices but more modestly going forward than we have aspirations for. But if things turn around, we'll do it.

Andrew Buscaglia:

So maybe -- you guys mentioned, or Robert, you mentioned your book-to-bill is just over 0.9, which is not too inspiring, heading into 2024. But you talked about some optimism in some areas, like Digital Imaging, some of those markets coming back. I'm wondering, can you comment on your expectations heading into the new year? Last quarter, you talked about backlog possibly or defense backlog converting into Q4. And you're sounding more optimistic around new awards as well materializing. So, I'm just wondering, can that book-to-bill change on us heading into the new year, or how are you feeling going into January, February?

Andrew Buscaglia:

Yes. Okay. Well, that dovetails into my next question around M&A. With your leverage now back below 2ish, what are you seeing in the pipeline for next year? And then, maybe if you don't see M&A materialize, what are your thoughts on share repurchase just given where your valuation is?

Operator:

Next, we go to Rob Jamieson with UBS.

Robert Mehrabian:

Let me answer the last question first. We're right in the middle of our planning cycle for our operating plan and made presentations to our Board yesterday, and the answer is yes. Let me now go back to the organic question that you asked for this year. Fundamentally, we're going to have -- organically, we're going to be relatively flat in our overall Digital Imaging business, maybe a little -- a percent down, but that's partly because we're also cleaning up some stuff that are not profitable. On the other hand, we will have organic growth of almost 6% in our Instrumentation businesses, which, as I said, is environmental, test and measurement, and marine. We're going to have similarly, over 6% in our Aerospace and Defense organic growth, and about 8% in our Engineered Systems. So, those are very healthy growths for this environment that we're all experiencing.

Robert Mehrabian:

Yes. The new protocol is the PCI Express Gen 7. The life cycle of that is usually a couple of years. I think we'll see some benefit from that next year, probably later next year. But the flip side is the protocol business that we just bought, Xena is fulfilling a gap that we had in our protocol businesses, which was the high-speed network protocols, and they fill that gap very well. So we love our protocol businesses and hope that we can buy more of them as time goes on.

Kristine Liwag:

Congratulations on the leadership changes. Robert, I hope that this change means you get some extra free time.

Kristine Liwag:

Well, great, and it's been wonderful to follow your career and what you've done for Teledyne. So, maybe with the leadership changes, I mean, sometimes there's also a change in strategic focus. I mean, Teledyne is a much broader and bigger company than it was over 20 years ago. You mentioned earlier that M&A is still a priority over share buybacks. I guess, as we look out the next 5, 10 or even 20 years and maybe that question is a little too broad of a scope for this call, but how do we think about the strategic direction for Teledyne? Like where to from here?

Operator:

[Operator Instructions] We have one more in queue at this time. We're going now to Noah Poponak. Please go ahead.

Robert Mehrabian:

I mentioned the margin for the year of 22.7% in DI, which is 35 basis higher than it was what I quoted in Q2 -- at the end of Q2. What has happened is that the cost out is important because it's not just people, it's the consolidation of our facilities as well. We have not done that. We were all focused on, at first, fixing our export control issues, fixing our tax liabilities. We're still working on tax liabilities somewhat. But what's happening is that the defense business at Digital Imaging, specifically FLIR, are getting better. And machine vision, while it's getting worse at the present time, it sooner or later is going to have to come back. And so, I was a little cautious about for next year when I was asked about the margins, and I stayed with the 22.7%, maybe 22%. But over the long term, there's no reason that these margins in these businesses could not be like margins in our Aerospace and Defense, which we're predicting this year to be 27.6% or our instruments with our 26.1%. There's no reason that margins cannot improve and get there.

Robert Mehrabian:

We have several large programs that came through in the third quarter. And large -- for us things are below -- above $10 million, $20 million, for example. We got some counter unmanned vehicle systems that we partnered with Kongsberg. That was a nice win in Q3. We've also penetrated some of our nano-drones are now moving into India. We had a nice award from there. Also, our surveillance program, we had to straighten out some of the issues with our gimbals and vibration and products that we inherited. We straightened those out, and we have now a Navy award that's about $35 million. So surveillance grew in Q3. And I think with the many drones and our newer products, we think we’ll do fine. Our unmanned programs we expect to grow in Q4. Overall, what we've been able to do is really take the non-profitable stuff-up, consolidate facilities that shouldn't have been separate to begin with, focus on the things that we can deliver, unmanned systems using our own sensors. Other people have unmanned systems to various conflicts that use our sensors. So we're happy to send them our sensors, but we also can incorporate them in our system. So, we kind of think that the defense business there in DI has had an inflection point and is really turning positive now.

Robert Mehrabian:

I think, overall, we're going to see an increase in revenue in DALSA, e2v part of DI, as much as 6% with some of it coming from acquisitions. In the other part of DI, which would be FLIR, we expect that we may have slight decline, let's say, to 1.839 -- 1.834 let’s say from 1.84 what was then 1.86 last year, which is very minor. And some of that comes from Raymarine, where we -- consumer products that are more discretionary at this time. But overall, I don't see a huge decline in Digital Imaging because DALSA, e2v has grown. And we are weathering the downturn in some of our other commercial products very well. And then we, of course, have some really good upside in things like healthcare, where markets, even in, let's say, in Q3, we had almost 12% increase in revenue in that area. So, it's balanced.

Robert Mehrabian:

Total Digital Imaging revenue. Yes.

Robert Mehrabian:

Just machine vision?

Robert Mehrabian:

Okay. There's different parts of it. There's a machine vision at DALSA, e2v and there's some machine vision in FLIR. I haven't added those two together. If I were to add those two together, I'd say, the full year might be down 2%. But again, could be a little higher, but it doesn't bother me that much, Noah, only because, as I mentioned before, we have new products like in battery inspection, and we're more emphasizing our ability to put some information and intelligence in our devices, cameras, a move up market. So, this market is going to turn. It's not going to stay where it is. Semiconductor is not going to stay down forever. And I think we're well positioned for growth once those turn a little bit.

Robert Mehrabian:

Thank you very much, Noah.

Robert Mehrabian:

Thank you, operator. I'll now ask Jason to conclude our conference call.

Operator:

Certainly. Ladies and gentlemen, this call has been recorded and will be available for replay from today at 10 am Pacific through midnight on November 25, 2023. To access the replay, dial 866-207-1041 and enter access code 6439556. International participants, dial 402-940-0847. Once again, those numbers are 866-207-1041 for domestic and for international it's 402-940-0847 and the access code again is 6439556. And that will conclude your conference call for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.

Operator:

Ladies and gentlemen, good morning. Thank you for standing by today's conference assembled [ph]. Welcome to the Teledyne Technologies Second Quarter Earnings Call. [Operator Instructions] At this time, it's my pleasure to turn the conference over to our host, Jason VanWees. Please go ahead.

Robert Mehrabian:

Thank you, Jason and thank you for joining our earnings call. In the second quarter, we achieved all-time record quarterly sales, with overall sales increasing 5.1%. Furthermore, sales as well as GAAP and non-GAAP operating profit and operating margin increased year-over-year in every segment. For the total company, GAAP and non-GAAP operating margins increased 105 and 73 basis points, respectively. Excluding foreign currency headwind, which negatively impacted second quarter sales growth by approximately 40 basis points, growth in local currency would have been 5.5%. GAAP operating margin of 18% was a second quarter record and non-GAAP operating margin was 21.4%. Second quarter GAAP earnings per share were $3.87 and non-GAAP earnings of $4.67 were also second quarter records. And finally, including continued debt repayment through July, which totaled about $620 million year-to-date, our consolidated leverage ratio declined to 2.1x. I'll now comment a bit further on the performance of Teledyne flare and the announced cost reductions and the outlook for the balance of the year. In the 2 years, since we've owned FLIR, we've resolved the most significant legacy tax matters, exited the consent agreement with the Department of State, consolidated leadership in marketing and operations for the FLIR Defense portfolio and corrected some historical product quality issues. As part of this effort, we also took a much more focused view of the Defense business, aggressively pursuing those opportunities where we have truly differentiated technology. I am pleased to report that the order book and backlog of FLIR, specialty FLIR Defense, significantly inflected during the second quarter. For reference, the commercial business across digital imaging, both DALSA to FLIR grew organically in the second quarter. While FLIR Defense sales declined year-over-year, nearly all of this was lower revenue in unmanned ground systems as we achieved the milestone of shipping our 1,000th man transportable robotic system increment to, to the U.S. Army. Overall, orders at all of FLIR were 1.18x sales and 1.5x sales at FLIR Defense. Large orders not only included the recently announced Black Hornet Nano UAV to the U.S. Military but also additional UAVs for customers in Europe as well as counter UAV systems and missile systems utilizing both FLIR imaging, radar and AI-based software systems. Additionally, more surveillance imaging systems for the U.S. and foreign customers. Having stabilized the business, including achieving stronger backlog, it is not time to focus on execution and additional margin improvement. Thus, the charges announced this morning are for the further reduction in the FLIR operating footprint and related headcount. We are exciting the elimination of 3 lease sites, all of those activities will be relocated to other FLIR Defense facilities, most of which are locates. Today, we are reaffirming our prior 2023 full year sales and non-GAAP earnings outlook, including -- excluding the $10 million to $12 million charges that -- covered. Supply chain challenges have continued to improve and we were once again able to exceed our original second quarter sales and earnings outlook by pulling forward some revenue from the third quarter. On revenue specifically, we continue to see total 2023 growth of approximately 5% or sales of approximately $5.73 billion, with the third quarter being roughly $1.4 billion. We continue to see non-GAAP earnings of $19.10 at the midpoint of our guidance, excluding the charges referenced above. I will now further comment on the performance of the 4 business segments. Second quarter sales, in our Digital Imaging segment, increased 2.3% with greater sales of X-ray products, commercial infrared imaging components and solutions and industrial scientific cameras partially offset by lower sales of unmanned ground systems for Defense applications. GAAP segment operating margin increased 51 basis points to 15.7% and adjusted for reduced the intangible asset amortization non-GAAP segment margin was 28 basis points higher at 21.5%. Turning to our Instrumentation segment. Overall, second quarter sales increased 5.1% versus last year. Sales of Marine instruments increased a healthy 10.5% in the quarter, primarily due to ongoing recovery in offshore energy markets, also greater sales of autonomous underwater vehicles. Sales of electronic test and measurement systems, which include oscilloscopes, digitizers and protocol analyzers, collectively increased 4.9%. We encountered some softness in sales of analyzers for electronic storage and data center application but this was more than offset by [indiscernible] for wireless and video protocols as well as continued strong sales of oscilloscopes. Sales of environmental instruments were flat compared to last year with greater sales of air quality, process gas, safety analyzers offset by drug discovery and laboratory instruments. Overall, instrumentation segment operating profit increased 10.6% in the second quarter, with GAAP operating margin increasing 123 basis points to 24.8% and 80 basis points on a non-GAAP basis, excluding reduced intangible asset amortization to 25.9%. In the Aerospace and Defense Electronics segment, second quarter sales increased 10.2%, driven by growth of both Defense Electronics and Commercial Aerospace products. GAAP and non-GAAP segment operating profit increased over 20% with margins approximately 250 basis points greater than last year. In the Engineering Systems segment, second quarter revenue increased 18.5% and operating profit increased 33.7%, representing 112 basis points increase in margin from last year. In conclusion, our short-term, more economically sensitive businesses remained resilient in the second quarter, collectively growing year-over-year, although comparisons for some do become more difficult in the second half. In addition, our longer Cycle Medical, Aerospace, Defense and Marine businesses continued to perform very well. Quarterly operating margin in our Instrumentation segment was an all-time record. Operating margin in our Aerospace and Defense Electronics segment was the second quarter record and just slightly less than the fourth quarter of last year. And now through a combination of sales growth, operating leverage and the more aggressive cost actions mentioned earlier, I fully expect digital imaging margins to grow considerably over time. And now I'm going to turn the call over to Sue.

