Q3 2020 Teledyne Technologies Inc Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the Teledyne third quarter earnings Conference 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.
Hi, if you should require assistance during the call. Please the like Star then zero as a reminder, this conference is being recorded I would now like to turn the conference over to our host Mr. Jason Vanwees. Please go ahead marybeth.
Good morning, and thanks, everyone. This is Jason Vanwees Executive Vice President and I would like to welcome everyone to Teledyne's third quarter earnings release Conference call. We released our earnings earlier this morning before the market opened.
Joining me today are teledyne's executive Chairman, Robert Mehrabian, President and CEO Al Pichelli Senior Vice President and CFO, Sue main and senior Vice President General Counsel, Chief compliance Officer, and Secretary Melanie Civic.
After remarks by Robert will ensue, we will ask for your questions, but of course before we get started our attorneys have reminded me to tell you that all forward looking statements made this morning are subject to various assumptions risks and caveats as noted in the earnings release, and our periodic SEC filings and of course actual results may differ materially.
In order to avoid potential selective disclosures. This call is simultaneously being webcast and a replay both via webcast and dial in will be available for approximately one month.
Here is Robert.
Thank you Jason Good morning, and thank you for joining us joining our earnings call I want to.
I want to open with the following comments first.
All of our 70 worldwide manufacturing sites as well as our corporate office and research laboratory remain operational and only 16% of total employees are working from home.
Second.
Our short cycle, environmental and test and measurement instrumentation businesses rebounded from the trough in the second quarter growing approximately 6%, that's 5% respectively often over quarter sorry.
Sure.
We believe our longer cycle commercial markets, such as marine instrumentation and medical imaging bottom in the third quarter.
Fourth our go.
Our government business has continued to grow and generally remained attractive niches TSYS has space based imaging manned and autonomous subsea systems and electronic warfare.
Despite the market turmoil and lower sales in 2020.
We have successfully demonstrated GOP margin improvement.
For example.
The second quarter GAAP operating margin increased sequentially over 150 basis points.
Especially the operating margin of 16.4% was the second highest in the company's history.
In addition, we achieved greater margins compared to last year in nearly every major business category, except commercial aerospace where sales have declined nearly 50%.
We also achieved record third quarter free cash flow.
All time record free cash flow for any first nine months period.
Finally.
Our balance sheet has never been stronger and our acquisition pipeline is healthy.
As the overall demand environment continues to improve.
Our substantially lower cost structure.
For example, we're operating with 9.2% fewer employees are.
Our lower cost structure should provide significant operating leverage in future quarters.
Coupled with acquisitions, we expect earnings and cash flow to continue compounding for years to come.
Before turning to out to report on the third quarter performance by segment.
I want to comment comment briefly on.
On two important items first one.
The one web satellite program and second the potential acquisition of autonomous.
Over the last few weeks.
The one lab situation has improved considerably.
First one.
One web current of our customer Airbus Oneweb satellite secures $235 million of interim financing in late September.
Second we read.
We received a substantial advance payment in the month of October and third we recently signed a new more favorable contract for which we have resumed limited production.
While some risk remains.
Including the successful exit by one web from bankruptcy we.
We currently expect a modest charge of approximately $3 million in the fourth quarter first.
Versus.
The potential $40 million with their year during the work stoppage.
Now regarding for autonomous.
On September 28, we paused our efforts to acquired the business and voluntarily we do our application for authorization by the government of France.
In summary, we.
We determined that that time that an acquisition under the proposed conditions of the French government was not usable.
Sellers' valuation expectations communicated to teledyne how.
Howard.
In recent days those sellers' valuation expectations have significantly moderated and we have renewed our acquisition efforts.
This time.
We are hopeful to conclude the negotiations and announced acquisitions before the end of the year.
I will now comment on the performance of our four segments. Thank.
Thank you Robert and our instrumentation segment overall third quarter sales decreased 6.9% versus last year.
Sales of environmental instruments decreased 2.1% from last year, However, sales increased 6.5% sequentially from the trough in the second quarter.
Compared with last year sales of certain products, such as laboratory instrumentation for life science applications increased however.
However, this was more than offset the year over year declines in sales of selected industrial products, such as ambient air monitoring instrumentation.
Sales of electronic test and measurement system decreased 6.5% year over year again, however, sales increased 4.6% sequentially.
