Q4 2020 Teledyne Technologies Inc Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the Teledyne fourth quarter earnings call.

At this time all participants are in a listen only mode.

If you should require assistance during this call. Please press Star then zero.

And I'd like to turn on our conference over to the host Jason and lease. Please go ahead.

Thank you William and good morning, everyone. This is Jason and bandwidth executive Vice President at Teledyne, and I want and welcome everyone to our fourth quarter and full year earnings release Conference call. We released our earnings earlier this morning joining.

Joining me today are teledyne's executive Chairman, Robert Mehrabian, President and CEO, Charlie Senior Vice President and CFO, Sue main and senior Vice President and General Counsel, Chief compliance Officer, and Secretary Melanie <unk>.

After remarks by Robert Al and Sue we will ask for your questions of course, though before we get started on.

I wanted to remind everyone on the forward looking statements made this morning are subject to various assumptions risks 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 Ireland will be available for approximately one month.

Here is Robert.

Thank you Jason Good morning, and thank you for joining our earnings call.

I'll begin by discussing our 2020 results.

Comment on the outlook for 2021 and of course comment on the pending acquisition of player.

We concluded 2020.

And the best earnings operating margin and cash flow and the company's history.

Compared to last year fourth quarter earnings increased 13, 7% operating margin increased 173 basis points and <unk>.

Free cash flow increased 57%.

For the full year, two and 20 GAAP operating margin increased slightly.

Free cash flow increased significantly 39.

1% to $547 million.

<unk>.

It is worth emphasizing that full year margin and non cash flow performance occurred despite over $32 million and nonrecurring charges.

Record Native GB GDP in the second quarter and the constant challenges faced by manufacturers during the COVID-19 pandemic.

For all of their efforts I want to congratulate our employees as well as offer my most sincere thank you to them for transforming and.

And difficult year until one of the most rewarding for our stockholders.

We entered 2021.

With a clear improvement in demand across the majority of our businesses in fact.

We received record orders in the fourth quarter and enter 2020 with record backlog.

Q2 orders were 910 and $20 million.

Or 114 times sales.

And year end backlog of $1 $7 million.

While it's still early in 2021.

We are expecting continuing recovery in our commercial businesses as well as growth and our government businesses in both cases strongest within our digital imaging segment.

Given some caution and conservatism related to the ongoing tug of war between shutdowns and vaccines, when we can't get a reasonable outlook for.

The total companys organic growth is between five and 6% for 2021 of course.

The largely pre Covid comparison in the first quarter cash will be the most difficult with revenue relatively flat.

Finally.

I want to comment on the <unk> acquisition.

We've been watching clear since we first entered the space MAGE <unk> Bay.

And imaging market in 2006, when we acquired Teledyne scientific and imaging.

We believe then and.

And we believe now that our infrared imaging technologies and market segments are uniquely complementary.

As both companies involved we've grown to be even more complementary flow.

An example.

Teledyne and third the subsea drone business in 2008 and.

And flare and turn the airborne unmanned business in 2016 and more recently the law.

Land based robotics business.

Perhaps more importantly, each company exited unattractive businesses Teledyne, Inc, 2011, and flare in 2018.

While our respective sensing technologies and market segments, our debt trend.

The fundamental desire of our and customers is that image.

And even better information.

This is true for X Ray imaging, Inc.

<unk> and imaging industrial machine vision, and even our underwater marine sonar imaging and software businesses in other words, there is similarity and synergy and Digitization imaging algorithms machine learning and other related.

Elegies and across each of our organizations.

I will conclude by noting that for 21 years Teledyne has consistently and predictably compounded earnings and cash flow and 2020 was no different Nevertheless, I have never been more excited about teledyne <unk> future and I am today.

And with the pending acquisition of <unk>.

I will now comment on the performance of our four business segments.

Thank you Robert and our instrumentation segment overall fourth quarter sales decreased six 2% when compared with last year.

Sales of environmental instruments decreased six 7% from last year, However, sales increased six 9% sequentially from the third quarter.