Robert Mehrabian:

Thank you very much, Sue. We would now like to take your questions. Operator, if you're ready to proceed with the questions and answers, please go ahead.

Jim Ricchiuti:

I wanted to talk a little bit, Robert, if I may, about digital imaging. If we exclude the acquisitions, it looks like your revenues were down year-on-year and sequentially. And some of this may be partly due to what you're seeing at FLIR. But I wonder if you could just expand on what you're seeing in digital imaging just because it's a large category that covers a lot of ground?

Jim Ricchiuti:

And follow-up question, I wonder if you could talk a little bit about -- just an update on the rate at which you may be burning through some of that higher cost component inventory that you had. And just in general, it sounds like supply chain has gotten better and how you're seeing that part of the business?

Jim Ricchiuti:

And if I could just slip one more in, apologies but you did talk about some pull-in from Q3. I wonder if you would size that for us.

Operator:

Our next question will come from the line of Joe Giordano, representing TD Cowen.

Robert Mehrabian:

Let me start with second quarter margin. Actually, second quarter Digital Imaging margin is up about 28 basis points. That's a 30 basis points year-over-year. And we think for the year, it might -- it will be probably flat, maybe down about 10 or 15 basis points but relatively flat. I think what -- what's going to happen is that the flare margins are going to increase somewhat and the historic or legacy digital imaging, they're going to decline a little bit. Basically, we think year-over-year, it's going to be flat. We've had, as I mentioned before, we've had a slower revenue and lower revenue in Defense in the first half of the year. But as I mentioned earlier, that's turning around now. So I think that's going to help us for the rest of the year. That's about really all I can say about the margins. I think second quarter year-over-year, we saw an improvement of about 28 to 30 basis points. For the whole year, it might be flat or down maybe 15 basis points but not much. And again, the balanced portfolio is really going to help us. The flip side of it is, if you look at our Aerospace and Defense segment, there second quarter margins increased 247 basis points. And for the year, we're projecting 80 basis points expansion. So sometimes, when we look at Defense, yes, we differentiate Defense -- that's in digital imaging, what I've talked about before. And then -- but we have a whole bunch of Defense programs in our Aerospace and Defense portfolio, which are doing really well. So overall, I think we're, okay.

Robert Mehrabian:

I don't know. They were down sequentially what, about 20 basis points. I'm not so concerned about that. There's so many moving parts in there that it just balances itself out. That's not something that worries me. That's all I'll say about that. Go ahead with your other area, please.

Robert Mehrabian:

Yes. As you know, on the Test and Measurement, we have 2 distinct product lines. One is oscilloscopes, the other is protocols. And both of those are relatively short-term revenue. So big backlog, which doesn't make a whole lot of difference. Our oscilloscopes revenue in Q2 was outstanding, really good. Our protocol revenue was relatively flat and partially, that's because new protocols are coming out in September and we expect that revenue to pick up. If you look at the whole year, we think that we're going to have something like 3.5% to 4% growth in our oscilloscope and protocol products. We think third and fourth quarter are going to be all right. They may not expand as much as the first quarter but year-over-year, we're going to be fine. In terms of just answering your question on backlog, book-to-bill in that Test and Measurement is very close to 1, it's 0.98. So I would say it's 1. So again, it's not something that concerns me right now.

Greg Konrad:

Maybe just one clarification. I mean it seems like you brought down -- you didn't change guidance for the year but brought down digital imaging. You talked about the strength in A&D. Has there been any change to the overall company margin guidance for the year just given it seems like A&D is tracking ahead and instrumentation continues to be maybe slightly above expectations?

Greg Konrad:

And then, I mean, you talked about FLIR Defense and kind of what you're seeing on the order front and A&D performance top line was really strong in the quarter. I mean, what are you seeing across Teledyne as it relates to Defense? And how are you kind of thinking about runway just given orders and some of the '23 budget money coming through?

Operator:

[Operator Instructions] And let's go to the line of Jordan Manosh with BOA [ph].

Robert Mehrabian:

Some will come to in '23 and some will come through in -- starting in Q4. For example, let me just give you one example or two. We do have some counter drone products that are going to Europe, probably about $25 million, $26 million. Most of that would come in '23. On the other hand, the Black Hornet 3 that we just announced for the U.S. Army is $94 million, only about 10% of it will come this year, the rest will come in future years. So it's a balance. I think we'll get some of it this year and a lot of it in future years.

Guy Hardwick:

Robert, I think you said in your prepared remarks that digital imaging margins should grow considerably over time. Could you a little bit flesh that out a little bit for us, what is over time? And could this mean that digital imaging margins exceed the sort of 24% levels I think that delivered in 2021?

Guy Hardwick:

I think last quarter, you had pointed out negative mix, lag of price increases, I think, in the Medical business. So was there any other mix effects other than Defense that you talked about in Q2? Is there anything else that we should be aware of, which may have held back margins? Because I think 3 months ago, you did expect sequential improvement and 30 basis points up for the full year?

Guy Hardwick:

Just one last one for me. In Aerospace and Defense Electronics, I think previously, you had mentioned that you benefited from a particularly good mix there. Is that -- presumably, that has continued in Q2 and assume that continues in the second half given your guidance for the margin?

Operator:

We'll go the line of Jim Ricchiuti with a follow-up from Needham.

Robert Mehrabian:

Sure. Jim, in Instruments, our book-to-bill is about 1.05, so over 1, led by our Marine businesses, which are doing really well, both -- in underwater vehicles as well as oil discovery and production. In the Digital Imaging as a whole, the book-to-bill is about 1.07. In Aerospace and Defense, that's a little more =- and Engineered Systems, those are much more lumpy orders. So quarter-over-quarter book-to-bill may change but it's not affecting the revenue that much because we expect both -- revenue in both segments to grow. Overall, across the company, our book-to-bill is about 1.

Robert Mehrabian:

Well, as I mentioned earlier, Jim, we paid on $620 million this year effective today, let's say. That's taken our net debt-to-EBITDA ratio to 2.1%. We have about $60 million of debt left that's variable, which we pay 6%, out of the $3 billion that -- $3 billion plus that Sue mentioned, the rest of our debt is on fixed. So other than that $60 million, our interest payments are 2.1% in future years, which is a very healthy place to be because we haven't really touched our line of credit. So we have a lot of capability to acquisitions. Last year, even as we were paying our debt down, last year, we did 3 bolt-on acquisitions and spent about $160 million. We expect to continue that bolt-on acquisitions. On the flip side is that because if we don't do anything else, if we don't make acquisitions, if we don't -- doing anything, our debt-to-EBITDA ratio is going to go less than 1 in about a year and 1.5 years. So we're bullish about acquisitions, including larger ones, if we can find them. And of course, we are continuously looking at that. The last question was, what areas. Right now, I would say in the general instrumentation area is what's very attractive. We have done some digital imaging acquisitions. As you know, we made the ETM acquisition. We made acquisition for our acquisition. But I think it'd be nice if we could find some things in our Instrumentation area.

Robert Mehrabian:

Thank you, operator. I now ask Jason to conclude our conference call.

Operator:

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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. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the call over to our host, Mr. Jason VanWees. Please go ahead, sir.

