Q1 2022 Teledyne Technologies Inc Earnings Call
Okay.
Yeah.
Ladies and gentlemen, we'd like to thank you for standing by and welcome to the Teledyne first quarter earnings call of 2022 at this time all participants are in a listen only mode and later well conduct a question and answer session with instructions being given at that time, if you should require any assistance throughout today's call.
Press the star followed by the zero and one of US will be with you immediately and as a reminder, today's call will be recorded would now like to turn the conference over to offer silicate and Mr. Jason fan.
Please go ahead Sir.
Thank you Steve This is Jason <unk>, Vice chairman of Teledyne, and I would like to welcome everyone to Teledyne's first quarter 2022 earnings release Conference call. We released our earnings earlier this morning before the market open joining.
Joining me today are teledyne's, chairman, President and CEO , Robert Mehrabian, Senior Vice President and CFO , Sue main and senior Vice President General Counsel, Chief compliance Officer, and Secretary Melanie Civic.
Also joining today is Edwin rocks executive VP of Teledyne.
After remarks by Robert and Sue we will ask for your questions.
Of course, well before we get started our attorneys have reminded me to tell you that all forward looking statements made this morning subject to various assumptions risks and caveats as noted in the earnings release and our periodic SEC filings.
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 and good morning, everyone, two or 98.
Earnings call.
Spinoff in November .
2019.
Point to our stock price spreads had approximately $9 this year.
Yeah.
We began today, we begin 2002, we began with the greatest first quarter sales earnings and adjusted operating margin in our company's history.
Our results in operational execution continued to reconnect.
<unk> balanced business portfolio.
Across both end markets and geographies.
Demand to our entire short cycle instrumentation and imaging businesses remained very robust.
Resulting in total organic sales growth of seven 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.
Really weak current scoring to explore these businesses.
Sales from our longer cycle commercial aerospace and marine businesses increased considerably.
Last year in backlog also grew.
Voluntary gap.
non-GAAP earnings were first quarter records.
GAAP earnings per share bridge, they exactly doubled compared with 2021 and non-GAAP earnings increased 34%.
I want to emphasize that our non-GAAP earnings exclude R&D.
Acquired intangible asset amortization.
In the first quarter it also excluded.
And large tax benefit related to clear foreign tax matters, which already appear.
In the GAAP results.
While free cash flow was lower than last year and reflected the following guidance first.
Bond interest payments, how forward $36 million made only.
In the first quarter and again will be made in the third quarter second.
Annual incentive compensation paid only in the first quarter and third is <unk>.
Significant investment in inventory to a derisk revenue in future periods.
These items will not be repeated in the second quarter.
Nevertheless.
Our leverage ratio declined to 2.8 X.
Two apex immediately after the <unk> transaction in May of 2021.
Turning to our 2022 outlook.
The demand environment across our businesses remain favorable.
Even with supply chain concerns and currency translation headwind, we are increasing our expectation for the full year organic growth to approximately 6%.
From Florida.
Two 5% communicated in January .
Coupled with a few full year SaaS contribution slightly less than $2 billion from player. This equates to total revenue of just over five $5 billion for the year.
Roughly equal to the current consensus I will now turn to comment on the performance of.
Our business segments.
Yeah.
Sure.
In our digital imaging segment.
First quarter sales increased 185% largely due to FLIR acquisition, but organic growth in our combined commercial and government imaging businesses was also very strong at 13, 1%.
Sales growth was strongest.
Industrial vision sensors and systems as well as our low dose high resolution digital X Ray detectors.
GAAP segment operating margin was $15 four but adjusted for intangible asset amortization segment margin was 21, 9% or about 20 basis points greater than last year.
In our instrumentation segment.
Overall per square through sales increased seven 8% versus last year.
Sales of electronic test and measurement systems, which includes our CLO scopes and protocol analyzers were very strong and increased 19, 1% year over year to record levels.
Sales in the environmental instruments were flat compared to last year with greater sandstorm firsthand human health and drug discovery product offset by lower sales of industrial and lab grew 30 gas detection devices.
Sales of marine instrumentation increased nine 7% organically.
Due to improved energy markets, but also a record sales of autonomous underwater vehicles for both defense and commercial <unk> applications.
Overall.
Instrumentation segment.
GAAP operating.
Profit increased 25% in the first quarter with operating margin, increasing 245 basis points or 229 basis points, excluding intangible asset amortization.
Moving to our aerospace and defense Electronics segment.
First quarter sales increased nine 9%.
Driven by modest growth in defense based on industrial shared sales combined with greater than 50% increase in sales of commercial aerospace products.
GAAP segment operating profit increased 51, 6%.
With margin 710 basis points greater than last year.
Finally.
In our engineered systems segment.
First quarter revenue decreased eight 9% and operating profit and margin declined due to lower sales, but especially.
Since we exited the higher margin cruise missile turbine engine business.
Following the first quarters.
Last year.
Yeah.
Before turning the call over to Sue I wanted to make a couple of concluding remarks.
Effective just this week.
Flair successfully fulfill the terms of the consent agreement with the U S Department of state.
Compliance has been always and will always be a critical component of our culture at teledyne.
But teledyne player has now moved beyond the extra burden and cost of.
Numerous investigations.
Third party audits.
Finally <unk>.
Regarding our global defense business, which represents approximately a 25% of our total sales.
Over the last six months.
Defense sales, including that of Teledyne clear declined slightly.
Year over year and backlog also increased.
However.
This was more than offset by very strong commercial orders and sales across the company.
No.
With firm or U S and NATO budgets.
Outlook for our defense has changed.
Creating opportunities for greater sales, but also limiting risk for teledyne is generally around economic growth decelerates in the future periods.
While the improvement in defense.
May benefit.
Future here's the most we are nevertheless, seeing an increase in near term bookings and opportunities some of which we expect to benefit the second half of 2022.
Okay.
This is especially true for the flip Teledyne clear business portfolio. There are commercially derived but military qualified crowd out the only required a purchase order as opposed to a lengthy appropriations process.
I will now turn the call over to suit.
Thank you Albert and good morning, everyone I will first discuss some additional financials for the quarter not covered by Robert and then I will discuss our second quarter and full year 2022 outlet in.
In the first quarter adjusted cash flow from operating activities was $79 7 million.
Compared with cash flow of $124 9 million for the same period of 2021.
The adjusted cash flow exclude a one time payment of $296 4 million.
The Swedish tax authority related to a disputed pre acquisition 2018 tax reassessment issued to a subsidiary of fleet.
Good.
Adjusted free cash flow that is cash from operating activities less capital expenditures was $58 $7 million in the first quarter of 2022, compared with $110 1 million.
In 2021.
Capital expenditures were $21 million in the first quarter compared to $17 6 million for the same period of 2021.
Appreciate you and amortization expense was $86 9 million for the first quarter of 2022 compared to $29 $3 million in 2021.
We ended the quarter with approximately $3 $85 billion of net debt that is approximately $4, one 3 billion of debt less.
Net cash of $284 3 million.
Our stock compensation expense was $4 3 million in the first quarter of 2022 compared to $4 $2 million for the same period of 2021.
Turning to our outlook management currently believes that GAAP earnings per share in the second quarter of 2022 will be in the range of $3 44 to $3 55 per share with non-GAAP earnings in the range of $4 32.
The $4 40.
For the full year 2022, our GAAP earnings per share outlook is $15 34.
To $15 66.
And on a non-GAAP basis, $17 75 to $18 the latter being an increase at the midpoint to our prior outlook of $17 62, $18 that we provided in January .
The 2022 full year estimated tax rate, excluding discrete items is expected to be 23, 1%.