Compared with last year sales of certain products, such as and wastewater samplers increased however, this was more than offset by year over year declines and sales of selected industrial products, such as ambien air monitoring instrumentation.

Sales of electronic test and measurement systems increased three 7% year over year share.

On a quarterly record of $70 million.

Sales of Marine instrumentation decreased 11, 4% and the quarter due in part to a difficult comparison with the fourth quarter of 2019 and.

In spite of lower sales and overall instrumentation segment operating margin increased 262 basis points to a record 22, 3%.

Now turning to the digital imaging segment fourth quarter sales decreased two 3% and primarily reflect the and lower sales of X ray detectors for dental and medical imaging.

Actually offset by greater sales eventually.

And visible detectors for space applications.

GAAP segment operating margin was 21, 6% and increased sub 407 basis points year over year and also a record.

Now and the aerospace and defense segment fourth quarter sales declined 14, 8% as greater U S. Defense sales were more than offset by a 45% decline and sales of commercial aerospace products as well as lower commercial space sales related.

Two one web.

The GAAP segment operating margin decreased due to lower sales as well as $5 8 million and severance facility consolidation and other contract charges.

And the engineered systems segment fourth quarter revenue increased 26 eight.

8%, primarily due to greater sales from defense nuclear and other manufacturing programs as well as electronic manufacturing services.

Segment operating margin increased 175 basis points compared with last year.

I will now turn the call to Sue who will offer some additional commentary regarding the first quarter and full year 'twenty 'twenty, one and outlook.

Thank you al and good morning, everyone I will first discuss some additional financials for the quarter not covered by Robert and Al and then I will discuss our first quarter and full year 2021 outlet.

And the fourth quarter cash flow from operating activities was $236 $4 million compared with cash flow and $167 9 million.

For the same period of 2019.

Free cash flow that is cash from operating activities less capital expenditures with $217 million and the fourth quarter of 2020, compared with $144 million and 2019 cash.

Capital expenditures were $19 $1 million and the fourth quarter compared to $23 9 million for the same period of 2019, depreciation and amortization expense was $28 7 million and the fourth quarter compared to $29 3 million for the same period of 2019.

We ended the quarter with $105 $4 million of net debt that is $778 $5 million of debt.

Net less cash of $673 $1 million for a net debt to capital ratio of only three 2%.

Stock option compensation expense was $5 9 million for the fourth quarter of 2020 compared to $5 7 million gallons for the same period of 2019.

Turning to our outlook management currently believes and earnings per share and the first quarter of 2021 will be and the range of $2 55.

To $2 60 per share and for the full year 2021 earnings per share outlook, and $11 and 25 to $11 and 45.

And each case these do not reflect the pending acquisition and <unk> and related acquisition and financing costs.

The 2021 full year estimated tax rate excluding discrete items is expected to be 22 three percentage. In addition, we currently expect significantly and ask a free.

Tax items in 2021, compared with 2020, I will now pass the call back to Capex.

Thank you we would now like to take your questions. William If you are ready to proceed with the questions and answers. Please go ahead.

Ladies and gentlemen, if you wish to ask a question. Please press London zero on your Touchtone phone.

You may remove yourself from the queue at any time by repeating the ones you comment.

Once again, if you have a question. Please press one zero at this time.

The first question will come from the line of Greg Konrad. Please go ahead.

Hi, good morning, and great quarter.

Thank you Greg.

You mentioned, 5% to 6% organic growth and 2021, but how are you thinking about that on a segment basis, just thinking about the different recovery cycles across the business.

Good question.

Let's start with day instruments, and then instruments.

Inc or.

Sales would increase about 5%, maybe just a hair over 5%.

And with.

Environmental and test and measurement is.

<unk> leading dose.

And digital imaging.

The theme for digital imaging for Lcs.

Recovery.

And even though our revenue only went down 1%. This year. We expect next year to have recovered and grew up about 9% and digital imaging.

Yes.

Aerospace and defense, we had a tough year, especially and aerospace.