Robert Mehrabian:

Thank you, Jason. Good morning, everyone, and thank you for joining our earnings call. We began 2023 with record first 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 headwinds, which negatively impacted first quarter sales growth by approximately 1.4%, growth in local currency would have been 6.1%. Excluding acquisitions, core growth in local currency would have been approximately 4.2%. GAAP operating margin of 17.5% and non-GAAP operating margin of 21.1% were also first quarter record. First quarter GAAP earnings per share were $3.73 and non-GAAP earnings of $4.53 were also first quarter record. Given record first quarter cash flow, our consolidated leverage ratio declined to 2.3 even after completing the ChartWorld acquisition at the beginning of the quarter. We also repaid $300 million of debt which matured on April 3rd on the first day of the second quarter. Turning to our 2023 full year outlook, we are reaffirming our prior sales and non-GAAP earnings per share outlook. As supply chain challenges improved modestly, we were able to exceed our original first quarter sales and earnings outlook by pulling forward some revenue from the second quarter. Consequently, by maintaining the full year guidance, we have also modestly derisked the quarterly sequential revenue and earnings slopes. While our short-cycle businesses are more economically sensitive, they were resilient in the first quarter. We are now a little more cautious. On the other hand, we are more positive in our longer-cycle medical, aerospace, defense and marine businesses. On revenue, specifically we will continue to see total 2023 growth of approximately 5% or sales of approximately $5.73 billion with the second quarter being roughly $1.4 billion. 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 four business segments. 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 ChartWorld to contribute almost 56% of Teledyne’s revenue today. First quarter sales in this segment increased 4.7% on a constant 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 especially -- specialty semiconductor devices, offset by some lower sales of certain commercial infrared imaging and marine’s products. GAAP 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, first quarter sales increased 8% versus last years with sales growing in all fields noted above. 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 in offshore energy markets. Sales of electronic test and measurement systems, which includes oscilloscopes, digitizes and protocol analyzers collectively increased 5.3% year-over-year despite a tough comparison with the first quarter of last year. 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 are Aerospace and Defense Electronics and Engineered Systems that together contributes 20% of Teledyne’s revenue. In the Aerospace and Defense Electronics segment, first 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. In the Engineered Systems segment, first quarter revenue increased 9.1% and operating profit increased 6.4%, 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 Teledyne’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 am optimistic that Teledyne will successfully navigate through today’s uncertain economic times as we have consistently done so in the past. 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.

Robert Mehrabian:

Thank you, Sue. We would now like to take your questions. Brad, if you are ready to proceed with the question-and-answers, please go ahead.

Jim Ricchiuti:

Hi. Thank you. Good morning. Robert, I am wondering if you could talk a little bit about the shorter-cycle areas of the Instrumentation business. I think you gave some color about the Digital Imaging short-cycle business, but if you look at Instrumentation, any changes that you are seeing in that shorter-cycle business?

Jim Ricchiuti:

Got it. Since you were good enough to give us a book-to-bill, which I think was for the entire Instrumentation business. I am wondering if you could provide some book-to-bill color on Digital Imaging and the Aerospace and Defense and maybe the company as a whole? Thank you.

Jim Ricchiuti:

Got it. And just final question if I may, just in light of that -- the some of the uncertainty that’s out there. I think you have talked about M&A. Should we still think mainly about M&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 better way to think about M&A, again without being specific which I know you can’t be?

Jim Ricchiuti:

Got it. Thanks very much.

Operator:

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

Robert Mehrabian:

Good morning, Greg.

Robert Mehrabian:

Well, first, let’s start with Q1. Organic -- and let’s also do what you suggested, which is stay with the first, what we would call our historical Digital Imaging, which is DALSA, e2v 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 are very happy with that and some of those like smaller cycle vision systems had a healthy growth rate there. On the FLIR side of the equation, which would be the newer digital imaging, we had both positives or negatives. Overall, we had 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 have had some very healthy awards in our UAVs, which are unmanned air vehicles. Surveillance declined and was plus 5%. Tomography was down a little bit -- a little under 4%, but uncooled and cooled cores, which are infrared cores, they were up 3%. And industrial vision system was up almost 19% -- over 19%. So it was a mixed bag. The drag down for that business was primarily in the defense and primarily on ground -- on unmanned ground systems. Now we had a little softness in tomography and maritime, which is our marine -- Raymarine businesses. But, overall, I think, we were okay. We just have to fill out the backlog for our unmanned vehicles, ground vehicles and we will be fine.

Robert Mehrabian:

Well, right now what I’d say 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 that would be pushed out on one side. I think, in Q2, we will improve sequentially on our margins and we should be fine and we are 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’d say, look in our instruments businesses, we are going to have margin improvement for the year of almost 80 basis points, Digital Imaging about 30 basis points, Aerospace and Defense is so healthy that I will be happy to just keep our 27.1% operating margin. Engineered Systems will probably increase in 50 basis points, and overall, the segment’s 40 basis points and the company about 40 basis points. That -- I hope that helps you.

Robert Mehrabian:

Thank you.

Elizabeth Grenfell:

Hi. Good morning.

Elizabeth Grenfell:

Could you give us -- 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? Thank you.

Elizabeth Grenfell:

Great. Thank you very much.

Operator:

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

Robert Mehrabian:

Good morning, Joe.

Robert Mehrabian:

I think, basically, we have pulled in about $10 million and most of that was in Instruments, most of that was in our marine businesses. We shipped more underwater vehicles in Q1 that we had anticipated. We have some really good orders -- we actually have good orders for Q2 also. So that’s -- 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 are having improvements in our supply chain. We are seeing improvement, significant improvement and I expect that to continue the rest of the year based on what we are seeing and based on what the Chief of our Procurement is doing with various companies. So that’s why we pulled it forward, we felt we could and did.

Robert Mehrabian:

Between the lines, I don’t think it’s going to be weaker, except that something terrible happens. It’s -- I feel good about, look, as you know, we are always more conservative. I can go out and say we are 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 are facing, with semiconductors being down, everybody is projecting semiconductors will recover in 2024, not this year, both equipment and supply. We grow -- we -- which obviously we serve those markets. I am 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 $19.10 that we projected or $19.20, if you want to take the high-end.

Robert Mehrabian:

Let me start with the free cash flow. We are going to beat last year’s free cash flow by a couple of $100 million, let’s just say, $850 million is our current estimate. I hope we can do better than that and we have just continued deleveraging the company, get ready for -- when all of this is uncertainty is behind us and use our capability and ability to buy things that have not there, perhaps, done as well in this environment. Coming back to the supply chain, we have seen improvement in Q1. Last year, in Q1, we -- our brokerage, we bought about $23 million of goods from brokerage and that does repay 70% premium let’s say. This year first quarter, it’s 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 are not missing a lot of revenue, because we don’t have parts. So there is improvement in the supply chain. We are seeing that. There is improvement in the premium that we are paying and also the fact that we are not going to miss as much revenue, because we can ship products, because they are sitting on the shelf, waiting for one or two parts. That’s it.

Robert Mehrabian:

For sure.

Guy Hardwick:

Hi. Good morning.

Guy Hardwick:

I think 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 you are now guiding to 40s. So what are the kind of the main parts of the change and is it bias towards Digital Imaging?

Guy Hardwick:

And is the intention to be price/cost neutral or do a little bit better than that and then on the second...

Guy Hardwick:

Okay.

Guy Hardwick:

All right.

Guy Hardwick:

And just to follow-up on the broker purchase, I believe that you said that it was $70 million incremental last year. What does your guidance imply in terms of lowering that $70 million in 2023?

Guy Hardwick:

So potentially $35 million…

Guy Hardwick:

… $30 million to $40 million lower.

Guy Hardwick:

$35 million lower broker purchases.

Guy Hardwick:

Broker, okay.

Guy Hardwick:

Okay.

Guy Hardwick:

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?

Guy Hardwick:

Okay. Thank you.

Operator:

[Operator Instructions] We will go now to Kristine Liwag with Morgan Stanley.

Robert Mehrabian:

Good morning, Kristine.

Robert Mehrabian:

Yeah. The big picture is that we are able to buy more from the OEMs than from brokers. We obviously prefer to buy from OEMs, because the prices are stable or it might be price increases versus last year. But brokers, you -- there you end up paying premiums of 70% to them. So that’s the big picture. 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 or some excess supply and we are buying, but we buy them at a discount to what we paid to the OEMs. So the market is improving. I like that.

Robert Mehrabian:

Yes. The answer to it is, yes. On the other hand, because we are in such a diverse market, if you look at some of our longer-cycle businesses, as I mentioned, like marine with energy dependent. Some of our defense businesses or others, they are not as price sensitive to what’s happening in the financial market. Some of our shorter-cycle businesses, yes, we have to be careful that we don’t increase prices and lose to the competition, lose market share to the competition. But in some areas, like healthcare, where we make X-ray panels that are very high resolution, very low dosage, there we have pricing power and so it’s a mixture. Overall, when I say uncertainty, about economic uncertainty, I am speaking exactly to what you pointed out, some of the uncertainty in the financial market that’s shipping out into other markets as well.

Robert Mehrabian:

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 portfolio has evolved, today we sell about 22% to the government, 28% U.S. commercial and 50% commercial and defense outside the U.S. So the macro -- global macro environment is what we are more sensitive to a 40% not so.

Robert Mehrabian:

For sure.

Robert Mehrabian:

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

Operator:

Certainly. Thank you. Ladies and gentlemen, the conference will be available for replay after 10 o’clock today and running through May 26th at midnight. You can access the AT&T replay system at any time by dialing 1-866-207-1041 and entering the access code 8989973. International parties may dial 402-970-0847. Those numbers again 1-866-207-1041, international parties 402-970-0847, with the access code 8989973. That does conclude our call for today. Thanks for participation and for using AT&A Teleconference. You may now disconnect.

Operator:

Ladies and gentlemen, good morning. Thank you for standing by, and welcome to the Teledyne Fourth Quarter Earnings Call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions and instructions will be given at that time. [Operator Instructions]. And as a reminder, today's conference is being recorded. At this time, it's my pleasure to turn the conference over to our host, Mr. Jason VanWees. Please go ahead.

