Q2 2022 Teledyne Technologies Inc Earnings Call

July 27, 2022

Yeah.

Ladies and gentlemen, thank you for standing by and welcome to the Teledyne second quarter earnings call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If you should require assistance during the call. Please press Star then zero as a reminder, this call is being recorded.

I would now like to turn the call over to our host Jason Zhang Li. Please go ahead.

Thank you and good morning, everyone. This is Jason <unk>, Vice Chairman and I'd like to welcome everyone to Teledyne's second quarter 2022 earnings release Conference call. We released our earnings earlier. This morning, joining me today are teledyne's, Chairman, President and CEO , Robert Mehrabian, Senior Vice President and CFO Sue main senior Vice President General.

Chip.

Good day, and also Edwin rocks executive VP 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 and of course actual results may differ materially in order to avoid potential select.

Disclosures. This call is simultaneously being webcast and a replay both via dial in and webcast will be available for approximately one month.

Here is Robert.

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

In the second quarter.

Sales increased nearly 21% to about $136 billion. In addition.

GAAP operating profit operating margin and.

Earnings per share were all time or second quarter record.

non-GAAP earnings declined slightly but last years.

non-GAAP margin and earnings resulted in part from the disproportionate amount of sales are likely to cause near the end of the quarter Teledyne layer as well as lower share count, but due to the mid quarter closing of the player transaction in May two.

2021.

Including.

Increased foreign currency headwinds, which negatively impacted second quarter sales growth by over 1.7% or approximately $23 million organic growth was eight 2% and accelerated from the first quarter of 2012.

You too.

Our short cycle commercial instrumentation and imaging businesses growing strongly in the quarter.

Sales from our long cycle aerospace and marine businesses also increased.

Finally, our U S government sales, including Teledyne linear increase from last year, Despite lower defense Department outlays in the second quarter of 2022.

In summary.

Over a year sales increased in all segments and reported product lines.

Overall demand remains strong.

And we achieved correctly.

Record quarterly orders with total company book to Bill of 1.08 or.

Orders were particularly strong that teledyne clear book.

Book to Bill was approximately 125.

Free cash flow improved from the first quarter.

Planned inventory levels remained elevated to commentary.

<unk> supply chain risk.

Finally.

Our leverage ratio declined to two five and having reached our targeted leverage range. We are again pursuing acquisitions.

We're pleased to have recently completed our first small bolt on acquisition of Teledyne clear.

Turning to our 2022 outlook.

Given the recent and significant appreciation of the U S dollar.

Ongoing supply chain constraints and inflation.

We believe it's prudent to revise our reported revenue and adjusted earnings outlook modestly for the remainder of the year.

Florida and currency translation impacts our three largest segment and approximately 20% of our total sales with digital imaging and particularly teledyne clear impacted considerably more than other segments.

In addition.

Supply chain constraints continue to limit shipments electronic component and all the material shortages negatively impacted second quarter sales by approximately $16 million.

Now we are assuming that as similar shortfall will continue in the remainder of the year.

We have content volatile these headwinds through our various procurement initiatives and strong execution.

Nevertheless.

We expect total company year over year reported organic sales growth of about 4% in each of the third and fourth quarters of 2022 compared with our prior outlook of roughly 5% to 6%.

Again, a few full year estimated sales of about $547 billion.

Despite these headwinds.

We continue to see full year organic sales growth, which excludes flair.

Just over 6% and full year sales from Teledyne premier slightly greater than the peak sales in 2020, which included over $125 million from cameras for elevated skin temperature testing.

Okay.

Finally.

While foreign currency sales and costs are reasonably balanced at teledyne that is less of an.

Impact on the earnings.

I will still remain a bit cautious regarding cost impact of inflation.

Therefore, we are modestly revising our full year adjusted earnings outlook by 30 <unk>.

At the midpoint or approximately one 7% lower than in April .

I will now turn the call over to <unk>.

No sorry, I haven't I'm going to continue with our performance of our business segments.