And we expect some improvement, especially in our defense businesses.

I would say about 4%.

Engineered systems had a great year, the best year, among all of our businesses in terms of improving sales. So we expect their sales to improve very modestly placed on a percent.

And the way <unk> laid it out Greg so far it adds up to something like five 5% to five 6% on.

I hope that's helpful.

Very helpful. And then the other thing that just sit out on the quarter and the year and just looking at free cash flow conversion I think it was like 136% and 2020 I mean, how are you thinking about conversion going forward and maybe this is too early but just kind of post FLIR close is there any reason to think that that level of <unk>.

And changes.

Well, let me Greg let me start.

Without player first.

We think year over year on free cash flow is going to be relatively flat, maybe a little down because as you said the conversion was.

Phenomenal.

There is.

There is of course, we had the benefit of.

Payroll tax.

About $24 million on last year, even though you put that and it doesn't impact our job and our.

Randy outstanding cash flow. So we got to pay some of that back next year.

But having said that I think.

Absent.

The one time charges and expenses that come with the FLIR acquisition on cash flow would be relatively flat, maybe a little down next year, but it will still be very close to the record debt. We accomplished this year.

Wow.

With flare.

What.

The way I can describe that is on an adjusted basis and five may because it is.

It's difficult for us to right now and determine what.

Net cash flow would be but based on historical trends. We think two gathers we would have and in adjusted EBITDA.

The acquisition of about $1 2 billion.

Ours and theirs and.

On that.

That's about the best I can do at this time, knowing what I know.

That's helpful. And then just one quick clean up question in terms of the debt financing for FLIR, I mean, any thoughts around kind of timing and rate on that thank you.

Sure.

Let me start by noting where we are two day and.

And what progress we've made to date.

We have and.

Interacted with banking institutions.

And we have.

Secured.

Financing for our term loans.

First we have.

125 billion of term loans.

H.

We have a commitment forward and the remainder of the 4 billion debt, we need we're coming corporate bonds and that we will do at third.

We have.

Hey.

After we will obtain.

And rate Inc.

And for ourselves from.

And the rating agencies Moody's and.

And S&P and I think we will get a <unk>.

Investment grade trading after which we will do that Brian and Nancy the other thing Thats important.

Is that.

We have increased our job.

Net debt.

Two EBITDA multiple to a four day.

And we think this would conveniently put us in a position where we'll have cash on hand after the acquisition.

And our covenants.

About 475% plus.

$4, eight and net debt and.

Last thing I'd say is that we've managed to also get a commitment to increase our.

On a line of credit from about what it is now 750 to over one $1 billion. So.

Yes.

About the best I can do in terms of weight.

Average borrowing rate debt.

And you asked about <unk>.

Best guess at this time, it's going to be 225%, maybe two 3% of debt amortization.

Thank you.

Sure Greg.

Okay.

The next question will come from the line of Jim Gucci. Please go ahead.

Hi, Thank you so I wanted to.

Pursue Robert if I may just the improvement that you're expecting.

And the digital imaging business and 'twenty 'twenty. One is are you seeing signs yet of the recovery in the X Ray detector business or are you just assuming as we get the pandemic behind us that that business starts to recover.

Well there is there are two parts to that.

There is the.

Thursday X rays for dental.

Imaging, which already are recovering.

And then there is the X ray for.

Cancer treatment.

Book.

And in that case, and we make components that go into machines, and that's recovering and get a little slower.

But we are seeing some recovery in our X Ray imaging.

Where we have this cmos image sensors, we're seeing some recovery there so our overall.

And I'm going to say that.

We will see.

And recovery in our health care I would say of the order of <unk>.

6% at this debt charge guests right now and maybe a little more than debt.

Got it and what kind of recovery are you, assuming and the industrial machine vision portion of the business.

Sure.

I think if you look at this year and debt.

Total vision mission and vision, which would include scientific cameras.

We expect to BARDA, and 10% recovery and that don't mean.

Got it and so the bookings that strength that you saw and.

In Q4 was that.