Robert Mehrabian:

Thank you, Jason. Good morning, and thank you for joining our earnings call. 2022 ended up being an excellent year. We concluded it with all-time record quarterly and full year sales and earnings per share. During 2022, Teledyne, as with many other companies, found itself faced with external forces beyond our control. These were inflation, strong dollar and part shortages. Nevertheless, with continued -- we continued our long history of navigating difficult market environment and we ultimately delivered earnings in excess of our own expectations. Excluding foreign currency headwinds, which negatively impacted fourth quarter sales growth by approximately 2.6%, growth in local currency would have been 5.7%. Excluding ETM acquisition, core growth in local currency would have been approximately 5%. GAAP operating margin of 19.3% was an all-time record and non-GAAP operating margin of 22.4% increased 95 basis points from last year. GAAP and non-GAAP earnings of $4.74 and $4.94, respectively, were also records for Teledyne. Fourth quarter free cash flow was reasonably healthy, but included interest payments of approximately $30 million, which last year were made in the third quarter of 2021. While we completed the acquisition of ETM, our leverage ratio continued to decline from 3.8 times in May of 2021 when we acquired FLIR to 2.4 times at the end of 2022. Finally, our acquisition pipeline remains healthy as evidenced by the recent addition of ChartWorld, whose maritime navigation software and hardware tools bridge a product and technology gap between our Teledyne Marine and Raymarine businesses. Turning to our 2023 full year outlook. While still very early in 2023 and with many unknowns, including projections of a recession, we're inclined to offer an initial revenue and earnings outlook in line with consensus expectations. On revenue, we see total 2023 sales growth of approximately 5%, including incremental sales from recent bolt-on acquisitions. For our backlog-driven long-cycle businesses, we expect growth to be higher than average. For the majority of our short-cycle commercial businesses, foreign currency headwinds will impact the first quarter of 2023 where comparisons are tough and economic uncertainty and export regulations remain fluid. We continue to see overall growth, not contraction in these businesses, but expect that growth will be less than the total company average. On the other hand, supply chain constraints are improving, albeit modestly. There are a few minors other non puts and takes such as increased scope on our NASA contract at Engineered Systems equally offset by the 2022 completion of our OneWeb contract in the Aerospace and Electronics segments, but no other significant items to highlight this early in the year. Our earnings outlook approximately 50 basis points of margin improvement in 2023 and we currently think instrumentation and digital imaging will be above-average contributors to this, while margins at Aerospace and Defense Electronics may be flat or declined slightly, given especially tough comps as a greater mix in 2023 of Defense Electronics relative to commercial aerospace aftermarket sales. I will now further comment on the performance of our four segments. In our Digital Imaging segment, fourth quarter sales were relatively flat despite currency translation headwind of approximately 3.5%. Sales increased year-over-year for our industrial and scientific vision systems, as well as our low-dose high-resolution digital x-ray detectors. Sales of commercial infrared imaging cameras and components also increased and were at record levels since closing the FLIR acquisition in May of 2021. While total FLIR-related sales increased sequentially from the third quarter, sales of some surveillance and unmanned ground systems declined from last year on especially tough comparison. On the other hand, sales of unmanned air systems increased considerably year-over-year. GAAP segment operating margin was 18.8% and adjusted for intangible asset amortization only, segment margin was 23.8%, approximately 50 basis points greater than the fourth quarter of last year. In our Instrumentation segment, overall fourth quarter sales increased 7.9% versus last year, despite approximately 2.4% of FX translation headwind. Sales of electronic test and measurement systems, which include oscilloscopes, digitizers and protocol analyzers increased 3.8% year-over-year despite a tough comparison with the fourth quarter of last year's. Sales of motor oscilloscopes and protocol analyzers remained healthy with continued strength in products for industry standards such as peripheral component, Interconnect Express or PCI Express and Universal Serial Bus or USB. Sales of environmental instruments increased 9%, compared with last year with greater sales of both drug discovery and laboratory instruments, as well as air monitoring and process gas analyzers. Sales of marine instrumentation increased 9.8% in the quarter, primarily due to a strong marine defense sales and the ongoing recovery in offshore energy markets. Overall, Instrumentation segment operating profit increased 18.4% in the fourth quarter with GAAP operating margin increasing 215 basis points to 24.2% and 162 basis points on a non-GAAP basis excluding intangible asset amortization, which brought the non-GAAP margins to 25.3%. In Aerospace and Defense Electronics segment, fourth quarter sales increased 8.9%, driven by broad-based growth of both defense and commercial aerospace products. GAAP and non-GAAP segment operating profit increased approximately 30% with margins over 480 basis points greater than last year. In the Engineered Systems segment, Fourth quarter revenue increased 6.7%, but operating profit declined given lower margins for some of our electronic manufacturing service products. Before I turn the call over to Sue, I want to make a couple of concluding remarks. First, I was very pleased that Teledyne was able to overcome issues faced by most companies in 2022. Despite the macroeconomic and supply chain challenges noted earlier, our results exceeded the top end of our earnings outlook issued at any point during the year. While difficult to predict outcomes in 2023, we are reasonably confident that a number of our long-cycle businesses serving defense, medical, energy and aerospace markets will grow. While demand is more difficult to predict in our short-cycle instrumentation and imaging businesses, supply chain constraints and the previous premiums for gray market electronic components have begun to ease modestly. Given the strength of our balanced business portfolio and our management's long history of navigating challenging markets, I am optimistic that Teledyne will continue on its successful path in 2023. I will now turn the call over to Sue.

Robert Mehrabian:

Thank you, Sue. We would now like to take your questions. Operator, if you are ready to proceed with the questions and answers, please go ahead.

Greg Konrad:

Good morning.

Greg Konrad:

Good quarter. And then, I mean, maybe just to start, given your commentary around supply chain and long cycle outperforming in 2023, can you maybe just update us on your expectations for defense across the businesses? I mean, it seems like peers have called out somewhat underperformance on supply chain this year. What are you seeing just in terms of the supply side and also in terms of demand?

Greg Konrad:

And then, I mean, I was pleasantly surprised with just margins in the commentary. I mean, some of them seem very outside across the segment. Just in terms of your margin commentary for this year, what are some of the assumptions around price and inflation, add backs and just looking at that Q4 outperformance, anything unusual in that just let me think about the opportunities for 2023.

Greg Konrad:

And then, maybe just sneaking one last one in. I mean, how are you thinking about free cash flow in 2023, just given top line growth, margin expansion and any working capital needs? I mean, in the past, you talked about a target, how are you thinking about 2023 in terms of free cash flow?

Greg Konrad:

Thank you.

Elizabeth Grenfell:

Just a couple of questions. One, in the 5% revenue growth guidance, could you just break out what is price and what is volume in that?

Elizabeth Grenfell:

Okay. And then, can you give us a little more detail on your outlook by segment and where you see the most opportunity for upside?

Elizabeth Grenfell:

Thank you very much.

Operator:

And we'll go to the line of Jim Ricchiuti with Needham & Company. Please go ahead.

Robert Mehrabian:

I think if I broke it down, the marine businesses have a little longer look at them. We think marine as a whole also because the energy -- offshore energy markets are improving and our projections for that are over 7%, maybe as much as 7.5% in marine. And in the short-cycle businesses, which is environmental and test and measurement, we think that will be about 3.5% together. We think that I have already talked about some of the others. In digital imaging, where we did have a really good year and a really good fourth quarter which was in DALSA and e2v. We think we are going to be relatively flat organically, but we made some acquisitions, so that should give us about with the acquisitions maybe 3.8%. We think FLIR would do better last next year, maybe a little over 5%, 6%. So -- and the -- it's built between defense and aerospace, defense is longer cycle than aerospace. If you discount the $20 million that we don't have in web, we think defense will grow some, Aerospace may be flat, more short cycle and I've already talked about Engineered Systems and the MOSSO, which we won which are longer-cycle businesses. We feel comfortable there.

Robert Mehrabian:

Yes, a little bit. I think you hit it on the head. Just a sliver, I'd say in -- if you look at Marine, our book-to-bill in the fourth quarter was 1.15. That's why I said it's longer cycle, we feel good about it. We're just going to specifically what you said, environmental and test and measurement, while for the whole year, our book-to-bill is about 1 in the fourth quarter, it dropped down to 0.96. To me, that's a sliver lower. So we are a little cautious about that. So DALSA, e2v dropped even further a little bit and I think FLIR would be okay, but some of our vision systems and scientific cameras, we just hit it out of the park in the fourth quarter and we think we're a little cautious about predicting. On the other side, I mean, just to cut to the chase, the other side is that it's very early. Everybody is predicting one thing or another. All we're doing is we are kind of hunker down and we are going to do what we always do. If we have to cut, we have cut and if we have to hire, we’ll hire and we’ll do what we have to do to make our numbers.

Robert Mehrabian:

Yes, just under 1, about 0.96, 0.97, but that has Engineered Systems in it, which was 0.9%, but that's but it's very lumpy. For the year, Engineered System was 1.12, which is a long-cycle business. For the year, the company was closer to 1.

Robert Mehrabian:

For sure.

Joe Giordano:

Hey guys. How are you?

Joe Giordano:

I've been hearing more people talk about risks, what may be in the second half of the year from prices actually going down just given some of the deflationary characteristics you're seeing in prices paid and things like that. Is that something that you're seeing, like how do you think about price and your ability to continue to raise or is it more about supporting where they are now?

Joseph Giordano:

If I think about your -- the bottom-end of your guide, I mean it's a pretty narrow guide, but if I think about the bottom-end of that guide, how protected do you think you are if there is like, what kind of recessionary outlook does that have? If we do -- some of these macro indicators are pretty bad. If we do go into a recession, do you feel like you have coverage there at the bottom-end of the guide and like which businesses? Like do you -- are you anticipating declines at certain businesses at the bottom-end?