Digital imaging second quarter sales increased 32, 9%.

Largely due to FLIR acquisition, but organic growth.

Our combined commercial and government imaging businesses was also very strong at 10, 3%.

Sales growth was strongest core industrial and scientific vision.

Sensors and systems as.

As well as for our low dose <unk>.

Resolution digital X Ray detectors.

Operating margin was 16, 2%, but adjusted putting bad Jumbo asset amortization segment margin was 21, 2%.

In our instrumentation segment overall.

Overall second quarter sales increased seven 4% versus last years.

Sales of electronic test and measurement systems, which include a pseudo scopes digitize their protocol analyzers.

Strong and increased 11, 2% year over year.

Sales of the environmental instruments increased two 4% compared with last year with greater sales from first in human health and drug discovery products offset by lower sales of industrial land laboratory, yes detection devices.

Sales of Marine instrumentation increased nine 9% in the quarter.

Due to improved energy.

Very good sands of autonomous underwater vehicles for both defense and commercial Oceanography application.

Overall instrumentation segment operating profit increased 13, 9% in the second quarter with operating margin, increasing 136 basis points.

We're at 108 basis points, excluding intangible asset amortization.

In the aerospace and defense Electronics segment second quarter sales increased 10, 8%.

Driven by a two 4% growth in defense space and industrial Sands combined.

43, 9% increase in sales of commercial aerospace products, yes.

GAAP operating margin increased 55, 3%.

<unk> margin is 749 basis points.

Finally.

In the engineered systems segment.

Second quarter revenue increased slightly but the operating profit margin declined primarily due to lower sales of fixed priced electronics systems.

Before turning the call over to Sue I want to make a few concluding remarks.

We continue to focus on strong execution in order to minimize ongoing supply chain increased inflation and now increased currency headwind.

While the operating environment remains challenging we are highly confident.

Of our balanced and resilient makes our commercial and government businesses.

Across a broad range of geographies and end markets.

Furthermore.

Uncertain times have traditionally created opportunities for teledyne.

For example.

The change in interest rates, we were able to repurchase speak straight debt issued just last year had a substantial discount.

And while relatively small the.

Cash paid towards the first acquisition for Teledyne player was negotiated and paid in euros.

Given the strength of our management.

Operations and balance sheet now.

Specifically with our leverage ratio at.

At two five.

Which we expect to be further reduced.

And the balance out of the year, we able to continue to seek similar.

And larger acquisitions in the future.

And now with kind of Cutler.

Thank you Robert and good morning, everyone I will first discuss some additional financials for the quarter not covered by Robert and then I will discuss our third quarter and full year 2022 outlet.

In the second quarter cash flow from operating activities was $196 $9 million compared.

Compared with cash flow of $211 3 million for the same period in 2021, the second quarter of 2022 reflected higher purchases of inventory and higher income tax payments compared with the second quarter of 2021.

Free cash flow that is cash from operating activities less capital expenditures was one.

<unk> hundred $76 $1 million in the second quarter of 2022, compared with $195 million in 2021, which included $66 $7 million of after tax cash payments related to the affiliate contract transaction.

Capital expenditures were $28 million for both second quarter period, depreciation and amortization expense was $82 7 million for the second quarter of 2022.

<unk> was $59 $7 million in 2021, which reflected the timing of the FLIR acquisition midway through the second quarter of 2021.

We ended the quarter with approximately $3 6 billion $367 billion of net debt that is approximately $3 $95 billion of debt less cash of $278.

$8 million.

Stock option compensation expense was $3 $6 million for both the second quarter period.

Turning to our outlook management currently believes that GAAP earnings per share in the third quarter of 2022 will be in the range of $3 36 to $3 54 per share with non-GAAP earnings in the range of $4 22.

$4 35.

And for the full year 2022, our GAAP earnings per share outlook is $15 and 13.

To $15.45.

And on a non-GAAP basis $17 45.

$17 77.