I'll now pass the call back to Ravi.
Thank you Sue.
Operator, we'd like to take.
If you're already proved proceeds with the questions and answers. Please go ahead.
Ladies and gentlemen, we will now begin the question and answer session of today's conference. If you wish to ask a question. Please press the one followed by the zero and you touched on phone.
Here at tone, indicating that you place yourself in Q and all questions will be pulled in the order. They are received you may remove yourself at any time by once again depressing. The one followed by the zero and if you're using a speakerphone. Please pick up your handset before pressing the keys once again to enter the queue. Please depress 180.
Our first question will come from the line of Greg Konrad of Jefferies. Please go ahead.
Good morning.
Good morning, Gary.
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 maybe given the comments on the supply chain, maybe some of the offset what seems like maybe slightly better volume.
Hello.
I don't know Greg.
Yes, I'm glad you call it greedy yes.
Ingredients so yes.
No.
Frankly.
No.
In a conservative company.
Right now sitting here.
We're worried about inflation.
Which is as you know it's difficult.
Supply chain issues, while we are managing them.
Manage them successfully.
Are still uncertain and there is no certainty as when that will change so having said that.
We expect revenue to grow.
It was about I think in January I mean, I've said it was four 6% organic growth.
Indicating.
6% or maybe a low margin Nevertheless, having said that.
We have to be conservative because there's too much uncertainty there is the supply chain is the inflation. There is the one in Europe as the shutdowns in China.
And.
This is not the time to answer your question.
This is the time to kind of.
<unk> focus on what we know we can de lever and go from there so.
That's my answer to that I didn't know if that helps or not.
Yes.
Helpful.
And then I mean, just kind of base lining the outlook with the quarter.
When I look at the margin.
Some of the segments, we're well ahead of at least our expectation maybe digital imaging.
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 youre expecting today.
Sure.
Let's start with.
Yes.
Digital imaging.
<unk>.
For the full year and I am willing to combined.
<unk> total imaging together, it's clear and legacy Teledyne.
We think for the full year it'll be about 22 point.
3%.
Full year 2022.
Slightly less than what it was in full year 2021.
Now.
In January .
We were a little more effort reticent about that we thought it would be closer to 23 nine.
But we think now 23 three is a better number primarily because we are experiencing some supply chain issues Clos.
Plus we're having to pay higher prices when we do find the components that we need.
Moving to the instrumentation segment.
In January .
I mentioned that it would be about 22, 8%.
The margin, we would increasing debt by 50 basis points because of the tailwind that we have in test and measurement. The pseudo scripts on a protocol with increasing that margin from 23, 8% to $24 three.
Moving to aerospace and defense.
The margin, we expect to increase substantially from what we projected.
In January .
In January we projected a margin of 21, 9%.
And we expect it to grow almost 190 basis points to 24%.
On the flip side.
In our engineered.
Engineered systems segment, which has revenue of about $400 million in its.
Primarily government businesses.
We expect margins to end lower than what we expected in January to be at 10, 4%.
So when you roll all of that up for the segments.
Right now we are expecting the margin towards the all of the segments combined to be 22, 7%.
And then renewed 14 corporate expense et cetera.
Company margin would be 25.
5% I.
I hope that helps Greg.
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 worried about defense, maybe bringing down the overall growth rate of Teledyne is there any way to maybe quantify what youre seeing in terms of maybe what you thought of kind of the long term defense growth rate prior and then.
Some of the the budget tailwind the NATO kind of what youre thinking that going forward today.
Okay.
Let me start with.
Q1.
Overall.
We saw some decreased.
In defence at Cros.
Our portfolio.
From Q1 of last year.
About two 5%.
And most of that debt.
Experience came in Teledyne.
Now having said that.
So longer term, we think our defense.
Sales should decrease in the mid single digits.
Which is.
If you take a negative two points rather than go to let's say, 5% or so about 75% turn around that would be though.
At the end of 'twenty, two or more likely 2024, and the reason I say that is.
Yes.
While we have kind of chewed away on our defense backlog.
We're not seeing significant opportunities.
In Europe .
As well as across the board.
Fms sales.
And I can't give you examples of that but.
We're seeing real demand for.
<unk> products that we have.
Especially in the cleared businesses Teledyne <unk> businesses.
Some of them directly a result of the unit Ukraine conflict.
And similar of MRO of course, because of the increased budgets that are coming in the NATO Alliance.
Thank you.
Thank you Greg.
Our next question will come from the line of Jim Ricchiuti with Needham and company. Please go ahead.
Hi, thank.
Thank you good morning, Robert you say in light of the.
The comments you just made I am wondering are you told I thinking differently about.
Longer term inorganic opportunities in defense and.
Over the years you guys have focused mainly on building up the commercial portfolio and you've done quite well, but I'm. Just wondering as you think about the business are you.
Has anything changed in the way Youre thinking about M&A going forward.
Okay.
Jim Good morning to you.
First let me backup.
Hey.
The way, we look at the tenants, which is now but we.
Flair included Teledyne <unk>, it's about 25% of our portfolio.
While we like to think about that parts 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 <unk>.
Conflict.
Have caused significant change in demand for our products, especially our products from our perspective.
<unk>.
We think we should be ready, which we are to enjoy the fruits of that having said that.
Im not really.
Im convinced that we should change the balance of our portfolio towards defense and I would say that we don't M&A.
I say that because.
But I don't really think it's very prudent Florida company like Teledyne.
No.
Changed strategy.
Cause 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 M&A will probably focus on.
Our commercial businesses, having said that we bought three around player had substantial.
<unk> business, we're absorbing 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 <unk>.
Commercial domain.
Got it thank you for that.
And also I appreciate the color on the segments in terms of the way you're viewing the prop.
Operating margins for the year.
I Wonder if you could talk.
For a moment to gross margins, which were quite strong in Q1 and I'm wondering if you could elaborate on what some of the biggest factors were in that and maybe how we should be thinking about gross margins going forward. I know there are some puts and takes obviously some of the cost pressures, but mix also but is your.
Any color you can provide on the strength there.
Yes.
Jim obviously very familiar with teledyne.
If you look at our Q1 gross margins.
Last year.
Yes.
It was about 38, 9% for the.
Legacy Teledyne, we didn't know clear at this time.
I'm clear on the other hand tenant I'm clear.
Enjoys higher gross margins.
Then us about 55% or did historically are 50% I'm sorry, so when you combine those two together.
The combined company gross margin in the first quarter.
From 38, 9% to 43%.
Having said that.
We also enjoyed higher margins.
Test and measurement businesses, because they grew significantly 19, 2% if thats in our insurance group.
And our aerospace and defense margins moved up huge because of the above 50% increase in our commercial aerospace business. So we enjoyed two tailwind one.
Buying a business, which is not a significant part of our portfolio that at higher gross margins that are legacy businesses.
Then.
Turnaround that we experienced through <unk>.
Our commercial aerospace business and then really good.
Correct.
<unk> net revenue in our test and measurement businesses.
I think in commercial air presumably you see that recovery continuing it looks like from at least from what we're hearing from hearing elsewhere is that fair to say.
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 first quarter, we were in a trough as you remember.
Well we're encouraged.
We do a lot of.
OEM products for commercial aircrafts, but we also do.
A lot of aftermarket products. So we are encouraged that reported tonight.
Okay. Thanks ill jump back in the queue.
Thanks, Jim.
Our next question will come from the line of Joe Giordano of Cowen. Please go ahead.
Hey, good morning, guys.
Good morning, Joe.
So just wanted to start with the.
The growth rate in the FLIR defense portfolio for the quarter I know that was down so.