Joseph Giordano:

Just the last one for me. Have you internally started adding things like, have you started to be a little bit more judicious on expenses and travel and things like that in anticipation of things weakening? Or is that you'll adjust as necessary?

Joseph Giordano:

Thanks, guys.

Operator:

[Operator Instructions] And we’ll go to the line of Guy Hardwick representing Credit Suisse. Please go ahead.

Robert Mehrabian:

Thank you, Guy. Good question. The answer is yes. We have some new products. We are -- we have some new markets, especially in machine vision and for example, also mapping or FLIR has this Raymarine business and we've had this geospatial business, where we do a lot of hydrographic mapping and the most recent acquisition that we made ChartWorld bridges the gap between those two. I don't know if we would have bought ChartWorld if we didn’t have FLIR, we were just hold geospatial. So, those are really good. The other thing is that, FLIR has really exceptional products in the unmanned air vehicle domain. And we have had historically good products at Teledyne legacy in the underwater domain. FLIR also brings now ground-based vehicles. So now, if you look at the combination of the two companies, we have about $450 million or so of revenue in unmanned vehicles, unmanned air vehicles, unmanned ground vehicles, unmanned underwater vehicles. And there is a lot of common technologies between those three in terms of control, because of software in terms of digitization and imaging. So, those are some examples, GUY, after 20 months. But that will, of course, grow as a function of time.

Robert Mehrabian:

It could be. As we think in the first half, certainly, first quarter, we think it's going to be a 1% headwind versus 2.1% to 2.5% last year. Having said that, I don't think anybody knows. I don't think the economies know, they might say, but they don't know. I don't think anybody knows what's going to happen. I certainly don't ever put it that way.

Robert Mehrabian:

Well, currently, it's 1.09.

Robert Mehrabian:

We're using about 1.06.

Operator:

And there are no other questions queued up at this time.

Jason VanWees:

Thanks, Tom, and thanks, everyone, for joining, of course, if you have follow-up questions, certainly feel free to call me or email me. My phone number on the earnings release. And Tom, if you could give the replay information on the call and conclude we'd appreciate it. Thanks you.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Teledyne Technologies Third Quarter Earnings Conference call. [Operator Instructions] And as a reminder, this call is being recorded. I’d now like to turn the call over to our host, Mr. Jason VanWees. Please go ahead.

Robert Mehrabian:

Thank you, Jason. Good morning and thank you for joining our earnings call. I am very pleased with our performance this quarter as well as Teledyne’s long history of navigating challenging markets. Despite the strong dollar, supply chain constraints and inflation, we achieved record third quarter sales, earnings, operating margin and free cash flow. Excluding foreign currency headwind, which negatively impacted third quarter sales growth by approximately 3% or $39 million, core growth in local currency would have been 6.9%. In addition, year-over-year reported sales increased in all segments despite the FX headwind. Non-GAAP earnings of $4.54, was a third quarter record and just shy of our all-time record. And our earnings quality was also very high given our largest effective tax rate in several years. Overall, orders and demand remained strong, which is a testament to the strength of our balanced business portfolio. Total company book-to-bill was 1.06x and while orders remained reasonably healthy in our short-cycle commercial businesses that were particularly strong in our longer cycle government, marine and aviation businesses and quarter end external backlog of approximately $3.2 billion was also a record. Record third quarter free cash flow of $252 million improved for the second consecutive quarter and was 116% of adjusted net income. Our acquisition pipeline is growing and we are pleased to announce – we were pleased to announce the pending acquisition of ETM earlier this morning. Turning to our 2022 full year outlook, with our strong operating performance in the third quarter, we were able to increase our full year earnings outlook while derisking the prior heavily weighed Q4 forecast. On revenue, given our current exchange rate and the U.S. government’s continuing resolution as well as the evolving semiconductor and technology export controls, we are a bit cautious at this time and now project full year sales of roughly $5.45 billion. In the third quarter, we also took the opportunity to refocus Teledyne FLIR by eliminating some smaller money-losing products to help improve our margins. And as a result, we had some cost towards our revenue. Finally, while supply chain constraints continue to limit shipments, we have seen a modest – very modest improvement in recent weeks at least with regard to availability of certain printed circuit boards as well as electronic components. I will now further comment on the performance of our four segments. Starting with our Digital Imaging segment, third quarter sales increased 2.3% despite currency translation headwind of nearly 4%. Sales growth was strongest for industrial and scientific vision sensors and systems as well as for our low-dose high-resolution digital X-ray detectors. Sales of commercial infrared imaging cameras and components also increased. GAAP segment operating margin was 17.2%, but adjusted for intangible asset amortization, segment margin was 22.9%, a 170 basis point improvement from the second quarter of this year. In our Instrumentation segment, overall third quarter sales increased 6.7% versus last year. Sales of electronic test and measurement systems, which include oscilloscopes, digitizers and protocol analyzers, remained strong and increased 9.7% year-over-year with growth in all major geographies and product categories. Sales of protocol analyzers across numerous industry standards such as Peripheral Component Interconnect Express or PCI Express, Universal Serial Bus or USB, and high-definition multimedia interface, HDMI, remains strong as well as sales of oscilloscopes and our unique crossing product, which combine oscilloscopes and protocol analyzers together. Sales of environmental instruments increased 6.3% compared with last year with greater sales of both drug discovery and laboratory instruments as well as air monitoring and process gas analyzers. Sales of marine instrumentation increased 5.1% in the quarter, primarily due to new record sales of autonomous underwater vehicles for both defense and commercial oceanography applications. Overall, Instrumentation segment profit increased 12.9% in the third quarter with GAAP operating margin increasing 126 basis points to 23.2% and 83 basis points on a non-GAAP basis. Excluding intangible asset amortization, the margins increased to 24.5%. In the Aerospace and Defense Electronics segment, third quarter sales increased 4.8%, primarily driven by a 20.7% increase in sales of commercial aerospace products. GAAP segment operating profit increased 23.4%, with margin 349 basis points greater than last year. And finally, in our Engineered Systems segment, third quarter revenue increased 7.2% and operating profit also increased slightly. Before turning the call over to Sue, I wanted to make a couple of concluding remarks. Over the last 18 months, we have endured the same challenges as most companies, that is record inflation, supply chain constraints and now strong U.S. dollar. At the same time, we completed the integration of Teledyne FLIR, our largest acquisition and then we rapidly deleveraged. While the operating environment remains challenging, we are glad to be back to doing what we do best, investing in our businesses to drive organic growth, being vigilant on costs and simplifying our operations to increase margins and finally, acquiring and integrating complementary businesses. And now I’ll turn the call over to Sue.

Robert Mehrabian:

Thank you very much, Sue. We would now like to take your questions. Operator, if you are ready to proceed with the questions and answers. Please go ahead.

Greg Konrad:

Good morning.

Greg Konrad:

Maybe just to start, Digital Imaging had a nice margin pickup and recovery from kind of H1. Can you maybe talk about the margin dynamics around price mix and how you think about the recovery there or maybe expectations for the year?

Greg Konrad:

And then can you maybe comment on just the Defense business more broadly? I mean it seems like you’re getting quite a few of contracts, some at FLIR, some in the broader business. I mean broader market commentary seems to think that demand outstrips supply right now. I mean how do you think about the timing of some of these new defense opportunities and kind of the outlook there?

Greg Konrad:

And then just last one, kind of a clarification question. I mean you called out the 3% headwind from FX. Just want to clarify, is that only a translation headwind? Or are you seeing any changes to competition just when you’re competing with maybe a local currency competitor?

Greg Konrad:

Thank you.

Operator:

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

Robert Mehrabian:

Good morning, Joe.

Robert Mehrabian:

Yes. Well, when we started the last quarter, we weren’t sure how much prices we could – of our price increases would stick. And obviously, we were also concerned whether we could manage our margins that take cost out to improve our margins. All of those coupled with the fact that our commercial orders held up pretty well, like in the Imaging businesses, helped us along the way. So in a way, yes, we were looking at – we weren’t in trouble in any way. We were just kind of very cautious because the headwinds were unpredictable. But as we took some cost out and increased prices, and we had good cash flow, by the way, it’s given us a lot more confidence. So we raised our outlook and de-risked Q4 at the same time.

Robert Mehrabian:

A little bit, yes. I think overall in the fourth quarter – well, let me go talk to the year, which is easier for me to do. For the year, we think we will be at 22.2%, which would be about 20 bps better than last year. So I think Q4 is going to be better about 22.9%, 22.7% of that range. Again, I’m a little cautious here because there is some softness in the commercial market. But again, our Defense businesses are picking up.

Robert Mehrabian:

Let me say, I think $1 billion for ‘23 is a little too high because we have capitalized R&D that we have to worry about. But having said that, if you look at the big picture, which is the way I approached this, we started the year – we started after the FLIR acquisition with a net debt-to-EBITDA of 3.7x. We’re down to about 2.5x now. By the end of the year, everything else going along, we will be down to 2.4x. If all goes well by the end of next year and then by the end of ‘24, we will be down to 0.9x. But that gives us a lot of cash to do acquisitions. And that includes making maybe $500 million of acquisitions in the interim. So the way I look at cash flow is a longer-term view. We probably won’t make the full $1 billion. We will come close, but most importantly, we will be levered and be able to make acquisitions. At the same time, put us in a position where we can do something bigger if we want to later on.

Operator:

And next, we will go to Elizabeth Grenfell with Bank of America. Please go ahead.