Were any of the major <unk>.

Segments.

Unusually strong.

That later on I think yes, yes.

Yes, Im sorry, I should let you finish your question now. Please please go ahead.

I think the strongest again.

And digital imaging and gave us about one two and.

And.

And that bodes well for us because it cuts and.

All of the businesses there including on our.

Aerospace and defense businesses and our microelectronics.

Electromechanical systems.

<unk>.

Got it okay. Thanks, thanks very much.

Sure Jim.

And our next question will come from line of Joe Giordano. Please go ahead.

Okay.

Hey, it's Joe I am not sure does that my.

Guys can you hear me.

And we got and activity can hear you loud and clear as day channel.

I'm not sure what day of Nellix.

Thanks for taking the questions.

I'll start just on aerospace and defense electronics.

Just given what's happened in that space and I know youre being conservative about the ramp back on and commercial side.

How do we think about margin recovery.

And that business given the cost and you took out like what kind of run rate of revenue do you need to achieve to get back to where we were and margins before.

Net revenue of course is.

One story, we don't expect at this time.

Much recovery.

Our aerospace businesses.

On the other hand, and we do expect some improvement in our defense businesses.

But coming back to the question of margin.

Last year, and we took out in 2020, we took a real hit and our margin and aerospace and defense.

In 2019, we had margins of 28%.

In 2020, we have 13, 7%. So the margin went down almost 700 basis points.

We expect.

Based on all of the costs that we've taken out of that business.

We expect the margins to improve to a little better than 18% from $13 seven or.

Or about 450 basis points approximately.

Even though we don't expect much recovery in the.

Aerospace side of the business is just primarily cost takeout.

And.

Improvement in everything else that we're doing.

Perfect that's really helpful.

And I saw that there was an expansion and awarded on a switch contract.

So just curious like I think you mentioned and engineered Alpha Goodyear as kind of a flat outlook.

The path over the next few years in engineered systems, just based on and.

And the pacing of contracts that you've won and the deployment schedule there.

Yes, first let me back up and say what business there is a strength.

And Thats, we are doing.

<unk> turbine engines.

And our missile specifically harpoon missiles and.

And that will be going away.

At the end of the first quarters I think.

That in terms of sales of turbine engines, which also are profitable businesses.

The impact on revenue of about $20 million next year. So that's on the contraction side.

On the expansion side.

Which will keep us hopefully flat year over year since we have tissue great year in 2020 on day expansion side, we've won a number of contract multiyear contract.

Of which we have put our news releases.

And.

We think that we had about half a billion dollars in total on new contracts.

A new on our contracts last year for example on coming back to this weeks.

What we have is we have on existing programs, which.

Our about profit numbers, let's say they'll add up to about $250 million then we'd received their foreign military sales contract for.

New boats.

Which is about 30.

And 35, or so and medium.

And would be on highest 40 and.

Thats, a plus in that business.

And excited about that business because as you know.

That underwater vehicle also uses a lot of our sensors that we develop and our marine businesses.

So.

I don't know if that answered your question is with us and you want it.

Yes. It is the margin profile from that business kind of similar on a similar run rate revenue you expect next year.

No I think margins will go down somewhat.

We had just a blow on margin year, this year and debt business, primarily because of turbine engines and some of our manufacturing programs and we ended the year at about 12% and Thats on a very high side of that business. I think we had revenue growth down to closer to 10, 5% next year.

And makes US and then just last from me any update on how you are.

And thinking of presenting FLIR once you're closing because I think the $1 2 billion EBITDA run rate that you were talking I assume that that's kind of on a full year equivalency. So as that comes in at some point during 'twenty. One how do you think youre going to present day.

The incremental the incremental operating performance plus the onetime costs associated with it.

Yes, what we will do Joyce will take the one time cost and put it aside.

As you know and that's going to be significant it's going to be on credit.

And guess my guess right now is about $105 million it could be a little higher than debt. So put that aside because there's nothing we can do about that.

And we'll go on too.

And let's assume the merger happens.