Sales of protocol test instrumentation in particular for PC, I Express and USBC test solutions increased from last year, but sales of general purpose, all sort of scopes declined.
Sales of marine instrumentation decreased 11.3% in the quarter. However, operating margin was stable due to head count management and business simplification initiatives over.
Overall instrumentation segment operating margin increased 86 basis points, despite the lower year over year sales.
Turning to digital imaging segment third quarter sales decreased 1.8% and primarily reflected lower sales of X ray detectors for dental and medical applications.
Firstly offset by greater sales of infrared detectors for the defense market and three D. Geo spatial imaging systems.
Sales of industrial and scientific cameras and sensors were largely flat with last year with continued strength in semiconductor conductor inspection and markets in Asia, largely offsetting some weaknesses in Europe and North America.
GAAP segment operating margin was 19% an increase of 210 basis points year over year.
In the aerospace and defense electronics market third quarter sales declined 18.2%.
As greater defense sales were more than offset by a 49% decline in color and sales of commercial aerospace products as well as lower commercial space sales related to Oneweb.
GAAP segment operating margin decreased due to lower sales, but increased 621 basis points sequentially, given a significant lower cost structure.
In the engineered systems segment third quarter revenue increased to 2.9%, primarily due to greater sales from space nuclear and other manufacturing programs as well as the electronic manufacturing services segment.
Segment operating profit increased 17.9% with margin 158 basis points higher than last year.
I will now turn the call to Sue who will offer some additional commentary regarding the third quarter in our Twentytwenty outlook. Thank you Allen good morning, everyone. I will first discuss some additional financials for the quarter not covered by revenue now and then I will discuss our fourth quarter and full year 2020 outlets.
In the third quarter cash flow from operating activities was $153.8 million compared with cash flow of $150.9 million for the same period of 2019.
I think free cash record third quarter free cash flow that is cash from operating activities less capital expenditures was $135.1 million in the third quarter of 2020 compared with $125.8 million in 2008.
Capital expenditures were $15.2 million in the third quarter compared to $25.1 million for the same period of 2018.
Depreciation and amortization expense was $29.2 million in the third quarter compared to $27.9 million for the same period of 2009.
We ended the quarter with $332.2 million of net debt that is $786.7 million of debt less cash of $454.5 million for a net debt to capital ratio of 9.9%.
Last option compensation expense was $5.7 million for both the third quarter 2020 and 2018.
Turning to our outlook management currently believes that GAAP earnings per share in the fourth quarter of 2020 will be in the range of $2.56 to $2.86 per share and.
And for the full year 2020, our GAAP earnings per share outlook is $9.70 to $10 compared with the prior outlook of $9.45 to $10 Intuity 20 full year estimated tax rate, excluding discrete items is expected to be 22.7%.
Sent a 210 basis point increase compared to full year 2019, due in part to less R&D tax credits.
In addition, we currently expect less discrete tax items in 2020 compared to 2018 I will now.
Ill now pass the call back to Robert Thank you Sue.
We would now like to take your questions Felicia if you're ready to proceed with the questions and answers. Please go ahead.
Thank you, ladies and gentlemen, if you wish to ask a question. Please select one then zero on your telephone keypad.
Withdraw your question at any time by repeating the one zero command if you using a speakerphone. Please pick up the handset before pressing the numbers.
Once again, if you have a question. Please select one been zero at this time one moment. Please for our first question.
And our first question comes from the line of Joe Giordano. Please go ahead.
Hi, everyone. Good morning.
Good morning, Joe.
So some interesting. So you said there Robert on Oneweb than on proton I wanted to touch on.
On one when I was going to ask kind of Q4 already knew about that development, what's kind of your broader.
Ill look for commercial space has obviously been a lot of buzz around the sector recently with some other big companies like Microsoft the other day talking about investment or your future ambition is there in terms of growth and is there a new applications that you might like one is involved in that sector going forward.
Yes. Thank you for the question, let me note that.
For us.
We have.
Space programs, both in the commercial and defense sectors in the.
In the commercial sector a lot of our Easter.
Instruments.
Our.
Euros both for study.
Studying the universe as well as looking down at the at the at our lower environmental.
Measurements.
The defense side on the other hand, we do have a large number of programs that address the needs for looking at weapons.
Through satellites.
While there are of course as you said, there's a lot of interest in communications in space like the pro.