So FLIR overall was down for the year.
Sure.
How was that.
How did that <unk> play.
Play out relative to what you were thinking internally three months ago 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 your updated views on organic growth by segment, that's probably helpful too.
Sure.
As you well know Joe clear So you had mentioned.
Defense business is named flare.
They declined year over year, if you went to their historical.
Defense business declined about 10, 9% year over year.
That is also consistent with our own engineered systems segment.
That declined about 9% year over year some of the prime that we were listening to this week.
Businesses declined about 8%.
Having said that.
We think in Q2.
Good clear to defense.
Our overall defense should be relatively flat.
And then pick up.
In the third and fourth quarters.
Im going to say.
Plus 5%.
And the reason I say that is because.
Overall.
Market.
That we are seeing the opportunities that we're seeing in the defense businesses.
Our positive.
<unk> in Europe .
As well as in this country. So when you look at it that way, yes, we did have a decline in Q1, but we had a decline in our existing defense business specialty engineered systems, which also recently covered.
As the year goes forward.
In the year overall and now you got a look at the other side of FLIR, which is their commercial businesses.
Our commercial businesses.
Reasonably well in the first quarter. They went up about two 3% compared to last year.
Last year, they had a little bit not much but they had a little bit of sales in <unk>.
Elevated skin temperature products.
So.
And Todd.
I think.
We expect for the year.
Bob.
The revenue year over year.
To go up.
The overall business Teledyne clear I should say.
So about.
From what was last year 189 billion, if your royalty down in historical as well as after the acquisition.
To about 197 no.
Which would be the highest over the last two years.
That would be a combination of defense and commercial.
I hope that answers the question.
Joe.
No.
That's helpful. Thank you.
Sure.
I was just I'm curious like your point on this is not the time to be at our best.
Full year outlooks because.
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 what's the most concerning part like what's do you think is the least protected our volume of our businesses.
If something were to happen negative globally.
I don't want to venture a guess because I don't know, but let me say this.
We have intentionally balanced our portfolio.
For just these kinds of times when times get uncertain.
Various parts of our portfolio absorb the shock.
The markets and from the economies. That's why if you look at our history.
When things bad things happened.
Right afterwards, some other companies may not deal with it as well.
Right after that Werent we.
By someone that is not done as well.
So.
I would say that I.
I feel comfortable with our portfolio.
We're guiding the street on what we think we can deliver.
And we don't want to be too as the word differ Vincent.
Vincent on the other hand.
If bad things continue happening as they are now might be a good opportunity for us coming out of this we had significant M&A.
We don't see a warning sign at this time Joe.
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 or do we start moderating on the rates and kind of stay on a gross dollar basis.
Similar level, how do you think about that business.
Well, hey, Darren going with our team.
I'm going to say.
Net.
GAAP earnings GAAP book growth net growth for the year.
Should be about 405, 5%, even though we had such a good first quarter, we're seeing better orders by the way even in the last three weeks.
But that's an area that we sell a significant amount of products in China.
And nobody knows what's going to happen with the.
Lockdowns there.
It's a short cycle business and the comps are going to be tougher in it as we move forward because we did pretty well the last three quarters of last year. So.
I would say we've increased our outlook from January a little bit from let's say, 4% to 405% will stay with that for now to see how things evolve as time goes on.
Sure.
Thanks, guys.
Our next question. Our next question comes from the line of Andrew Buscaglia of Baron Berg. Please go ahead.
Hey, good morning, guys.
Good morning, Andrew.
So I.
I was hoping you could maybe add a little bit more commentary specifically absolutely.
Positive on defense.
In government business, specifically with FLIR too.
FLIR had always kind of talk about these big longer term programs of record thereafter.
And very positive on their unmanned systems business, which was small but.
Definitely an area of the deposit.
A big source of growth.
When do you make those comments are you are you referencing that things like that are there any other color you can get particularly going to look kind of the nature of these awards are our potential opportunity as you said.
Yes.
Let me.
Let me first comment on the.
Long term legacy.
Systems programs of record.
Some of that this has happened will happen.
Some of it I am not so sure.
Because I don't look through the same lens.
The previous management did having said that.
There are.
Significant opportunities.
Soldier borne sensor systems.
And when you mentioned the unmanned systems. There is a range of M. As you well know as you move through the air.
There is of course, the black Hornet.
Black Hornet C, which is five inches in size very silent and go about a mile come back.
The GPS.
<unk>.
Performing GPS denied environment, we're seeing real interest in that.
And that's doing very well.
On the flip side.
We have undergone systems are pack bots.
Bots are doing really well actually some of them.
<unk> thousand videos are being used in Ukraine by the Ukrainian forces that we've trained before the war.
India.
Jim bonds that we have.
<unk> has done there has been doing very well some of them actually are more on the new Ukraine, new helicopters and Keith.
Our IR sensors going to various drawn manufactures.
And we're seeing a lot of demand across.
All of large unmanned systems.
For not just.
Jon's, but also for the sensors that go on top of those.
We also have in the longer term as you said programs.
We also have an interesting opportunity.
We chose to do.
And larger drone.
That said a little bit like.
What is known as the Switchblade.
That June would be if we can achieve a program of record coming through the words you said.
If we can achieve program, our Frankfurt towards best drone.
That would be a real window.
It's Brian .
Brian No stages of prototyping, we should be able to get some revenue by the end of the year.
It has.
And really.
Stronger capability to vertical takeoff and landing drawn.
It.
It has opportunities to carry munitions.
Ricardo.
That is if you wave off.
<unk>.
And.
Assignments, you can you can wave EBITDA within the last two seconds and bring it back.
Sure.
It's Scott.
30 minute flight time.
Let me go out 20 kilometers so when I think about something like that.
That's a keen to.
On opportunities.
We can enjoy when we get that certified on flying.
Having said all of that.
I think it's important to recognize that.
Getting into programs of record is not that easy.
And what we like to focus on.
It is yes.
<unk> what you can now sell royalty can then plan for the future or the long term, but don't hedge all of your eggs in that basket.
I don't know whether that helps them.
No very helpful.
No it sounds encouraging.
And maybe you can comment to you or the other.
This quarter is that that the consent agreement going away.
Can you just remind us the impact that that it sounds like.
Again that is included in your kind of annual synergy estimate and where we stand with synergies from clear at this point.
Yes.
That the total cost of that.
Fourth player and then tailor benign.
The order of 80 some million dollars.
It started in 2018.
And.
We successfully.
And did it this quarter.
We had some expenses in Q1, we also have to pay $10 $5 million. The government that we are obligated to pay.
<unk>.
We've built that into the synergies.
Going forward.
Already.
But but part of the reason that we're able to.
Have the synergies that we enjoyed with teledyne clear is that when we bought them. We said look we expect to have.
Accretion.
In the first year.
Year.
And.
We thought that at the time.
The accretion would be.
Somewhere between $40 million $280 million this year.
So wherever is what I see right now.
Guess.
$80 million would be at the low end.
And it would be closer to 100 million as synergies and that kind of.
Absorbs.
Some of the opportunities that we see now that the.
With consent.
Decrease behind us.
Okay got it.
Okay.
Alright, thank you.
Thank you.
Thank you Andrew.
Our next question will come from the line of Christine Li Wang of Morgan Stanley . Please go ahead.
Hey, good morning, everyone.
Good morning Christine.
Looking at the supply chain.
Last quarter, you had mentioned that alternative sourcing has thus far proven successful in about 60% to 70% of cases are these trends holding steady improving or worsening and also what other initiatives can you implement to manage direct.
Thank you Chris.
Very good question, let me start with the effects.
The net net effect.