The 2022 full year estimated tax rate, excluding discrete items is expected to be 23, 1% I'll now pass the call back to Alex.

Thank you Sue we would now like to take your questions operator, if you're ready to proceed with the questions and answers. Please go ahead.

Thank you, ladies and gentlemen, if you would like to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the command up one zero. Once again, if you have any questions or comments. Please press one zero.

And our first question comes from the line of Greg <unk> with Jefferies. Please go ahead.

Good morning.

Good morning, Greg.

Interesting.

Last name there.

Yes.

I mean, I guess, it's uncharacteristic for teledyne to cut guidance I mean, a lot of time do you have contingency and just low P rating in your guidance and the commentary was helpful. But is there any way to maybe parse across the segments I mean it seems.

A&D might be running ahead of your guidance digital imaging below can you just maybe give us some more color around how youre thinking about the growth and margin outlook for the segments.

Right. It is uncharacteristic, Greg you're right.

I admitted.

There are three things that have happened to.

We were dealing with fairly successfully.

And that would be overall inflation.

And basically parked short cages with seem to be rolling $60 million and required carried over.

And over so in total they continue at that level, but one that just hit us very hard was foreign currency.

Foreign currency translation, basically FX, 20% of our business and the reason they attempt digital imaging the hardest that's where we have most of our foreign currency transactions.

You are right.

And we did well.

Instruments did okay.

<unk> systems was down slightly with engineered systems, nice only 8% of our portfolio.

Its the foreign currency that hit us about one 7% in Q2 or about $23 $25 million in revenue.

And we expect it to continue in Q3 and Q4 I think that's the fundamental change that we saw and it was mostly of course in digital imaging.

We have not changed our guidance.

This four times in 22 years and it's.

Something we do not do accept.

The trees.

Continuing headwinds that we see we could handle two but the third one just is too much at this time, hopefully, we'll execute better as we move along in the rest of the year.

And I appreciate that.

I guess everything Youre, saying is more on the supply side, let's say rather than the demand side and you mentioned that book to Bill, but maybe there are areas that have risks I'm thinking about tech spending and what we've heard from some of the tech companies I mean.

Anywhere where you have seen any demand deterioration or kind of concerns or is this really all more supply in FX driven.

Yes, I think.

The quick answer is no.

Our demand is.

It's been very strong.

Maybe.

As a function of time.

We may have some demand.

Declined, especially in our discretionary businesses, which are really primarily raymarine.

So there I think demand was softer but across the board the demand has been pretty good.

And then just last one for me I mean, you mentioned FLIR booking I.

I guess they were 25% above sales we've seen some nice awards there how does that maybe intersect with the supply chain and kind of ability to deliver on these and let me just think about defense getting better is that more of a 2023 items, just given supply chain or how youre thinking about the kind of the cadence there.

Yeah.

I think we have supply chain challenges there.

<unk>.

We have across our businesses.

I think what we're looking at is <unk>.

Improving our revenue there in.

In the fourth quarter in the third and fourth quarter better than we have.

As the first two quarters are mostly in the fourth quarter. So.

We have we have the same problems across the board.

As clear.

The unusual situation that we've had to slowly and we're collecting Edwin <unk>, who runs our digital imaging businesses is working very hard on it is to linearize the sales over to core <unk>.

And that's been hard because flares historically always sold more in the last month in the last week of the course, there has been early on and that causes issues, especially if you have some supply chain issues that can cause you to miss last maintenance revenue. So we're taking all of that into consideration.

And what we've put out in our earnings release.

Thank you.

Our next question is from Joe Guadagno Cowen. Please go ahead.

Joe how are you.

Hey, I'm doing well thanks, guys good morning.

Can you just talk a little bit about price and what you guys have been doing.

In the quarter and maybe more recently given FX changes is this changing the way you are you're going to market a little bit.

Yes.

Our price increases.

For the year.

We anticipate it to be about 3% of sales.

It's a little more.

<unk>.

In the.