The programs that you mentioned our involvement tried NYSE oneweb more interesting Clark to us is.
His defense imaging sector, where we've been winning contracts recently and where our programs are very healthy for example, we.
We are involved with the wide field of view program in the defense sector.
And that all peers program, which is persistent.
Overhead infer that classified program.
I think going forward, we'll see at what worked outcome is under long web program.
They they have.
Ambitions of course to increase the number of satellites in the future, but right now we're more focused on making sure that we make the products, we promise to make and we get paid for revenue from.
On a night that answered your question Joe.
Thank you.
On proton is.
Do these new do given discussions with the French government like what kind of scope changes does that entail Mike what is the size of the business that you would potentially be acquiring kind of different now than what we initially thought given.
Given our discussion.
Yes, initially obviously, we were to acquire 100% of the business the French.
The French government as asking that we led.
Hey.
French government stake state sponsored investment bank invest 10% in the company.
You cannot be itself, we find that.
Okay.
We're going to work with the French government that especially the investment bank to make sure that we have all of our procedures in place.
Uh huh.
On the more important thing that has happened recently Joel is that there was a significant change in price.
We asked for and received.
About 15%.
On us dollars spaces.
Frankly, you can appreciate that owning 100% out an entity.
Is very different than owning get 90% of an entity and thats why the product price reduction I think we have an agreement in principle right now and we need to finalize our deep.
Detailed paper work with the government and then see if we can proceed from there.
No it's definitely good to hear.
And just two more quick ones from me can you go.
Can you guys give maybe your current views. So I know it's been shifting in the market for your current views on the defense sector under it under a Biden administration and what are your thinking early stage I'd like your biggest margin opportunities into next year across the portfolio. Thanks.
I think.
In the short term.
We're looking at which I'm in there.
The really short term and let's say mid time next next year, we're looking at the growth in the defense sector for our programs in the mid single digit range.
Yes, David Chang.
Duration as you indicated then I think in the future years in the out years.
We think he thinks we have remained relatively flat our job is really very simple regardless of.
Which administration needs and which programs are supported our job is to be able to get our share of the market and gain market against the competition. So I feel very good about our defense programs because of the breadth of offerings, we have from spatial imaging.
Thanks to electronic warfare to communication et cetera, having said all of that.
Defense today.
Is about 20% of our sales our portfolio and I would say a little less than that 20% of our operating income. Consequently, really my attention going forward our attention going forward is to expand our commercial businesses, where we enjoy much.
Higher margins.
Thats CTO.
Our next question comes from the line of Blake Gendron with Wolfe Research. Please go ahead.
Yeah. Thanks, good morning, So I wanted to dig into the margin improvement into next year you quantified some of the cost out in the past things you are doing internally with the target goal of two.
20%, GAAP EBIT margins or better I'm wondering if you could update us on both the cost captured to date and then additional opportunities moving forward and what the timeline of part of that will be thanks.
Sure Blake I'll try to answer that the best I cannot this time.
First there are two primary.
Changes in our cost structure.
The first and the most important one is the lower.
Number of employees.
In general.
We're down about 9.3% that is outfit adding.
About.
30, 40 people in our long lead program in the UK. So we've done about 9.3% which is about.
1100, a little less than 1100 employees.
That's the effect of that.
Maintaining that cost structure is that it will help our margins.
Approximately.
110, 30 basis points or so.
The other thing is that.
We also have a procurement initiatives, which are.
Helping us to reduce our costs across the board.
As we procure read by about $1.2 billion worth of goods and services and our procurement initiatives are aimed at reducing that so we and we expect to get a little bit how pump that domain as well, but by and large I'd say the 130 basis points.
For next year is a good number that I gave you I'm, hoping that it will be higher than that.
Understood. That's that's really helpful circling back on digital imaging I'm, hoping to better understand kind of roughly the end market waiting across things like machine vision semi is life sciences et cetera, I mean, it seems like life science demand could carry the segment into for you.
What specific end market considerations are baked into the segment outlook through year end and what are some of the larger longer or trends that you are focused on we see a lot of product announcements and expansion, but it's tough to contextualize exactly where those fit across your end markets. So so I guess just high level, how do you expect this.
Looking to evolve.
Okay, I'll try and answer that.
Let us start with our digital imaging sales for this year at about nine.