We think in the first quarter of this year the one just behind us.
The effect of.
Shortages.
<unk> by about $74 million.
We think.
Going forward.
That's not going to be.
Changing all that much having said that.
We also were able to buy components find components or redesign our products.
<unk>.
Let this.
Sell over $100 million yourself products that we couldnt tap if we had not enjoyed that we have a very robust.
Activity.
The language chores pages in our procurement.
Led by Paul de La Rosa.
And 30 of our business units. So they do three things first.
They identify.
Who has the shortages.
What are the common suppliers, who are those shortages.
And we then deal directly as a company with that supplier and prioritize.
What we can buy from them. So we may have shortages in various businesses, but one may not affect our revenue as much as the other so that help us focus on the high priority ones.
Second.
We source.
From third parties.
Especially we have our own people in the far east plus we have some of our suppliers.
Primary suppliers for.
Semiconductor.
Requirements that are looking for part so if were missing like 700 parts. Today. We may have already planned maybe 450 parts that we can enjoy and but we have to of course <unk> not quantified them, we're not just going to take them and put them into our product we have to qualify them like we do.
Do everything else and then we also lastly.
Look at Green design.
That is can be a redesign not just.
So specific card, but can we redesigned the product try the camera that we're selling.
To avoid.
Mark.
As significant shortage, especially we see forward.
Looking forward so.
Long answer to your question is the following one yes, we're going to have some revenue shortfall because of that but it's not going to be killing goods.
It's going to be in the same level that we had.
And <unk>.
Part of it is Olivier did cause we've also put in some inventory.
One of the reasons that we've talked about our cash we've increased our inventory and sitting on our shelves are.
<unk> and also materials that we have either long term or products that once we get the product we can get it out the door.
There is a whole combination of these things thats kind of so far.
Perhaps help us avoid.
Significant.
FX on the company as a whole I hope Kristine that that answers your question.
Robert that was really helpful. And then if I could do a follow on.
The supply chain issues that you're seeing.
Our legacy Teledyne, the same as what Youre seeing for flare or is there a difference between the two.
Not much difference.
Christine.
I think there is digital imaging as an example, which is now 60% of our business.
The same because we make very similar products.
<unk>.
Different end markets.
<unk> product complexity et cetera, So I would say the same.
There are some exceptions here and they are buying larger.
10%.
Great. Thank you very much Robert.
Of course of treatment.
Our next question comes from the line of Noah <unk>.
Goldman Sachs. Please go ahead.
Hi, good morning, everyone.
Morning Noah.
Yes.
Robert can you quantify how much inventory you added in that buffer stock process.
I'm going to say about $55 million.
I hate to speak.
Well it seems sensible with what's happening at the moment and it sounds like Youre, saying, you don't expect that to.
To alleviate anytime soon so youll just hold that.
The inventory balance at that level as opposed to burning that down through the year.
I'm sorry.
We've got a Bernie Don Miller.
Yes.
That might close, but we've got a burden.
I mean, if youre not expecting supply chain to improve won't you need to hold.
Buffer stock.
We'll roll some off course, we will Noah, but here's the thing.
<unk>.
I think.
The combination of things that I.
Just mentioned is making us feel a little more comfortable the other thing is.
Some of our businesses.
Or have been a little too conservative we on a plan to reduce.
This year by a similar amount.
So now it has gone up.
So if we can bring it back but we still have ample inventory, we just have to move it around so that.
The.
Measurement is such that it doesn't really encouraged our cash flow we have for example.
The problem, we have for example with wafers.
And that's something that.
That's long term and we got a buying.
We buy 30 tonnes of wafers.
In digital imaging and we got to buy it ever got to keep it because that's one that you cannot buy.
In the market.
It's east Asia, or whether it's here you can't buy that so that one we feel but then other things that.
We can get rid of this year.
Okay.
Are you still expecting total company bottom line full year free cash to net income conversion over 100%.
Very close.
Very close.
Okay.
I think thats right I told the board yesterday.
Okay.
On the cost input inflation piece.
Is that what is the rate of increase that youre seeing at the moment.
Yes.
It's a good question.
No. There's two parts to that one of them is materials.
And the other one is wages.
On the material side.
With everything that's going on in the World.
Our costs are increasing.
At this time about 10, 5%.
Our growth.
Okay.
Some of our goods.
Currently.
We look at that from both the business side I also look at it from the corporate side wage inflation is a little less maybe 3% to 5%. So when you roll that up altogether.
Seeing about.
Cost increases.
3%, let's say.
Got it.
The flip side is we also are increasing prices ourselves, where we can not be negative program.
We're pretty much offsetting that.
We had price increases so net net so far being very careful and prudent in what we do we've managed to negate those two when we will have to work very hard to keep doing that.
Or are you raising price at a rate equal to or slightly greater than the cost inflation or are you are you actually maintaining the price cost gap that you previously had.
I think I would say we're maintaining.
So you already had pricing and you're accelerating the pricing to maintain the price cost gap.
Okay.
And then last thing I wanted to ask because you've discussed.
A new a new opportunity set evolving on the national security front.
As a as the combined business now what percentage of your.
Defense or government related to National security revenues are domestic versus international.
Permitting for example, I think.
About.
Overall, we're 25%.
I would say about just under 20%, 19% is U S and <unk>.
I mean, I would say about five to six percentage part.
At this time.
Got it.
Okay. Thank you I appreciate it.
Thank you.
Our next question is a follow up from that.
Line of job or excuse me, Jim Ricchiuti of Needham <unk> Company. Please go ahead.
Yes, I may have missed it but.
Robert I was wondering if you provided.
Any information on a book to bill either for the company or for the segments. If there was much.
Variability in the book to bills that you saw on the different segments.
Yes.
That's a good question Jim.
Let me start with the total company if I may.
Book to Bill is pretty healthy.
It's 1.9, we have really good back backlog by the way are the highest backlog that.
I remember, we have about $2 $95 billion of backlog memory backlog with defined very carefully.
Kind of money.
The money that we already know it's going to come in so our book to bill of $1 nine needs pretty healthy, but it's very abundant across the company.
Let's start with <unk>.
<unk> total imaging.
Digital imaging is a little less than the whole company. It's about one point to go forward, but still healthy.
In instruments is close to the company towards permits were at one point to eight with marine being a little higher.
Dan Environmental Marine being at 113.
Test and measurement being at 1.7 environment and at one point going forward.
Total instrumentation is same as the company at one point.
Aerospace and defense electronics.
As I mentioned because of the commercial.
Aerospace coming back, but we have a 113.
Book to Bill.
And then in engineered systems were.
Our revenue went down for the reasons I mentioned, partly because we are not going to we got out of the.
Turbine engine business after the first quarter of last year Claus, we've been eating into our backlog we have some really nice additions our book to Bill is 138, but.
I'm always cautious on that one because that's a long term program lumpy.
Program wins, so overall.
One point online.
That's pretty good for us in this time.
In this environment.
Got it that's helpful.
Thanks, Jim.
Thank you.
Yes.
Yes.
No further questions in queue at this time.
Thank you very much operator.
Ill now ask Jason to conclude our conference call. Please.
Thanks, Robert and again, thanks, everyone for joining us this morning.
I have follow up questions. Please feel free to call me at the number on the earnings release and of course earnings release are available on our website teledyne.
Dot com Steve.
Steve If you could conclude todays conference call and provide the replay information we would much appreciate it goodbye everyone.
Certainly Mr families, ladies and gentlemen that does conclude our conference call for the day, which will be available for replay today at two PM Eastern time until May 27th Midnight of that day, you may access the replay by dialing 8662071041 in it.