<unk> hundred three in Q4 than it was in Q2.

In <unk> toys was less than 3%.

Which has not been greatly.

We just put in some increases in prices, especially in some of our instrument businesses, where we could.

And that would be in Q3, so overall I'd say, Joe it's about 3% the flip side is that.

The.

Cost increases due to inflation and also wages.

That we have have exceeded that.

I'm going to say by five 6%.

And that's causing some issues, but we.

We kind of knew that would happen.

And we kind of worked on that very hard to think that kind of suddenly came out of <unk> was the change in the exchange rates starting in April .

And that will establish the hard cost.

So when I look at margin.

You know running running hot.

<unk> just on on the mix with the lower comp.

Content, and then running now lower than people would have thought and imaging.

As you start thinking about the next couple of quarters.

Good good.

None of those are probably totally representative of like the normalized so when we think about margins.

Coming out of this in a more normal situation.

Well.

Let me start with versus April , which would be a good way to go.

As I said before in instruments.

For the full year, we expect margins to improve about 50 to 55 basis points.

In digital imaging now.

We expect it to.

Be lower by 130 basis points.

From.

For the full year.

In aerospace <unk> defense.

We have a good drug and primarily because you know.

Commercial air Aerospace is coming back and so we expect improvements in margin of 150 basis points.

And lastly, as I've said in a smaller segment, which is our engineered segment.

60 basis points declined when you add all of that.

It's about 45 basis points decline.

Across the company.

That I think Thats versus April .

But the summaries.

And if I were to think about coming out of this though like I know, it's too early to look at 'twenty three guidance, but like if I was to think about coming out of this versus the second half run rate that the imaging and aerospace specifically youre going to have.

Is the aerospace margins.

Level from which to grow from or is that like too hard of a comp and vice versa. The imaging second half provide a pretty attractive like exit rate for you to improve on.

Thanks, I think I think you are correct on aerospace and defense, it's already past full year margins.

Sure.

25, 5%, which is pretty high he couldnt go up a little bit.

Thank you.

The opportunity is going to be in digital imaging and also in.

Engineered systems the margins in instruments are already pretty healthy approaching 25%.

Thanks, guys I'll pass it along.

Yeah.

Okay.

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

Hi, good morning.

Yeah.

As we think about things that have slipped to the right because of supply chain challenges are those going to be able to be shipped later at a later date.

Sure Yes.

Yes. Good question very good question first let me, let me back up a second.

<unk>.

When we started.

Q2.

We had supply chain challenges, we have a very strong program in procurement and.

And we were able to offset that bought 120 plus million dollars of supply chain challenges by buying through brokers by buying our own.

<unk>.

Buyers in Asia by a variety of techniques and so we offset the $120 million plus of revenue that was in danger that left us with 60 million that we couldn't but that 60 is rolling in a way.

Core series to course or at least not additive and what happens is that.

We think that.

Right now that's going to continue.

For the next two quarters, and Thats, where our estimates are coming from but having said that.

Because we have elevated our.

Inventory over time that this is going to dissipate.

There's no question about that whether it's the overtime is going to be early next year or later next year, but over time. This is going to this is not loss revenue on its not lost inventory.

Just last.

Revenue for the time being so it's going to improve.

Great. Thank you very much.

Thank you.

Our next question is from Jim Ricchiuti Needham and company. Please go ahead.

Hi, Thank you good morning.

Right.

Appreciate the Sun.

Sudden change in currency, but I wanted to go back to supply chain.

Have you.

Are you guys, perhaps underestimated the impact of supply chain.

<unk>, maybe you thought it would improve a little sooner or is this just something that you know you.

You've been tracking and it's just market better and this was in line with what you expected.

Jim.

Yes.

It's.

It improved.

Only because we were able to find more parts.

We have for example, if you look at year to date, we have about we're missing about 900, what we call important critical.

Part Dave.

They range from computer chips.

Going to.

Vision systems too.

<unk> et cetera.