980, 580 $385 million last year that were about nine nine knee sales flat year over year.
No.
Big chunk of that is our cameras and vision systems and sensors that are used for both for flat panel. This space just about any phone or any television that you look at as to be expected on a lot of those are down by our cameras and also our cameras are you.
As the semiconductor industry for inspection.
Overall, we sell both sensors and cameras.
Now of course, our treaty.
Three dimension on the use of things.
And our that sales in that business is about $240 million and it's a fairly stable business with all the problems with the pandemic.
That business has remained healthy.
It's flat year over year, but having said that the margins have improved.
The area that.
Has hit us a little bit hard there is in the healthcare area.
That's sales there at about a $220 million.
We make X ray detectors, both for dental as well as orders are looking at.
Human and.
And thats enough.
And we also make some X ray sources, but let's stay with the detectors as you know the detectors that we make in the dental for the dense dental industry, they're both incurred oro into or an actuarial that's outside the mark on inside the mine.
That has been very slow because dentists have not been very active up until very recently, our internal road detectors are picking up our extra order of the Texas, we'd probably be a little while before let pickup we think that business would start picking up at the end of the fourth.
Portage the one area that surprised us frankly in healthcare is that we make.
Did we make sources weve full we make the magnetrons that go into radiotherapy instruments that are instruments that are used for cancer treatment.
A lot of those instruments are also used scored.
Looking for cancer.
Because of the pandemic that area has significantly slowed down.
So until that area comes back we don't think our healthcare businesses would be as robust as they used to be and we think thats going to happen by the way next year.
The aerospace and defense that includes both our imaging for classified programs here as well as studying space both here and in Europe.
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That's been an increase for us this year.
Year over year, I think we have about an 8% increase we had about $270 million that's pretty healthy.
The last two items are the men's business.
Men's and micro electronic systems.
Two mechanical systems revenue.
Revenue there is about 95 million itself to about 12% from last year, primarily because we bought a small mems business, we're probably.
The largest independent men spawn three in the world today.
And we're very positive about that business. The issue there is it's a fab very.
Very capital intensive so we'd always balancing our capital investments against.
What kind of market share we want to have the last area of course is our Geospace show, where we make light.
Slide ours and other devices.
And that's that's a healthy business, but it's relatively small it's out the order of $58 million.
So I don't know if that answered your question Directionally I think.
We expect digital imaging business to grow next year.
That's a that's extremely helpful. I appreciate the detailed response I'll get back in queue.
Thank you.
Our next question comes from Greg Konrad with Jefferies. Please go ahead.
Good morning.
Hi, Good morning, Greg pay down I, just wanted to follow up on two of the previous questions. I mean first on health care and you kind of talked about it and in the release and talked about kind of a recovery in late Q4, I mean pre cove in that business seems to have just been straight up you've picked up share.
In a lot of the new technologies I mean, when we think about into next year does that business kind of get back to that normalized level and continue its growth trajectory I mean, what type of opportunities do you see going forward.
Well I think.
Theres no question that that business has a very healthy futures and you know the reason is very simple we make.
We make detectors X ray detectors that have higher resolution that normal detectors, and therefore, you use much less X ray.
To be able to.
Project on image.
Having said that that's a no brainer that.
That task is gone the takeoff these.
The issue is at what time, our hospitals going to be allowing patients in four other than serious surgery or cancer treatments or other things, we think thats going to happen next year, we even think overall.
Overall in digital imaging, we should have.
Yes, a little increase from this quarter into next quarter.
I would say as much as maybe $10 million and we think.
For next year.
We probably should see of the range of about 8% to 9% increase in revenue overall in digital imaging, which would be really good progress since it's one of our higher margin businesses.
And then just to follow up on the defense question I mean, you mentioned space an unmanned.
I think shallow water submersible, but we're also seeing a.
A lot of new opportunities. The Navy is talking about growing its unmanned portion I mean, well what did your content or opportunity with that whether it's larger systems. There are smaller ones and kind of just the outlook for opportunities within unmanned.
First up you mentioned.
You mentioned the shallow water some submersible and of course, that's for the our Navy seals and we have the sole provider of that that program's going really well as you move to the unmanned vehicles from a defense perspective, we really have two sets of the.
Codes that are being used today.