During an access code of 5805962, if you're dialing from international locations. Please use foreseeable 29700847, and the access code of 580596 to once again on behalf of today's panel, we'd like to thank you for join.
Today's teledyne teleconference call and thank you for using our service have a wonderful day you may now disconnect.
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Ladies and gentlemen, we'd like to thank you for standing by and walking to the Teledyne first quarter earnings call of 2022 at this time all participants are in a listen only mode and later, we'll conduct a question and answer session with instructions being given at that time, if you should require any assistance throughout todays call. Please press the star.
Followed by the zero and one of US will be with you immediately and as a reminder, today's call will be recorded would now like to turn the conference always cooperate militated Mr. Jason Fan weeks. Please go ahead Sir.
Thank you Steve This is Jason <unk>, Vice chairman of Teledyne.
Welcome everyone to Teledyne's first quarter 2022 earnings release Conference call. We released our earnings earlier this morning before the market opened.
Today are teledyne's, chairman, President and CEO , Robert Mehrabian, Senior Vice President and CFO , Sue main and senior Vice President General Counsel, Chief compliance Officer, and Secretary Melanie Civic.
Joining me today is Edwin rocks executive VP of Teledyne.
After remarks by Robert and Sue we will ask for your questions.
Of course, though 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.
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 and good morning, everyone, two or 98 earnings call <unk>.
Spinoffs in November .
2019.
At this point, our stock price spreads had approximately $9 this year.
We began today, we begin 2002, we began with the greatest first quarter sales.
And adjusted operating margin in our company's history.
Our results in operational execution continued to reflect exceptionally well balanced business portfolio across both end markets and geographies.
Demand throughout our short cycle instrumentation and imaging businesses remained very robust.
<unk> total organic sales growth of seven 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 towards these businesses.
From our longer cycle commercial aerospace and marine businesses increased considerably from last year and backlog also grew.
Voluntary GAAP and non-GAAP earnings were first quarter Records.
GAAP earnings per share bridge, I exactly doubled compared with 2021 and non-GAAP earnings increased 34%.
I want to emphasize that our non-GAAP earnings exclude already acquired intangible asset amortization, but in the first quarter. It also excluded.
And large tax benefit related to clear foreign tax matters, which only appear in.
In the GAAP results.
While free cash flow was lower than last year.
<unk> the following guidance first.
Bond interest payments, our forward $36 million made only.
In the first quarter and again will be made in the third quarter second.
Annual incentive compensation paid only in the first quarter.
Our significant investment in inventory to Derisk revenue in future periods.
These items will not be repeated in the second quarter.
Nevertheless.
Our leverage ratio declined to two eight X.
Two apex immediately after the <unk> transaction in May of 2021.
Turning to our 2022 outlook.
Whereas demand environment across our businesses remain favorable.
Even with supply chain concerns and currency translation headwind, we are increasing our expectation for the full year organic growth to approximately 6%.
From Florida.
Two 5% communicated in January .
Coupled with our pure full year SaaS contribution.
Likely less than $2 billion strong player. This equates to total revenue of just over five $5 billion for the year.
Roughly equal to the current consensus I will now turn to comment on the performance of.
Our business segments.
<unk>.
In our digital imaging segment.
First quarter sales increased 185% largely due to FLIR acquisition, but organic drop in our combined commercial and government imaging businesses was also very strong at 13, 1%.
Sales growth was strongest.
Industrial vision sensors, <unk> systems, as well as our low dose high resolution digital X Ray detectors.
GAAP segment operating margin.
But adjusted for intangible asset amortization segment margin was 21, 9% or about 20 basis points greater than last year.
In our instrumentation segment.
Overall first quarter sales increased seven 8% versus last year.
Sales of electronic test and measurement systems, which includes our CLO scopes and protocol analyzers were very strong and increased 19, 1% year over year to record levels.
Sales in the environmental instruments were flat compared to last year with greater sandstorm firsthand human health and drug discovery product offset by lower sales of industrial and laboratory gas detection devices.
Sales of marine instrumentation increased nine 7% organically.
Due to improved energy markets, but also a record sales of autonomous underwater vehicles for both defense and commercial portion auger fee applications.
Overall.
Instrumentation segment GAAP operating.
Profit increased 25% in the first quarter with operating margin, increasing 245 basis points or 229 basis points.
Excluding intangible asset amortization.
Moving to our aerospace and defense Electronics segment.
First quarter sales increased nine 9%.
Driven by modest growth in defense based on industrial share sales combined with greater than 50% increase in sales of commercial aerospace products.
GAAP segment operating profit increased 51, 6%.
With margin 710 basis points greater than last year.
Finally.
In our engineered systems segment first.
First quarter revenue decreased eight 9% and operating profit and margin declined due to lower sales, but especially since we exited the higher margin cruise missile turbine engine business.
Following the first quarter.
Last year.
Before turning the call over to Sue I wanted to make a couple of concluding remarks.
Effective just this week.
Flair successfully fulfill the terms of the consent agreement with the U S Department of state.
Compliance has been always and will always be a critical component of our culture at teledyne.
Teledyne Flair has now moved beyond the extra burden and cost of numerous investigations and third party audits.
Finally <unk>.
Regarding our global defense business, which represents approximately a 25% of our total sales.
For the last six months defense sales, including that.
Teledyne clear declined slightly.
Year over year and backlog also increased.
However.
This was more than offset by very strong commercial orders and sales across the company.
But now.
With firm or U S and NATO budgets, the our outlook for our defense has changed.
Creating opportunities for greater demand sales, but also limiting risk for teledyne, if general economic growth decelerates in the future periods.
While the improvement in defense.
May benefit.
Future years. The most we are nevertheless, seeing an increase in near term bookings and opportunities some of which we expect to benefit the second half of 2022.
This is especially true for the flip Teledyne clear business portfolio there are.
Commercially derived but military qualified crowd out the only require a purchase order as opposed to a lengthy appropriations process.
I'll now turn the call over to suit.
Thank you Albert and good morning, everyone I will first discuss some additional financials for the quarter not covered by Robert and then I will discuss our second quarter and full year 2022 outlet.
In the first quarter adjusted cash flow from operating activities was $79 7 million compared.
Compared with cash flow of $124 9 million.
Same period of 2021.
The adjusted cash flow exclude a one time payment of $296 4 million.
The Swedish tax authority related to a disputed pre acquisition 2018 tax reassessment issued to a subsidiary of Sweden.
Adjusted free cash flow that is cash from operating activities less capital expenditures was $58 7 million.
First quarter of 2022, compared with $110 1 million in 2021.
Capital expenditures were $21 million in the first quarter compared to $17 6 million for the same period of 2021, depreciation and amortization expense was $86 9 million for the first quarter of 2022 compared to $29 $3 million.
In 2021.
We ended the quarter with approximately $385 billion of net debt that is approximately <unk>, one 3 billion.
Debt less cash of $284 million.
Our stock compensation expense was $4 3 million in the first quarter 2022, compared to $4 2 million for the same period of 2021.
Turning to our outlook management currently believes that GAAP earnings per share in the second quarter of 2022 will be in the range of $3 44 to $3 55 per share with non-GAAP earnings in the range of $4 32.
<unk> to $4 40.
For the full year 2022, our GAAP earnings per share outlook is $15 34.
To $15.66.
And on a non-GAAP basis, $17 75 to $18 the latter being an increase at the midpoint to our prior outlook of $17 62 to $18 that we provided in January .
The 2022 full year estimated tax rate, excluding discrete items is expected to be 23, 1% I'll now pass the call back to Ravi.
Thank you Sue.
Operator, we'd like to take.