And the acquisition and happens on July one.

And then when we're looking at is.

You can look at that two ways you can look at it.

As on adjusted basis, and when I talk adjusted.

And really speaking about adjustments for intangible amortization and not to announce.

If you look at it that way then the acquisition is going to be accretive almost immediately and.

And the first full year, it's going to be accretive significantly could be as accretive as $2 56.

With the $40 million of talks tax.

Takeout cost cash cost that we'd estimate inc. For the first full year.

We think on a.

GAAP basis.

It should be accretive after the first full year marginally accretive.

So the way we've presented is what is the combined revenue on a b.

At this point I would say after the if you look at the 2020 pro forma Youre looking at 5 billion. If you look at 2021 plus clear for the first full year Youre looking at $5 2 billion and revenue and then we will.

Work on debt free cash flow same as we do now with trial and presented on a non-GAAP basis, only I would say that because in our agreement with.

And with our lenders.

In terms of what they have agreed to and tuition on large debt.

Debt net debt to EBITDA debt, excluding the one time costs that were running through inc. Incurred in that business. So we'll have a table on free cash flow per layer.

All of our debt out.

Thanks, guys.

Thanks, Joe.

Once again, if you ask a question. Please press one zero at this time. Our next question from from the line of Andrew Buscaglia on please go ahead.

Good morning, guys.

Good morning, Andrew and.

I wanted to ask on.

And I believe last quarter, you provided sort of a soft target for this year's margin to be to expand about 130 basis points.

And you kind of walk through a couple of segments, but do you still stand by that initial.

Initial take.

Well yeah.

Yeah.

You said it was a soft target that 100 to 100 basis points improvement okay.

I think we do a little better net debt.

And I brought us as a stand alone company again, excluding any one time charges, which were going to happen.

I think our margin should improve and bought a $110 20 to 140 basis points.

And 2021 versus 2020.

Okay.

Okay and then.

And Robert you sounded less last time or last quarter, a little bit.

I guess your expectations around that.

And by the administration would not be great for your defense business.

Given that much more thought and all thats coming to fruition.

And broadly it sounds like defense still has some legs into 'twenty and 'twenty, one, but I guess, what's your outlook beyond that.

Well.

Sure.

And it's very interesting one of our directors made on observation yesterday or day, which I agree with that I don't think by and large.

Democratic administrations have.

Ben.

Against defense spending because they obviously debt.

And I don't want to be.

And as being soft on defense and with the world situation as it is today.

Inc. Defense is going to be stable and we have long term programs and very critical areas.

Including spacing product programs that are going to be healthy.

That's about all I can say on the defense side. There are there things are of course down affect us which.

Would be.

Interest rates, if they went up and of course <unk>.

Texas will hit all Corporation and see if there were two growth.

Okay.

And last one and this might be.

Little out there, but you guys sounded really excited about.

Central M&A this year.

Pretty clear and and I know you've got your handful of FLIR, but is M&A off the table completely this year.

Outside of flurry, and so you digest that one.

Yes.

Yes, and no M&A is never off the table.

And if something really attractive came along and we thought we could do it.

And being gas.

Busy as we are at this time and going to be integrating.

We would have the capacity as I've mentioned and we would have another almost $10 billion that we can spend but I don't I would say, it's not likely at this time because.

The amount of work we have on day other hand, EBITDA and a small bolt on that we can talk to one on taco weighted to one of our.

Businesses, Yes, we would do it.

Okay. Thank you.

At this time, we have no further questions in queue.

Thank you William.

Ill now ask Jason to conclude our conference call. Please thank you Robert and again, thanks, everyone for joining US. This morning, all of our news releases are available on our website and of course, if you have follow up questions on my numbers, there and please do feel free to call me or semi and noticed sort of a time to speak thanks, everyone.

And if you could give the replay information please that would be great. Thank you.

Ladies and gentlemen on this conference will be available for replay after 10 am today through February 27.

You may access the AT&T teleconference replay system at anytime by dialing one 806 2071 041 entering access code 90.

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