One of them is really a vehicle that is gliders that glides in in the ocean and in front of a battleship formation. They can use us has as many as 100 gliders in orders to sample the salinity Dan.
City of the water, which of course FX sonar transmission.
And reception.
In that area, we've had the probably the largest programs.
From the Navy and other.
Another area of course is that we.
We make medium size.
Economists vehicles, and we have an opportunity we have sold some of those both to our military as well as overseas.
We're looking at more opportunities in that area, especially as as a prime.
Going back to the large displacement.
Well. This is all we are going to be down got program, probably as a sales.
Subcontractors to someone else. We're frankly, if you were to come.
Look at if you were to look at the submarine.
And say, okay, what kind of vehicles are available today.
In the world.
To be able to.
Exit be housed in a sub marine at exit submitting the only new vehicle is ours and that the submerged.
Shallow water submersible vehicle and of course, coupled with our unmanned vehicles that I, just mentioned and the technologies that go with it our way fairly bullish in.
Window for that area.
And then just one more quick one.
I think last quarter, you talked about well.
In excess of $1 billion and capacity to do M&A I mean on the photonics deal that seems to be well less than half I mean, what are you seeing in the broader M&A market, whether just valuation.
Volume of potential opportunities just given that you tend to be fairly conservative and prudent around M&A.
Yep.
We believe we've demonstrated both.
Cataract statistics, both being very prudent but also when opportunities.
Our afforded to us to be able to be more aggressive I'll just mention to you that when we went through the downturn in 2008 to 10 the financial crisis.
Right. After we came out of that we acquired two very strong companies on much lower.
Troy and the second one was dalsa.
Fast forward through the crisis in 2014 to 16, Richard on crisis for US We lost about 200 million in revenue, we improved our cash flow just like we are doing now as soon as we came out of there are we acquired the two b, which was our last largest acquisition too.
It's about $780 million and Thats done really well we started in March instead of seven 8%.
They're almost reaching.
Reaching 20% today no.
Yes.
Going back now to your job.
Observation on question.
I've said before our ability we had a billion dollars or a little more than that because of our cash flow that has significantly increased two days. So.
I think its closer to one and a half.
I think it could go out to try.
It could go out as far as 2 billion, depending on the weather job.
How much of an EBITDA, we acquired our debt to EBITDA ratio limit is about 3.5 today, we're sitting at around 1.4 and.
And with more cash generation in the fourth quarter, we should be a little better than that so I would say 1.5 to 2 billion 1.9 billion is that range that are Cape we're capable of doing now if you take for autonomous which is going to cost us at least two.
Our best estimate is closing costs et cetera.
He is going to be about 450 $460 million and subtract that out that leaves us with one to 1.4 1.5 billion additional capability. So we're looking we're looking very hard.
As we come out of this year I think people are having a difficult time and.
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Some of the boards, obviously boards and management as I said before we are always looking in the rearview mirror, saying, how well their stock used to be whereas shareholders are always looking at least my view of it is they're always looking forward through the FOT front window, saying where things done.
What kind of an unfair would be attractive so having said all of that.
I think we've we think this a good environment for us to make acquisitions.
Thank you.
Our next question comes from the line of Andrew Buscaglia with Berenberg. Please go ahead.
Okay.
Good morning, Andrew.
Operator, I don't think Andrews on.
Okay, well move on to the next one our next question comes from the line of Jim.
Teachey with.
With Needham and company. Please go ahead.
Good morning, Jim.
Our for some reason operator, we're not getting the people there is something wrong about your end because.
I can hear you, but the questions are not coming through.
Robert I think that one was on me Robert I had my phone on mute that's my apology if.
If I may Robert can you shed a lot more confident about closing on the photonics acquisition and.
I Wonder if maybe you could talk a little bit about what you find so attractive about this business I think in some respects it looks a little bit reminiscent of.
Of the acquisition that you did the TV, but I'm wondering if you could talk a little bit about it to the extent you can.
Sure first.
I'm any more positive about it because.
We've had some discussions with the French investment bank, and we find them to be much more job.
Business oriented than government oriented of course, they're going to have a say in making sure that the technology doesn't mobotap, France, but we think I feel better about it because I think we can live with that.
Live with that enterprise as a minority shareholder for a number of years.
The second part is that that business seems to have we have to yet your final due diligence check that business seems to have held up pretty well.
During this difficult period, just like our defense businesses because primarily.