Robert Mehrabian:

Yes. I’d be happy to. It’s really, it’s a – while we didn’t disclose the terms, it’s got about 112 employees. It’s in Northern California. What it does is really it gives us two very important components to our – ads to our products that we don’t have. First, in the microwave area, we make traveling-wave tubes. But in order to drive these tubes, you need a power supply. So far, we’ve had to go to other people to buy the power supplies for our tubes. And we’ve been looking for that, and there is a scarcity of suppliers in that domain. With this acquisition, now we can essentially supply a system of both tubes and power supplies. For example, in a given application, we were studying, we sell the tubes and they add up to about $300,000 for that application. When we put the power supply with the tubes together, we can sell it over $2 million. So that’s in the Defense area. The second area is in our Medical field where we supply products that go into cancer therapy, radiotherapy, X-ray systems to kill cancer. We basically have a product that makes microwave – high energy pulsed microwave that are used in that system. And we’ve added to that – we seriously sell that for about $10,000. We’ve added to that more components, and we’ve gotten to where we sell about $40,000, $50,000 of products in a system. But again, what we didn’t have is the power supply, cooling system, the whole system that you can use in developing the high-energy X-rays. And that, again, is something that ETM brings to us. So what happens is a content that used to be $10,000, we have grown it to maybe $40,000, now can grow over $100,000 per radiotherapy system. And they have really good customer contacts and they have been accepted by the customers as have we with our own products. So that’s why we’re making this acquisition. It’s complementary to both our Defense as well as our radiotherapy businesses.

Robert Mehrabian:

It improved margins slightly, but more importantly, what we’re doing is we took the costs out by reducing the workforce. It was a product line, for example, that they bought just before our acquisition in December of 2020. We bought them in May of 2021. It was a product where they were trying to produce basically commercial – industrial, commercial UAVs, unsuccessful, difficult business to be in. We have – in FLIR, we have really good products in the defense domain that we sell substantial amounts of. But to compete in the industrial domain, that was a product that we had to kill.

Robert Mehrabian:

Elizabeth, let me answer the second part of the question first. What’s happening to us is that we have about a $60 million shortfall in sales that rolls over quarter over quarter. So it’s not cumulative. It’s not like you have four quarters of $60 million loss in sales that adds to $240 million, just $60 million. What happens, it gets delayed, we get parts. The next quarter, we ship what we couldn’t ship, then we get delayed again. So we may start the quarter looking, saying, it’s going to hurt us by $100 million, but we recover from that, so it’s a $60 million problem for us right now. The flipside, the first part of your question, we are seeing some improvement especially in the more simpler printed circuit board assemblies. For example, to sell our cameras from Teledyne, DALSA and e2v, we need about 1,000 circuit boards a day on occasion. And that was drying up for various reasons. We’ve managed to address that problem. So that’s good. We also have some improvement in components. Having said that, we still have really tight market for more complex systems like field-programmable gate arrays, which – gate arrays, which are FPGAs. And there, what’s happening is the supply shortages are such that people are allocating certain number to each company. We have a very effective effort underway to combine all of our needs across Teledyne, prioritize them and give our priority numbers to our suppliers. Having said that, that is not improving. Some of our suppliers are asking for non-cancelable orders that go out a year from now. And so you have to make choices there, obviously. And we’re also doing that. So part of it is relaxing the PCBAs, but part of it with the field-programmable gate arrays, that’s not. So it’s a mixture. But I’d say, overall, there is improvement.

Robert Mehrabian:

Sure.

Jim Ricchiuti:

Thank you. Good morning. Robert, you alluded to the short-cycle business holding up reasonably well. And I’m just wondering, as you think about that area of your business in a mild recessionary environment, which areas do you see the business beginning to soften the first? And are you seeing any signs of that in your bookings in any of that short-cycle business?

Jim Ricchiuti:

Okay. And just on the comment that you made about M&A and certainly you could see the net leverage really coming down fairly meaningfully over the next 1 to 2 years. You alluded to 2024 potentially giving you the opportunity to do a big deal. Are you averse to doing a larger deal in ‘23? Or is it a case of – there are a lot of – there are smaller deals that you could do and you’ll just maybe gauge how the macro environment is and whether valuations potentially come down for certain larger assets?

Jim Ricchiuti:

And is your interest mainly in the commercial area, or has anything changed with respect to how the defense environment looks?

Jim Ricchiuti:

Alright. Thanks very much and congratulations on the quarter.

Operator:

Next, we will go to Andrew Buscaglia with Berenberg. Please go ahead.

Robert Mehrabian:

Good morning Andrew.

Robert Mehrabian:

Sure. Let me start with the products. Generally, I would say because of the breadth of the products, while there are some softness in some areas, just like our – rest of our digital imaging, FLIR’s book-to-bill right now is close to 1x, 0.98x, which is in some ways better than DALSA, e2v. From – because of the – again, because of the breadth of the products that they have from tomography instruments to infrared detectors to maritime systems, security, traffic, I don’t think we are going to get hit on all of those all at once, and we are not. The only problem that we have at FLIR, if I may call it that, is that historically, their revenues have been more skewed to the end of the quarter rather than evenly paced during the quarter like the rest of our digital imaging is. So, the only risk there is you get closer to the end of the quarter and something unforeseen happens. And then it can hurt you. We are working very hard to flatten that out. It will take us – we have the same problem in every acquisition we have made, large acquisitions, whether it was DALSA or e2v or others. And so we are working very hard to flatten that curve, the shipment curve. Having said that, coming back to margins, I think margins are settling in. They – from a non-GAAP perspective, while there has been some volatility, as you appropriately noted, I think will settle by the end of the year, we will settle to about overall in digital imaging to 22.2%. FLIR will be a little bit down from that. But generally, we should be okay. We are looking forward to really – last year was an odd year because we bought FLIR in the middle of the second quarter, and we essentially shipped 12 weeks of product with 8 weeks of cost. Again, because of that, end of the quarter shipment that I mentioned. So, that skewed the numbers. But things are fairly well stabilized now. And I think what we are looking for is make sure we get to our 22.2% by the end of the year for all of our digital imaging and then hunker down and improve that next year.

Robert Mehrabian:

Alright. Obviously, we have been hesitant to talk about it, but it’s going to be probably in our Q anyways in a few days, maybe later on. But it’s got about 112 people. The reason I am a little hesitant about the sales, which are about $50 million, is that they also buy products from us. So, they buy our traveling-wave tubes, including with their power supplies and they sell them. So, the deal is going to be accretive. How many cents depends on how you look at the cost of borrowing. Could be accretive $0.02, $0.03, $0.04, if we say the cost of borrowing is 4%, 5%. On the other hand, our cost of borrowing is not 4%, 5% because our average cost of borrowing with our fixed borrowing and cash is more like 2%. So, it’s going to be accretive, revenue a little shy around $50 million, with some pass-through of our own products. I don’t know if that’s helpful.

Robert Mehrabian:

Sure.

Kristine Liwag:

Hey. Good morning everyone.

Kristine Liwag:

Robert, on the supply chain, it really sounds like it’s starting to ease for you and your mitigating actions have been paying off. But can you provide a quantitative update? Last quarter, you had mentioned that the 800 of 900 missing components were resolved. Where are we at this quarter? And how does that trend from here?

Kristine Liwag:

I see. And then in terms of – maybe back to digital imaging, you had mentioned a return to portfolio simplification activities. Now, you have pruned a very small loss-making product line. But as you assess that portfolio having owned FLIR now for a few quarters, are you evaluating a potentially larger cost-cutting initiative or a divestiture, or is this kind of insulated and minimal?

Kristine Liwag:

Very helpful color. And if I could sneak in one more. Back to your comment on the supply chain, you mentioned that for some of the missing items, the lead times are getting longer. What’s driving those incremental headwinds? I mean I would think with some of the demand in other parts of semiconductors, for example, we are seeing rolling consumer demand, shouldn’t that free up capacity for your orders? And I guess I am just surprised that we are seeing some things continue to lengthen instead of really get resolved sooner.

Kristine Liwag:

Great. Thank you very much.

Operator:

And next, we will go to Noah Poponak with Goldman Sachs. Please go ahead.

Robert Mehrabian:

Good Noah.

Robert Mehrabian:

I think in the private deals it’s probably cracked a little bit. And the reason for that is private entrepreneurs are looking at things – they are looking at the world, Noah, the way it is evolving, right. The uncertainty in the future is becoming much more pronounced at this time. So, entrepreneurs that have built a business like the one we just bought, that – those people have been in business since 1973, they are becoming more reasonable because they see things are not going to get better in the short-term. So, on the smaller deals like that, I think you are right. We are seeing some better pricing. Having said that, on the bigger deals and public companies, they are still seeing 52-week highs in the background. Until we get beyond that, which is going to be another six months, four months, where people are not looking at, look my high was $500. And I am now trading at $350, they look in the mirror and say, well, my high was more like $400 and now we are at $350. Then I think it’s going to be more actionable.

Robert Mehrabian:

Yes. It depends on the business. Some businesses, we have a hard time increasing prices because of the programs that we have, long-term programs. But let me just give you an example. In digital imaging, DALSA, e2v, for example, we have been able to increase prices about 4.7%. In marine, where we supply unmanned vehicle, but also a lot of connectivity products for oil and gas, we have also been able to increase prices about 4.7%. On the other hand, in some of our defense products, we have hardly cracked price or gotten about 1% or 2%. Having said that, on the average across the company, our price increases have been about 3.6% year-to-date. And against that, we have wage increases that are 4%. And then products, material that we buy that have been about 3.4%. That’s excluding the extra 2% that we pay for scarce materials. So, that’s been a wash between the price increases and the inflation. Where we hurt is, of course, we are spending $50-plus million extra on getting our scarce products. So, I think over time, that will go away too.