Questions, if you're already proved proceeds with the questions and answers. Please go ahead.
Ladies and gentlemen, we will now begin the question and answer session of today's conference. If you wish to ask a question. Please press. The one followed by the zero and you touched on phone you'll hear a tone, indicating that you place yourself in Q and all questions will be pulled in the order. They are received you may remove yourself at any time by once again depressing. The one followed by the zero.
And if you're using a speakerphone. Please pick up your handset before pressing the keys once again to enter the queue. Please depress one zero.
Our first question will come from the line of Greg Konrad of Jefferies. Please go ahead.
Good morning.
Good morning, Gary.
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 maybe given the comments on the supply chain, maybe some of the offset what seems like maybe slightly better volume.
Hello.
I don't know, Greg, but yes, I'm glad you call it greedy yes.
Our ingredients.
Yes.
No.
Currently.
No.
We are conservative.
Company.
Right now sitting here.
We're worried about inflation.
So which is as you know it's difficult.
Supply chain issues, while we're managing them.
We have managed them successfully.
Are still uncertain and there is no certainty as when that will change so.
Having said that.
We expect revenue to grow.
It was about I think in January I've said, it was four 6% organic growth.
Indicating two 6% or maybe a low margin Nevertheless, having said that.
We have to be conservative because there's too much uncertainty there is the supply chain is the inflation. There is the warranty in Europe theres the shutdowns in China.
And.
This is not the time to answer your question.
Isn't it time to kind of.
<unk> focus on what we know we can de lever and go from there so.
That's my answer to that I don't know if that helps or not.
Yes.
Helpful.
And then I mean, just kind of base lining the outlook with the quarter.
When I look at the margin some.
The segments, we're well ahead of at least our expectation 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 youre expecting today.
Sure.
Let's start with.
Yes.
Digital imaging.
Uh huh.
For the full year and I am going to combined.
Digital imaging together, it's clear and legacy Teledyne.
We think for the full year.
It'd be about 22 point.
3%.
That's full year 2022.
Slightly less than what it was in full year 2021.
Now.
In January we.
We were a little more effort reticent about that we thought it would be closer to 23 nine.
But we think now 23 three is a better number primarily because we are experiencing some supply chain issues.
Plus we're having to pay higher prices when we do find the components that we need.
Moving to the instrumentation segment.
In January .
I mentioned that it would be about 22, 8%.
The margin, we would increasing debt by 50 basis points because of the tailwind that we have in test and measurement with SEDAR scripts on a protocol with increasing that margin.
22, 8% to $24 three.
Moving to aerospace and defense.
The margin we expect to.
Increased substantially from what we projected.
In January .
In January we projected a margin of 21, 9%.
And we expect it to grow almost 190 basis points to 24%.
On the flip side.
In our engineered.
Engineered systems segment, which has revenue of about $400 million and is.
Primarily government businesses.
We expect margins to end lower than what we expected in January down 10, 4%.
So when you roll all of that up for the segments.
Right now we are expecting the margin towards the all of the segments combined to be 22, 7%.
And then menu 14 corporate expense et cetera.
On company margin would be 25.
5% I.
I hope that helps Greg.
That's helpful and I'm, just kind of sneak in one last one.
You mentioned defense and kind of the increased opportunities and I think at one point people worried about defense, maybe bringing down the overall growth rate of Teledyne is there any way to maybe quantify what youre seeing in terms of maybe what you thought of as kind of the long term defense growth rate prior and then.
<unk> closed some of the the budget tailwind the NATO kind of what youre thinking that going forward today.
Okay.
Let me start with.
Q1.
Overall.
We found some decreased.
In defence across.
Our portfolio.
From Q1 of last year.
About two 5%.
And most of that debt.
Experience came in Teledyne flare.
Now having said that.
So longer term, we think our defense.
Sales should decrease in the mid single digits.
Which is huge.
You've taken a negative $2 five and go to.
Let's say, 5% or so about seven 5% turn it on that would be though.
At the end of 'twenty, two or more likely 2024, and the reason I say that.
Here's why.
While we've kind of chewed away on our defense backlog.
We're not seeing significant opportunities.
In Europe .
As well as across the board.
Fms sales.
And I can't give you examples of that but.
We're seeing real demand for.
<unk> products that we have.
Especially in the cleared businesses Teledyne <unk> businesses.
Some of them directly a result of the unit Ukraine conflict.
And similar with MRO of course, because of the increased budgets that are coming in the NATO Alliance.
Thank you.
Thank you Greg.
Our next question will come from the line of Jim Ricchiuti of Needham and company. Please go ahead.
Hi, thank.
Thank you good morning, Robert you're saying in light of the.
The comments you just made I am wondering are you told I thinking differently about.
Longer term inorganic opportunities in defense and.
Over the years you guys have focused mainly on building up the commercial portfolio and you've done quite well, but I'm. Just wondering as you think about the business are you.
Has anything changed in the way Youre thinking about M&A going forward.
Okay.
Jim Good morning to you.
First let me backup.
Hey.
The way, we look at the tenants, which is now but with clear included Teledyne <unk>, it's about 25% of our portfolio.
We like to think about that parts 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 conflict.
Have caused significant change in demand for our 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.
Not really.
Im convinced that we should change the balance of our portfolio towards defense and I say that we don't M&A and I say that because.
<unk>.
That I don't really think it's very prudent for a company like teledyne.
No.
Changed strategy because.
Cause 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 M&A will probably focus on commercial businesses, having said that we bought three around player had substantial.
Defense business when absorbed it but.
Dependency is good it's got a predictable backlog, but it's not really it doesn't have the kind of margins you can enjoy.
Commercial domain.
Got it thank you for that.
And also I appreciate the color on the segments in terms of the way you're viewing the.
Operating margins for the year.
Wonder if you could.
For <unk> two.
Gross margins, which were quite strong in Q1 and I'm wondering if you could elaborate on what some of the biggest factors were in that and maybe how we should be thinking about gross margins going forward I know, there's some puts and takes obviously some of the cost pressures, but mix also but is there any any color you.
You can provide on the strength there.
Yes.
Jim.
Obviously very familiar with teledyne.
If you look at our Q1 gross margins.
Last year.
Yeah.
It was about 38, 9% for the.
Legacy Teledyne, we didnt have clear at that time.
All clear on the other hand Teledyne flair.
Enjoys higher gross margins.
Then.
And then us about 55% or did historically are 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% thats in our insurance group.
And our aerospace and defense margins moved up.
Huge because of the above 50% increase in our commercial aerospace business.
So we enjoyed two tailwind one.
Buying a business, which is not a significant part of our portfolio that at higher gross margins that are legacy businesses.
Then turnaround that we experienced.
<unk>.
Our commercial aerospace business and then <unk>.
Really good record.
Or there is net revenue.
In our test and measurement businesses.
I think in commercial air presumably you see that recovery continuing it looks like from at least from what we're hearing from hearing elsewhere is that fair to say.
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 first quarter everybody in a trough as you remember.
We're really encouraged.
We do a lot of.
OEM products for commercial aircrafts, but we also do.
A lot of aftermarket products. So we're encouraged that we put into it.
Okay. Thanks, I'll jump back in the queue.
Thanks, Jim.
Our next question will come from the line of Joe Giordano of Cowen. Please go ahead.
Hey, good morning, guys.
Good morning, Joe.
So just wanted to start with the <unk>.
The growth rate in the FLIR defense portfolio for the quarter I know that was down.
So FLIR overall was down.
Youre right here.
How was that how.
How did that <unk> play.
Play out relative to what you were thinking internally three months ago 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 your updated views on organic growth by segment, that's probably helpful too.