It provides a.
Non iconic image intensifies.
For night vision systems now.
What we bring to it is all of our digital imaging capabilities, which are all complimentary not duplicative.
Stat that field is moving more towards Digitization, which we are experts in so we think we bring substantial synergistic value to the enterprise, which has been missing in the recent past the country's been owned by a private equity firm. Therefore, we didnt have sales.
The companys to interact with.
Sales as smaller part of the business also.
This has to do with commercial laboratory instrumentation.
And for very low light using photon multiplier semtech common to use for the night vision that says.
That's attractive to US also because we bought the scientific camera businesses, which serve laboratories instruments and academic instrument across the world and we think that is.
Really attractive to us because they bring the best mass spectrometry detectors to the field and it'll be a very nice overlap with our existing.
Businesses that we acquired last year in that area. So those are some of the specifics about that acquisition. Jim that's helpful. Robert I Wonder if you Mega also may have missed it but did you give any information on on orders to book to Bill and maybe a little.
Color on book to Bill per segment.
You also I think gave a little bit of color about what you're anticipating for the digital imaging business in Q4, I Wonder if there is any color you can provide on some of the other business units.
Well, let me start with.
With the book to Bill.
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The book to Bill.
In Q3.
It's about <unk> 0.95, maybe a little more than that because on in engineered systems is a very lumpy business that we get a big book to bill, but the skew excluding that it's a little over <unk> 0.95, we expect next quarter to exceed one in book to be based on everything that we see so far.
During the quarter, we expect to end the year just below one maybe.
Nine 8.97 now.
Q4.
Revenue, which.
I talked about.
Digital imaging.
Being up somewhat.
Q4 revenue should increase over Q3.
By about.
For 44% or so were $40 million, that's a that's a little higher than 4%.
That would be very attractive for us big cars index in Q2.
Where we had I think about 743 in revenue I said I expected Q3 to be equal Im very similar to that end up the revenue was about 7 million 6 million higher.
And the income.
It was about the same as even though we didn't have many one time benefits in the third quarter.
Just a depressed for a second if you take the third quarter of this year versus the third quarter of last year.
They were dosed at 29 cents.
Income.
Difference from taxes, one time tax items and against one time charges to benefit last years.
Third quarter. So if you kind of do an apples to apples, which we never agreed to non-GAAP measures, but if you do that we'd only down about seven eight cents from last year's fourth quarter, so going into the fourth quarter.
I think if we can increase the revenue.
In various groups and achieve about $40 million.
Increasing overall revenue.
Comparable to.
What is now our better margins that way to achieving.
Our margin this quarter was.
16.4%.
And so we think what will happen is that.
We we will have.
We will have a better earnings as well, which is what sue alluded to as we have raised the midpoint of our earnings.
Earlier today.
Got it. Thank you that's very helpful.
Our next question comes from the line of Noah Poponak with Goldman Sachs. Please go ahead.
Hi, good morning, everybody.
Good morning.
Robert.
Sort of following up there and in your prepared remarks, you mentioned that you.
So you think you've seen a bottom in your cyclical businesses can you just elaborate on that.
Comment I mean is that in an exit rate versus entry rate into the quarter or order action or any more detail.
Any more detail to help us get comfortable thats happened would be helpful.
As output Charlie mentioned earlier.
We've seen five and six per night and I said. It also is in 5% to 6% improvement in revenue in the environmental and test and measurement businesses.
Our job.
Book to Bill in those two areas are over one of our one point or two to 1.24, so 2% to 4% above what we sold and we think as a consequence, we think that those businesses are going to do okay going.
Going forward, we expect some marginal sell improvements in our total instrumentation business, maybe as much as 15 million or so.
But more importantly, I think.
We're seeing some act.
Act of course, China is coming out of there.
Downturn.
Doing well, but we also see some new products that we're offering in the pharmaceutical area as well as water sampling area that are encouraging for us so.
The instrumentation would be the one digital imaging I think I've already spoken about.
It could it could be as high as 10 to 15 to maybe even $20 million in Q4 versus Q3 I think.
I think in aerospace and defense I think we are going to be fairly flat, primarily because I don't think there is going to be any much movement in the aerospace domain in our defense is already pretty healthy.
In the engineered system, we may have some uptick in revenue, but will have some pressure on our margins but.