Robert Mehrabian:

Just really, there was just an Altavian product that they bought in December of 2020, about four months, five months before we bought them. Actually, we were already in discussions with them, and they picked that up. And it was – I think it’s basically an industrial, commercial drone business, not in a very difficult market. There are 20 companies that – of that ilk that are competing with one another. Me on that domain, I would rather buy the truck and put in our very really advanced imaging systems on somebody else’s truck. I don’t want to build those inexpensive trucks. So, that’s the one.

Robert Mehrabian:

Sure Noah.

Jason VanWees:

Thanks Robert. And again thanks everyone for joining us this morning. Brad, if you could give the replay information at the end of the call that would be great. And if you have follow-up questions, certainly do feel free to call me as well. Bye-bye.

Operator:

Ladies and gentlemen, thank you for standing by and welcome to the Teledyne Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would now like to turn the call over to our host, Jason VanWees. Please go ahead.

Robert Mehrabian:

Thank you, Jason. Good morning, and thank you for joining our earnings call. In the second quarter sales increased nearly 21% to about $1.36 billion. In addition, our GAAP operating profit, operating margins and earnings per share were all time or second quarter records. Non-GAAP earnings declined slightly but last year's non-GAAP margin and earnings resulted in part from a disproportionate amount of sales relative to costs near the end of the quarter at Teledyne FLIR, as well as lower share count, both due to the mid-quarter closing of the FLIR transaction in May 2021. Including increased foreign currency headwinds, which negatively impacted second quarter sales growth by over 1.7% or approximately $23 million, organic growth was 8.2% and accelerated from the first quarter of 2022. Our short cycle commercial instrumentation and imaging businesses grew strongly in the quarter, and sales from our long cycle Aerospace and Marine businesses also increased. Finally, our US government sales including Teledyne FLIR increased from last year, despite lower defense department outlays in the second quarter of 2022. In summary, year-over-year sales increased in all segments and reported product lines. Overall demand remained strong and we achieved record quarterly orders with a total company book-to-bill of 1.08 times. Orders were particularly strong Teledyne FLIR, where book-to-bill was approximately 1.25. Free cash flow improved from the first quarter, but planned inventory levels remained elevated to counter continuing supply chain risk. Finally, our leverage ratio declined to 2.5 times, and having reached our targeted leverage range, we are again pursuing acquisitions and are pleased to have recently completed our first small bolt-on acquisition of Teledyne FLIR. Turning now to our 2022 outlook, given the recent and significant appreciation of the US dollar, ongoing supply chain constraints and inflation, we believe it's prudent to revise our reported revenue and adjusted earnings outlook modestly for the remainder of the year. Foreign currency translation impacts our three largest segment, and approximately 20% of our total sales with digital imaging and particularly, Teledyne FLIR impacted considerably more than other segments. In addition, supply chain concerns continue to limit shipments. Electronic component and other material shortages negatively impacted second quarter sales by approximately $60 million, and we are assuming that a similar shortfall will continue in the remainder of the year. We have countered both of these headwinds through our various procurement initiatives and strong execution. Nevertheless, we expect total company year-over-year reported organic sales growth of about 4% in each of the third and fourth quarters of 2022, compared with the prior outlook of roughly 5% to 6% resulting in a few - full year estimated sales of about $5.47 billion. Despite these headwinds, we continue to see full year organic sales growth which excludes FLIR of just over 6%, and full year sales from Teledyne FLIR slightly greater than the peak sales in 2020, which included over $125 million from cameras for elevated skin temperature testing. Finally, while foreign currency sales and costs are reasonably balanced at Teledyne, there is no delays and impact on earnings. We also remain a bit cautious regarding cost impact of inflation, therefore, we're modestly revising our full year adjusted earnings outlook by $0.30 at the midpoint, or approximately 1.7% lower than in April. I will now turn the call over to - no sorry, I'm going to continue with our performance of our business segments. In digital imaging, second quarter sales increased 32.9%, largely due to FLIR acquisition, but organic growth in our combined commercial and government imaging businesses was also very strong at 10.3%. Sales growth was strongest for industrial and scientific vision sensors and systems, as well as for our low dose high resolution digital X-ray detectors. GAAP operating margin was 15.2%, but adjusted for intangible asset amortization segment margin was 21.2%. In our Instrumentation segment, overall second quarter sales increased 7.4% versus last year's. Sales of electronic test and measurement systems, which include oscilloscopes, digitizers and protocol analyzers remained strong and increased 11.3% year-over-year. Sales of environmental instruments increased 2.4% compared with last year, with greater sales from certain human health and drug discovery products offset by lower sales of industrial and laboratory gas detection devices. Sales of marine instrumentation increased 9.9% in the quarter due to improved energy record sales of autonomous underwater vehicles for both defense and commercial oceanography applications. Overall, instrumentation segment operating profit increased 13.9% in the second quarter with operating margin increasing 136 basis points, or 108 basis points excluding intangible asset amortization. In the Aerospace and Defense Electronics segment, second quarter sales increased 10.8% driven by a 3.4% growth in defense, space and industrial sales combined 43.9% increase in sales of commercial aerospace products. GAAP operating margin increased 55.2% with margin 749 basis points . Finally, in the Engineered Systems segment, second quarter revenue increased slightly, but operating profit and margin declined primarily due to lower sales of fixed price electronics systems. Before turning the call over to Sue, I want to make a few concluding remarks. We continue to focus on strong execution in order this to minimize ongoing supply chain risk, inflation and now increased currency headwinds. While the operating environment remains challenging, we're highly confident of our balanced and resilient mix of commercial and government businesses across a broad range of geographies and end market. Furthermore, uncertain times have traditionally created opportunities for Teledyne, for example, the change in interest rates, we were able to repurchase fixed rate debt issued just last year at a substantial discount. And while relatively small, the cash paid for the first acquisition for Teledyne FLIR was negotiated and paid in euros. Given the strength of our management, operations and balance sheet now, specifically with our leverage ratio at 2.5 times which we expect to be further reduced in the balance of the year, we're able to continue to seek similar and larger acquisitions in the future. And now, I will turn the call over to Sue.

Robert Mehrabian:

Thank you, Sue. We would now like to take your questions. Operator, if you are ready to proceed with the questions-and-answers, please go ahead.

Greg Konrad:

Good morning.

Greg Konrad:

Interesting last name there. But yes, just I mean, I guess it's uncharacteristic for Teledyne to cut guidance. I mean a lot of times, you have contingency and just low P ratings in your guidance. And I mean the commentary was helpful. But is there any way to maybe parse across the segments? I mean, it seems like A&D might be running ahead of your guidance, digital imaging below. Can you just maybe give us some more color around how you're thinking about the growth and margin outlook for the segments?

Greg Konrad:

And I appreciate that. I mean, I guess everything you're saying is more on the supply side, let's say, rather than the demand side. And you mentioned the book-to-bill, but maybe there are areas that have risk. I mean I'm thinking about tech spending and what we've heard from some of the tech companies. I mean anywhere where you've seen any demand deterioration or kind of concerns? Or is this really all more supply and FX driven?

Greg Konrad:

And then just last one for me. I mean you mentioned FLIR bookings, I guess they were 25% above sales. We've seen some nice awards there. How does that maybe intersect with the supply chain and kind of ability to deliver on these? And let me just think about defense getting better. Is that more of a 2023 item, just given supply chain? Or how you're thinking about the kind of the cadence there?

Greg Konrad:

Thank you.

Robert Mehrabian:

Joe, how are you?

Robert Mehrabian:

Yes. Our price increases for the year, we anticipate it to be about 3% of sales. It's a little more in the Q3 and Q4 than it was in Q2. In Q2, it was less than 3%, which has not been really - we're just put in some increases in prices, especially in some of our instrument businesses where we could, and that would be in Q3. So overall, I'd say, Joe, it's about 3%. The flip side is that the cost increases due to inflation and also wages that we have exceeded that, I'm going to say, by 0.5%, 0.6%, and that's causing some issues. But we kind of knew that would happen and we kind of worked on that very hard. The thing that kind of suddenly came out of at us was the change in the exchange rate starting in April, and that was the hard part.

Robert Mehrabian:

Well, let me start with versus April, which would be a good way to go. As I said before, in instruments for the full year, we expect margins to improve about 50 to 55 basis points. In Digital Imaging now, we expect it to be lower by 130 basis points from what - for the full year. In Aerospace and Defense, we have a good run there, primarily because you know commercial aerospace is coming back, and so we expect improvements in margin of 150 basis points. And lastly, as I said, in a smaller segment, which is our Engineered segment, maybe 60 basis points decline. When you add all of that up, it's about 45 basis points decline across the company. That's - I think that's versus April, that's what the summary is.

Robert Mehrabian:

I think you're correct on Aerospace and Defense. It already has full year margins of 25.5%, which is pretty high. It could go up a little bit. I think there are opportunities going to be in Digital Imaging and also in Engineered Systems. The margins in instruments are already pretty healthy approaching 25%.

Operator:

Our next question is from the line of Elizabeth Grenfell, Bank of America. Please go ahead.

Robert Mehrabian:

Hi. Good morning, Elizabeth.

Robert Mehrabian:

Yes. Good question. Very good question. First, let me back up a second. When we started Q2, we had supply chain challenges. We have a very strong program in procurement. And we were able to offset about $120 plus millions of supply chain challenges by buying through brokers, by buying our own buyers in Asia by a variety of techniques. And so we offset the $120 million plus of revenue that was in danger. That left us with $60 million that we couldn't. But that $60 million is rolling in a way quarter-to-quarter, it's not additive. And what happens is that we think that right now, that's going to continue for the next two quarters and that's where our estimates are coming from. But having said that, because we have elevated our inventory over time that this is going to dissipate. There's no question about that. Whether the over time is going to be early next year or later next year, but over time, this is going to - it's not lost revenue and it's not lost inventory. It's just lost revenue for the time being. So it's going to improve.

Robert Mehrabian:

Thank you.