Sure.
As you well know Joe you had mentioned.
Defense business as a flare.
They declined year over year, if you went through the historical.
Defense business declined about 10, 9% year over year.
That's also consistent with our own engineered systems segment.
That declined about 9% year over year some of the primes that we were listening to this week.
Businesses declined about 8%.
Having said that.
We think in Q2.
Clearly the defense.
Our overall defense should be relatively flat.
And then pick up.
In the third and fourth quarters.
Im going to say classic.
Plus 5%.
And the reason I say that is because.
Overall.
Market.
That we are seeing the opportunities that we're seeing in the defense businesses.
Our positive.
<unk> in Europe .
As well as in this country. So when you look at it that way, yes, we did have a decline in Q1, but we had a decline in our existing defensiveness.
Specialty engineered systems, which also has been covered.
As the year goes forward.
In the year overall is now you got a look at the other side of FLIR, which is their commercial businesses.
Our commercial businesses.
Reasonably well in the first quarter. They went up about two 3% compared to last year.
Last year, they had a little bit not much but they had a little bit of sales in <unk>.
Elevated skin temperature products.
So.
And Todd.
I think.
We expect for the year.
<unk>.
The revenue year over year.
To go up for the overall business Teledyne clear I should say.
To about.
From what was last year $1 eight 9 billion if your royalty down in historical as regards outfitted their acquisition.
So about 197 known.
Which would be the highest.
Over the last two years that'll be a combination of defense and commercial.
I hope that answers the question.
Joe.
No.
That's helpful. Thank you.
I was just I'm curious like.
Your point on this is not the time to be at our best in.
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.
What's the most concerning part like what do you think is the least protected our volume of our businesses.
Something that happened.
Globally.
I don't want to venture I guess, Joe because I don't know, but let me say this.
We have intentionally balanced our portfolio.
For just these kinds of times.
When times get uncertain.
Various parts of our portfolio.
This shock.
The markets and from the economies. That's why if you look at our history.
When things bad things happened.
Right afterwards, some other companies may not deal with it as well.
Right after that Werent, we buy someone that is not done as well.
So I.
I would say that.
I feel comfortable with our portfolio.
We're guiding the street on what we think we can deliver.
And we don't want to be too as the word differ Vincent for Vincent on the other hand.
If bad things continue happening as they are now might be a good opportunity for us coming out of this we had a significant M&A.
We don't see a warning sign at this time Joe.
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 or do we start moderating on the rate and kind of stay on a gross dollar basis.
Similar levels, how do you think about that business.
Well again growing with our team.
I am going to say.
Net.
GAAP earnings GAAP growth net growth for the year should.
It should be about 405, 5%, even though we had such a good first quarter, we're seeing better orders by the way even in the last two weeks.
But that's an area that we sell a significant amount of products in China.
And nobody knows what's going to happen with the.
Lockdowns there.
And it's a short cycle business and the comps are going to be tougher as we move forward because we did pretty well the last three quarters of last year. So.
I would say we've increased our outlook from January a little bit from let's say, 4% to 405% will stay with that for now to see how things evolve as time goes on.
Thanks, guys.
Our next question. Our next question comes from the line of Andrew <unk>.
<unk>.
Aaron Berg. Please go ahead.
Hey, good morning, guys.
Morning, Andrew.
So.
I was hoping you could maybe add a little bit more commentary specifically absolutely positive on defense.
And government business, specifically with FLIR too.
And clear had always kind of talk about the big longer term programs of record thereafter.
And very positive on their unmanned systems business, which was small but.
It's definitely an area they.
The.
Big source of growth or when.
When you make those comments are you are you referencing that things like that are there any other color you can get specifically into the kind of the nature of these awards are our potential opportunity as you said.
Yes.
Let me.
Let me first comment on the.
Long term legacy.
Systems programs of record.
Some of that is.
Has happened will happen.
Some update im not so sure because I don't look through the same lens.
The previous management did having said that.
There are.
Significant opportunities in soldier borne sensor systems.
And when you mentioned the unmanned systems Division.
A range of M. As you will note as you move through the air.
There is of course, the black Hornet black.
Black Hornet C, which is five inches in size very silent and go about a mile come back.
The GPS.
<unk>.
Performing GPS denied environment, we're seeing really interesting.
And that's doing very well.
On the flip side.
We have undergone systems are pack bots.
All right.
Doing really well actually some of them. We saw some videos are being used in Ukraine by the Ukrainian forces that we've trained before the war.
India.
Jim bonds that we have.
<unk> has done theirs, they're doing very well some of them actually are more on the new Ukraine, new helicopters and Keith.
Our IR sensors.
According to various drawn <unk> tuners, and we're seeing a lot of demand across.
All of large unmanned systems.
For not just <unk>.
Drones, but also for the sensors that go on top of on those.
We also have in the longer term as you said programs.
We also have an interesting opportunity.
We chose to do.
And larger drone.
That's a little bit like.
What is known as the Switchblade.
That John would be if we can achieve a program of record coming through the words you said.
If we can achieve program, our Frankfurt towards SaaS drone.
That would be a real winner.
It's <unk>.
The final stages.
Prototyping, we should be able to get some revenue by the end of the year.
It has.
And really.
Stronger capability, it's a vertical takeoff and landing drawn.
It.
Has opportunities to carry munitions.
It has recovered.
That is if you wave off.
And.
Assignments, you can you can wave EBITDA within the last two seconds and bring it back.
<unk>.
It's Scott.
30 minute flight time.
Let me go out 20 kilometers so when I think about something like that.
That's a keen to.
An opportunity that.
We can enjoy when we get certified on flying.
Having said all of that.
I think it's important to recognize that getting into programs of record is not that easy.
And once we like to focus on.
It is yes.
Get what you can now sell what you can and then plan.
Our plan for the future over the long term, but don't hedge all of your eggs in that basket.
I don't know whether that helps them.
No very helpful.
No it sounds encouraging.
And maybe you can comment too.
This quarter is that the consent agreement going away.
Could you just remind us the impact that that it sounds like.
Forget if that is included in your kind of annual synergy estimate and where we stand with synergies from clear at this point.
Yes.
That the total cost of that.
Fourth player and then tailor the line draws out beyond the 80 some million dollars.
It started in 2018.
And.
We successfully.
And did it this quarter, we had some expenses in Q1, we also had to pay $3 5 million. The government that we are obligated to pay.
<unk>.
We've built that into the synergies.
Going forward.
Already.
But but part of the reason that we are able to.
The synergies that we've enjoyed with teledyne clear is that when we bought them. We said we expect to have.
Accretion.
In the first.
Year.
And.
We talked at the time.
The accretion would be.
Somewhere between $40 million $280 million this year.
But wherever it's what I see right now.
I guess.
$80 million would be at the low end.
And it would be closer to 100 million as synergies and that kind of.
Absorbs.
Some of the opportunities that we see now that the.
The consent.
Decrease behind us.
Okay got it.
Okay.
Alright, thank you.
<unk>.
Thank you Andrew.
Our next question will come from the line of Christine Li Wang of Morgan Stanley . Please go ahead.
Hey, good morning, everyone.
Good morning Christine.
Looking at the supply chain.
Last quarter, you had mentioned that alternative source has thus far proven successful in about 60% to 70% of cases are these trends holding steady improving or worsening and also what other initiatives can you implement to manage the risk.
Thank you Chris.
Very good question, let me start with the effects.
The net net effect.
We think in the first quarters of this year the one just behind us.
The effect of.
Shortages.
Thanks to this by about $74 million.
We think.
Going forward.
That's not going to be.
Changing all that much having said that.