But generally we think if you add all of that up we could out.
We could have about $40 million increase quarter over quarter because.
The things that I mentioned.
Okay. That's helpful.
Try trying to piece together the margin commentary you've made today.
Got it looks like the second.
Segment operating margin at the total company level full year 2020 is going to come in around.
17%, depending on exactly where the fourth quarter is in them.
Are you.
Or the comments that you made earlier sort of officially targeting a 130 basis points of improvement in that next.
Next year, and then I I can't quite tell if youve provided a long term, 20% target or not but it certainly sounds like you expect more improvement beyond that I mean are we kind of looking at something in the zone approximately of 100 basis points of segment operating margin improvement for a few years.
Yes, I hope so let me I'm going to get some folks around the table from my various segment operatives and others, but let me let me go back for a second.
If we do what we have just said we would in the fourth quarter.
We should end the year with segment operating margins of about 17%, which is what you noted because early in the year of course, Q warranty was 15.2 and Weve continuously improved.
If we do that then to Charleston company.
Operating margin, which was about 15%.
In the end of Q2, which is what I thought it would be should improve to about 16.2% to 15.3% now.
No point.
Going forward into next year because of the actions that we spoke about growth people on procurement and a whole bunch of other 80 20 programs that we have we expect to bump that up to 130 basis points next year.
Our operating margins and frankly, if you put it on 17 and we put it on PC.
15, it's the same thing because.
The percentage of corporate costs are fairly fixed having said that and going forward I think that would moderate somewhat because we took a lot of cost out this year and we're going to enjoy the fruits of that next year, but I would be disappointed if we can't.
Continuously improve our margins similar somewhere between 80 to 100 basis points in the next few years.
Okay.
That's helpful. And then finally, just wanted to ask about the cash flow statement.
Is it possible to quantify or bracket. The October advance payment related to one way that you mentioned and then it certainly looks like you'll come in ahead of the.
Full year $400 million of free cash flow that you have discussed previously if you're willing to provide an update to that and then the conversion to net income is pretty high for the year Capex is down I guess, maybe if you were to speak to.
I guess, we're just assuming the conversion was 100% into perpetuity is any reason not to expect that.
Let me start from the read end of that question because that's that's the easier one.
To answer for me.
Over a 100% conversion yes.
And we anticipate that that will continue because of all the programs that we have in reducing manage working capital and reducing costs in general.
Now.
Going to the.
The cash flow for the year.
In Q2, I said they'd be a little over $400 million.
In Q3, where we enjoyed a 135 million of free cash flow data also included $15.8 million that we had to repay the government for the carriers that.
So the 110 35 is really very healthy cash more for a company like ours. If we can continue that momentum we.
We I expect that by the end of the year, we will be over 400.
For 25 I think.
I think thats within reach maybe a little higher than that.
And I expect if we can do all of that then our net debt.
Good job around 200 million, a little north or south of $200 million, which puts us in a really good position for the future.
Sales of acquisitions.
Very helpful. Thanks, Thanks, a lot.
Sure.
Our next question comes from the line.
And then with Wolfe Research. Please go ahead.
Yeah. Thanks for getting me back on here feel free to pump me from the call Theres not enough time here I'd just two quick follow ups first on instrumentation, you know it looks like the shorter cycle industrial recovery is starting to playing out a little bit if environmental outperforms testing next year, what would that do from a margin mix perspective.
Dave and how does the three stack up really marine bonuses or environmental versus testing.
Let me, let me start though.
The marine businesses.
Our fairly flat.
Year over year, and they're going to remain so for a long time, primarily because.
The.
We've moved more away from some of our oil and gas markets to defense markets and until the oil and gas markets, even though they don't change did they come back.
We expect revenue increases having said that.
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The marine businesses. If you look at the total instrumentation business. The marine businesses, However have lower margins in general even though the margins are improving significantly, but there is still about 200 basis points lower than the others environmental is about 100 basis points.
Above the average saws test and measurement those are very healthy businesses. So.
Combined together it kind of flattens out.
But I think.
We are encouraged that our higher margin businesses are the ones that we're looking forward to growing.
Understood and then one just quick one on M&A.
You wouldn't rush.
You'll announcement, obviously and photonics, notwithstanding because thats TBD, but as.
But as you think about the election and maybe the tax.
The tax regime in by the administration does that maybe.