Jim Ricchiuti:

All right. Thank you. Good morning. Robert, I could appreciate the sudden change in currency. But I wanted to go back to supply chain. Have you guys perhaps underestimated the impact of supply chain or in that maybe you thought it would improve a little sooner? Or is this just something that you've been tracking and it's just not getting better and this was in line with what you'd expected?

Jim Ricchiuti:

Got it. And one of the things that struck by - I - was the Defense business. I thought you might have shown a little bit more growth in Q2. Is this just more indicative of the pattern we've seen at FLIR over the years, where it's just going to be skewed more toward the Q4 period?

Jim Ricchiuti:

And last question from me, and I'll go back into the queue is just you mentioned Raymarine potentially as the macroeconomic environment deteriorates that could be impacted. But just given the way the portfolio has changed now with FLIR. As you look at the broader portfolio, which areas of the business might potentially be precursors of some change in demand that you might see if the economic environment changes more quickly?

Jim Ricchiuti:

All right. Thank you.

Robert Mehrabian:

Good morning, Andrew.

Robert Mehrabian:

Well, yes. So, as you know, Andrew, we've had a succession of awards recently in the Defense that have been - and we put news releases out on most of them. And most of them by in the FLIR area. We think some of our European awards are a little delayed. As you know, to get, for example, if you were to get things to Ukraine, you have to go through one of the other NATO countries. And some of those are taking time. The flip side is that some of the larger awards that we've had, for example, US Army's family of weapons site for individuals, which are mounted devices that go in rifles, that's a $500 million reward. But we're in the early phase, so we expect that the increased revenue for that will come in future periods rather than immediately. We've had a major award from the Danish Ministry of Defense for mobile sensor systems. And we also had, as we announced, we had a really nice award for our very small AUVs, which are Black Hornet from the Norwegian government. And those awards, while they've been made, the shipments are starting to come now. And we expect those awards will lead to more revenue in the future as we move forward from small prototype production or small-scale production to full rate production. So we feel very good about that. But the worst that we've had and some that we're going to get especially in Europe.

Robert Mehrabian:

No. I think the programs we're participating in they're really just greater budgets in the US and NATO countries. And I don't think that's going to go away in any foreseeable future. As you can judge, the invasion of Ukraine has been a lesson to everybody that you cannot be in a situation where you are liable. And I think those budgets are here to stay. And the NATO alliance is getting tighter and their budgets are going up, US budgets going up in all domains. There are programs in the US that we participate in related to high-performance infrared sensors in space to track missiles. There's - I think that's here to stay.

Robert Mehrabian:

I would say in all areas, I would probably exclude strictly government services businesses, type businesses. We've seen things across our segments. So it's not necessarily pure one segment or another. Our emphasis has been Digital Imaging will continue, and we like instruments. But there are certain areas of aerospace and defense like in our connector businesses where our margins are superior to everything else. So we would not exclude that. We won't buy something. We will not participate in something in the government services business, for example.

Robert Mehrabian:

Thank you.

Kristine Liwag:

Hi, good morning, everyone.

Kristine Liwag:

You've mentioned to return to M&A now that you've hit your target leverage range. With a sharp increase in interest rates, have you seen asset prices come down to preserve your return thresholds? And also, in terms of timing, there's a lot of economic uncertainty. Do you think now is the time to look at these assets or wait and see how the economic environment unfolds?

Kristine Liwag:

Thank you for all the color.

Operator:

And at this time there are no other questions in queue.

Jason VanWees:

Thanks, Robert. And again, thanks everyone for joining us this morning. If you have follow-up questions, please feel free to call me at the number on the earnings release or email me directly. Maxine, If you could conclude the call and give the replay information, we would appreciate it. Thank you.

Operator:

Ladies and gentlemen, we'd like to thank you for standing by, and welcome to the Teledyne First Quarter Earnings Call of 2022. [Operator Instructions] And as a reminder, today's call will be recorded. I would now like to turn the conference over to our facilitator, Mr. Jason VanWees. Please go ahead, sir.

Robert Mehrabian:

Thank you, Jason, and good morning, everyone, to our 19th [ph] earnings call since our spin-off in November of 2019, at which point, our stock price was approximately $9 a share. We began today -- we began 2002, we began with the greatest first quarter sales, earnings and adjusted operating margin in our company's history. Our results and operational execution continue to reflect exceptionally well-balanced business portfolio across both end markets and geographies. Demand throughout our short-cycle instrumentation and imaging businesses remain very robust, resulting in total organic sales growth of 7.8%, including approximately 100 basis points of currency translation headwind. We achieved record orders for our electronic test and measurement instrumentation and industrial imaging sensors and systems, even in a typically weak first quarter for these businesses. Sales from our longer-cycle commercial aerospace and marine businesses increased considerably from last year and backlog also grew. Both our GAAP and non-GAAP earnings were first quarter records. GAAP earnings per share was exactly doubled compared with 2021 and non-GAAP earnings increased 34%. I want to emphasize that our non-GAAP earnings exclude only acquired intangible asset amortization. But in the first quarter, it also excluded a large tax benefit related to FLIR foreign tax matters, which only appear in the GAAP results. While free cash flow was lower than last year, it reflected the following guidance

Robert Mehrabian:

Thank you, Sue. And operator, we'd like to take questions. If you're ready to proceed with the questions-and-answers, please go ahead.

Greg Konrad:

Good morning.

Greg Konrad:

This might be a little bit greedy, and I appreciate the conservative nature of forecasting. But it sounded like you took up the organic growth outlook quite a bit with maybe a more minimal change in EPS that you announced this morning for the year. Can you maybe talk about the dynamics there? And then maybe given the comments on the supply chain, maybe some of the offsets to what seems like maybe slightly better volume.

Greg Konrad:

Greedy on that part, though.

Greg Konrad:

Yes. That's helpful. And then, I mean, just kind of baselining the outlook with the quarter. When I look at the margin, some of the segments were well ahead of at least our expectations, maybe digital imaging fell a little bit short. Can you maybe just level set us on the outlook for the year for margins by segment and kind of what you're expecting today?

Greg Konrad:

That's helpful. And I'm just going to sneak in one last one. I mean, you mentioned defense and kind of the increased opportunities. And I think at one point, people are worried about defense maybe bringing down the overall growth rate of Teledyne. Is there any way to maybe quantify what you're seeing in terms of maybe what you thought of as kind of the long-term defense growth rate prior and then post some of the budget tailwinds in NATO kind of what you're thinking at going forward today?

Greg Konrad:

Thank you.

Operator:

Our next question will come from the line of Jim Ricchiuti of Needham & Company. Please go ahead.

Robert Mehrabian:

Okay. Jim, good morning to you. First, let me back up and say, the way we look at defense, which is now about with FLIR included, Teledyne FLIR, it's about 25% of our portfolio. The way we like to think about that part of our portfolio is kind of like a shock absorber. When commercial businesses go up and down, especially if they go down and you have serious inflation and other things become very negative, it acts like a shock absorber. But having said that, you also have to look at what's happening across the world. And the way we see it is that the conflicts have caused significant change in demand for products, especially our products from our perspective. And we think we should be ready, which we are to enjoy the fruits of that. Having said that, I am not really that convinced, that we should change the balance of our portfolio towards defense. And I say that – with an M&A. And I say that because that I don't really think it's very prudent for a company like Teledyne to change strategy because of something that has happened or is happening. And I think our primary growth engine has always been our commercial businesses, and we have more opportunities there. So I think in M&A, we'll probably focus on commercial businesses. Having said that, we bought FLIR, and FLIR had a substantial defense business. And we observed it, but defense is good. It's got a predictable backlog, but it's not really – it doesn't have the kind of margins you can enjoy in the commercial domain.

Robert Mehrabian:

Yes. Jim, you're obviously very familiar with Teledyne. If you look at our Q1 gross margins last year, it was about 38.9% for the legacy Teledyne. We didn't have FLIR at the time. FLIR, on the other hand, Teledyne FLIR, enjoys higher gross margins than us about 55% or did historically or 50%, I'm sorry. So when you combine those two together, the combined company gross margin in the first quarter moved from 38.9% to 43%. Having said that, we also enjoyed higher margins in our test and measurement businesses because they grew significantly 19.2%, that's in our Instruments group. And our Aerospace and Defense margins moved up huge because of the about 50% increase in our commercial aerospace business. So we enjoyed two tailwinds

Robert Mehrabian:

Yes, I would say, so we do have some concern going forward only because the comps are going to be a little tougher in Q3, Q4. Last year, when the first quarter, we were in a trough, as you remember what we're encouraged. We do a lot of both OEM products for commercial aircraft. But we also do a lot of aftermarket products. So we're encouraged. Let me put it that.

Robert Mehrabian:

Thanks, Jim.

Joe Giordano:

Hey, good morning guys.

Joe Giordano:

So, I just wanted to start with the growth rate in the FLIR defense portfolio for the quarter. I know that was down. So FLIR overall was down year-on-year. Just how was that – how did that 1Q play out relative to what you were thinking internally three months ago? And has your overall like mid-single-digit growth for the FLIR portfolio this year changed? And maybe you can – if you want to loop that in with like your updated views on organic growth by segment, that’s probably helpful too.

Joe Giordano:

That’s helpful. Thank you. I was just curious like your point on this is not the time to be effervescent and full year outlook because of what’s going on in supply chain and what’s going on with inflation. I think that’s totally fair. If you look at your portfolio, like what’s the most concerning part? Like which do you think is the least protected of all your businesses, if something which happen negative globally?

Joe Giordano:

Okay. And if I could just one last quick one. The test and measurement growth is really strong again. How sustainable is that at that level? Do we start moderating on the rates and kind of stay on a gross dollar basis at similar levels? How do you think about that business?

Joe Giordano:

Thanks guys.