We also were able to buy components find components or redesign our products.
<unk>.
Let's let this.
Sell over $100 million yourself products that we couldnt tap if we had not enjoyed that we have a very robust.
Activity.
The language <unk> hedges and our procurement.
Led by Paul de La Rosa.
30 of our business units so they do three things first.
They identify.
Who has the shortages and what are the common suppliers, who are those short term sense.
And we've been deal directly as a company with that supplier and prioritize.
What we can buy from them. So we may have shortages in various businesses, but one may not affect our revenue as much as the other so that help us focus on the high priority ones.
Second.
We source.
From third parties.
Especially we have our own people in the far east plus we have some of our suppliers.
Primary suppliers for job.
Semiconductor.
Requirements that are looking for a part so if were missing like 700 parts today, we may have already planned maybe 450.
The part that we can enjoy.
We have to of course <unk> not quantified them, we're not just going to take them and put them into our product we have to qualify them like we do everything else.
And then we also lost fee.
Look at Green design.
That is carefully redesign not just.
So specific card, but can we redesigned the product try the camera that we're selling.
To avoid.
Park that has significant shortage, especially we see forward looking.
Looking forward so yes.
Long answer to your question is the following one yes, we're going to have some revenue shortfall because of that but it's not going to be killing goods.
It's going to be the same level that we had.
And <unk>.
Part of it is Olivier did because we are also putting some inventory.
One of the reasons that we've talked about our cash we have increased our inventory and sitting on our shelves are.
<unk> and also materials that we have either long term or products that once we get the product we can get it out the door.
There is a whole combination of these things thats kind of so far.
Has helped us avoid.
Significant.
FX on the company as a whole I hope Christine.
So to your question.
Yes, Robert that was really helpful. And then if I could do a follow on.
The supply chain issues that you're seeing.
Sure.
<unk> Teledyne the same as what Youre seeing for flare or is there a difference between the two.
Not much difference.
Christine.
I think.
Digital imaging as an example, which is now 60% of our business.
It's the same because we make very similar products.
<unk>.
Different end markets.
Miller product complexity et cetera, So I would say it's the same.
There are some exceptions here and there by and large though.
10%.
Great. Thank you very much Robert.
Of course.
Our next question comes from the line of Noah <unk>.
Goldman Sachs. Please go ahead.
Hi, good morning, everyone.
Good morning Noah.
Robert can you quantify how much inventory you added in that buffer stock process.
I'm going to say about $55 million I hate to speak.
Well it seems sensible with what's happening at the moment and it sounds like Youre, saying you don't expect that.
To alleviate anytime soon so youll just hold that.
The inventory balance at that level as opposed to burning that down through the year.
Thanks Rajiv.
We've got a Bernie done.
Yes.
That might close, but we've got a burden.
I mean, if youre not expecting supply chain to improve won't you need to hold.
Buffer stock.
We'll roll some off course, but here's the thing.
<unk>.
I think.
The combination of the things that I, just mentioned is making us feel a little more comfortable with the other thing is.
Some of our businesses.
Or have been a little too conservative we had a plan to reduce.
This year by a similar amount.
So now it has gone up.
So if we can bring it back to Bruce.
Still have some inventory, we just have to move it around so that.
<unk>.
The.
Measurement is such that it doesn't really hurt our cash flow we have for example.
The problem, we have for example with makers.
That's something that that's long term and we got a buying.
And by 230 tons of wafers in.
In digital imaging, we got a buy that we got to keep it because that's one that you cannot buy.
In the market whether it's.
East Asia or whether it's here you can't buy that so that one we feel but then other things that.
We can get rid of this year.
Okay.
Are you still expecting total company bottom line full year free cash to net income conversion over 100%.
Very close.
Very close.
Okay.
I think thats right I told the board yesterday.
Okay.
On the cost input inflation piece.
Is that what is the rate of increase that youre seeing at the moment.
Yeah.
Good question.
No there's two parts to that.
One of them is materials.
And the other one is wages.
On the material side.
With everything that's going on in the World.
Our costs are increasing.
At this time about 10, 5%.
Our growth.
Okay.
Some of our goods.
Firstly.
We look at that from both the business side I also look at it from the corporate side wage inflation is a little less maybe three 5%. So when you roll that up altogether, we're seeing about.
Cost increases.
3%, let's say.
Got it.
The flip side is we also are increasing prices ourselves, where we can not be negative program.
We're pretty much offsetting that.
We had price decreases so net net so far.
Very careful and prudent in what we do we've managed to negate those too.
We'd have to work very hard to keep doing that.
Or are you raising price at a rate equal to or slightly greater than the cost inflation or are you are you actually maintaining the price cost gap that you previously had.
I think I would say we're maintaining.
So you already had pricing and you're accelerating the pricing to maintain the price cost gap.
Is it.
Okay.
And then last thing I wanted to ask because you've discussed the.
A new a new opportunity set evolving on the national security front.
The combined business now what percentage of your.
Defense or government related to National security revenues are domestic versus international.
But still missing for example, I think.
About.
Overall, we're 25%.
I'd say about just under 20%, 19% is U S and I.
I mean, I would say about 5% to 6% these foreigners.
At this time.
Got it.
Okay. Thank you I appreciate it.
Thank you.
Our next question is a follow up from that.
Line of job or excuse me, Jim Ricchiuti of Needham <unk> Company. Please go ahead.
Yes, I may have missed it.
Robert I was wondering if you provided.
Any information on a book to bill either for the company or for the segments. If there was much.
<unk> ability and the book to bills that you saw on the different segments.
Yes.
That's a good question Jim.
Let me start with the total company if I may.
Book to Bill is pretty healthy.
It's 1.9, we have a really good backlog by the way are the highest backlog that.
I remember, we have about $2 $95 billion of backlog memory backlog, we define very carefully kind of.
The money that we already know it's going to come in so our book to bill of $1 nine needs pretty healthy, but it's very abundant across the company.
Let's start with digital imaging.
Digital imaging is a little less than the whole company. It's about one point to go forward, but still healthy.
In instruments is close to the company <unk>, where at one point to eight with marine being a little higher.
Then environmental marine being at 113.
And test and measurement being at one point or seven environment and at one point going forward.
Total instrumentation is same as the company at one point.
Aerospace and defense electronics.
As I mentioned because of the <unk>.
Commercial.
Aerospace come back we have a 113.
Book to Bill.
And in engineered systems were.
Our revenue went down for the reasons I mentioned, partly because we are not kind of we got out of the.
Turbine engine business after the first quarter of last year, plus we've been eating into our backlog we have some really nice additions our book to Bill is 138.
I'm always cautious on that one because that's a long term program lumpy.
<unk>.
Program wins, so overall.
One point on nine.
That's really good for us in this time.
In this environment.
Got it Thats helpful.
Thanks, Jim.
Thank you.
Yes.
There are no more further questions in queue at this time.
Thank you very much operator.
Ill now ask Jason to conclude our conference call. Please.
Thanks, Robert and again, thanks, everyone for joining us this morning, and if you do that.
Follow up questions. Please feel free to call me at the number on the earnings release and of course earnings releases are available on our website teledyne.
Dot com Steve.
Steve If you could conclude todays conference call and provide the replay information we would much appreciate it goodbye everyone.
Certainly Mr families, ladies and gentlemen that does conclude our conference call for today, which will be available for replay today at two PM Eastern time until May 27th Midnight of that day, you may access the replay by dialing 8662071041 in it.
Creating an access code of 5805962, if youre dialing from international locations. Please use foreseeable 29700847, and the access code of 580596 to once again on behalf of today's panel, we'd like to thank you for join.
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