Maybe accelerate your M&A pipeline processes at all or do you expect.
Valuations to kind of normalize with any change in tax thanks.
Oh boy, that's a difficult one I can only answer the following week.
We're not going to hurry up to do anything.
Never have never will regardless of.
Which administration is occupying the white house.
Rob.
I think.
Taxes would change up or down, but I think we live by the businesses that we're looking at the ones that we're looking at we'll buy him because they're good businesses in the long term and we can improve their margins and.
I wondered trash about it not because of the election or subsequent to the election on the other hand, I wouldn't be very slow about it either because you know things things are going to improve next year and everybody is price.
Prices are going to go up so this might be a good opportunity.
Understood. Thanks, so much for the time.
Thank you Blake.
Our next question comes from the line of Andrew Buscaglia with Berenberg. Please go ahead.
Hey, guys.
You hear me now and some technology that edge first.
Yes.
All right.
As our everything's pretty picked over but I am curious high level, you know within digital imaging you guys can see some pretty powerful growth in that segment. If you look back to 2017 or so.
Yeah, you're able to grow over 20% organically there I would think that you know kind of given.
Kind of given the set up in the 2021, you've had a couple of years of more muted growth.
And and physically machine vision seems to be.
Yes, there could be some optimism and some upside brewing there given the semi is intact cycle.
Yeah, I guess, how you're thinking about that.
Business I guess in a bull case in order of magnitude, we where do you see that isn't going away are the differences between this entering 2021 in 2017.
Well I think.
In 2017, obviously does the year that we also acquired the two VSOE things got really bumped up that here because of the acquisition, but lets say absence any acquisition I think right now I expect us to.
Grew our top line in the higher single digits in the overall digital imaging domain I will only put the caveat on that this healthcare situation.
Hit us pretty hard and we are expecting that we will improve if that were to happen I think.
High single digits growth in revenue for digital imaging overall should be expected and of course, if as you said, if we make the photonics acquisition down trading and others will understand 50 plus million dollars worth of right.
Revenue and.
We so the business is gonna grow that's for sure. There is the question is can we get over the healthcare.
Hum that.
We are experiencing right now.
Okay.
Okay, and I know that.
I know the FISA small to your offshore oil and gas exposure went from being very optimistic.
For that I'll, let their two pretty pessimistic I think based on what's going on in energy.
Are you changing your view on strategically you know.
You know.
That segment and if you know where you want to play in that business. If it still viable near mine to that as a long term growth opportunity for you guys.
Yes.
I would say.
Obviously, there is two parts to our job.
Marine businesses there.
Managed our offshore energy, which is both production as well as exploration and then the second part is construction.
Construction science hydraulic three but more importantly defense.
Where we are.
Major player in.
Making penetrators for our submarine fleet and then we have of course that auto sensors program that are used whether it is in order.
In our dry autonomous vehicles or others. So I think the defense sector of the business.
Is healthy and we remain so I'm probably grow in future years, and I know, you're throwing science and construction et cetera.
Thats really gone.
Got to be almost 60% of our business going forward.
No.
So overall segment does subsegment, the marine subsegment as revenues of about $420 million to $425 million. So the rest of it is offshore oil production on exploration, but I'd say, a 550 million total.
That is fairly stable for us primarily because there is still at $40 a barrel or floors finished steel developments going on and we are winning because.
We have the best products, plus we have standardized products, which people can buy at.
And we think thats going to be very stable they area that.
Has not come back is the offshore exploration, where we provide a streamer cables and sensors that used to be a pretty healthy business for us even after the downturn in the oil industry.
That is kind of not being that.
Hi, recently and if that comes back if they put more vessels in the water for X.
Exploration.
I think that will help but generally our marine business, but looking forward I'd say.
Growth in the marine business is going to be relatively benign.
Where what we are going to do that and we've done them continuously improve the margins.
It is enjoying a really good margins above the average margins of our segments right now.
And are they generally yes.
Yeah, no that's great detail. Thanks.
Sure.
And there are no further questions.
Hi, Michelle.
I will not ask Jason on ways to conclude our conference call. Thank you very much. Thank you Robert and again, thanks, everyone for joining US. This morning of course, if you have follow up questions. Please feel free to call me the number on the earnings release.
Operator, Lisa if you could give the replay information on the call and then sign off for everyone. Thank you.
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