And all of the 900 that we've actually relocated 800.

And through the various processes.

Sometimes we redesigned the product if we can if it says earnings include redesign sometimes we.

Bye at par then we have obviously qualified.

So and sometimes we just buy parts so brokers.

I Didnt estimate we didn't that they made was that the broker purchases would be as expensive as they are we're paying sometimes as much as 70% premium towards the same part when we buy through a broker because they're going out and finding the part.

But.

That's not a usual if you create a vacuum eventually air comes in right. So you've got these brokers that are doing really good work and making a lot of money.

When that happens supply chain is going to change eventually and it is.

The only places that I would say.

We may be underestimated.

Some of the very high end and complex component, whereas the.

Or there is that.

Our suppliers are quoting guard 12 to 24 months out.

And they're also asking to foreigners to put a noncancelable orders.

So you have to be very careful in the ladder of course, so I don't think we underestimated it.

It just got things Didnt get better at all and we're not counting on it getting better in the rest of the year I think 2023 is going to be defensive some of this stuff continues the way. It is we're really designed more products.

Just the way it is with a designer and debenture to come out of it but I don't think he is going to go away beyond 2023.

Got it.

One of the things I was struck by.

Was the defense business.

Thought you might have a little bit more growth in Q2 is this just more indicative of the pattern. We've seen it's clear over the years, where it's just going to be skewed more towards the Q4 period.

Yes.

Here's the problem was defense budgets are up.

Would place or not.

It's kind of like.

Constricting dam, that's constricting the flow.

<unk>.

The flip side of it is that if you look at the second quarters and you look at clear particularity.

Fence side of FLIR actually increased 8%.

Is the commercial outside of player that was <unk>.

<unk> or just slightly down primarily due to raymarine the maritime that I mentioned, which is discretionary.

But the defense side, the increase year over year actually if you looked at clear Q2 of last year Q2 of last year.

Versus Q2 of this year that is look at how much they sold before we acquired them how much. They sold after we acquired them versus how much. They saw this quarter overall <unk> revenue was up two 8% primarily because of their defense business being up 8%. So.

With these recent awards.

Feel very good about that and we have very strong leadership in our defense businesses in their defence, who used to be with US mentioned the department of defense ended up at the very end of her career there to be acting Deputy Secretary of research and engineering. So.

We feel good about that and we are expecting things to improve that.

And then last question for me and I'll go back into the queue is just.

You mentioned raymarine potentially as the macroeconomic environment deteriorates that could be impacted but just given the way the portfolio has changed now with leisure.

As you look at the broader portfolio, which areas of the business.

It might potentially be precursors of some change.

Man that you might see.

Economic environment changes.

More quickly.

I think.

The.

Canary in the mine if you wanted to say weighted that way.

Is going to be some of our commercial.

Digital imaging products.

We saw some declines in certain areas, there's different reasons for it for example in our healthcare digital imaging because of clothing things went soft, but nights growing very fast and doing really well and taking market share, but I would say some of our commercial digital imaging.

Would be a good signal for us a strong <unk> market perspective.

But we have because we overall because we have relatively small very limited exposure to consumer demand.

We don't see that affecting us we're not we're not.

50% of our portfolio is defense aerospace medical and energy those markets are going to be fine.

Alright, thank you.

And our next question comes from the line of Andrew The Stockyard Fair number.

Please go ahead.

Good morning, good morning, guys.

Good morning.

So last quarter, you guys sounded a little bit.

More net positive on.

Yes look and defense, obviously with what's going on in the world.

What is your view at this point and <unk>.

Do you foresee some potential awards there are.

Projects that arent currently embedded in your guidance moving forward, maybe before year end.

Well.

Yes, so as you know Andrew we have had a succession of awards recently, India.

In defence that have been.

We've put news releases on most of them.

And then most of them by in the clear area.

We think.

Some of our European.

Awards are a little delayed.

As you know to.

To get for example, if you are to get.

Thanks to Ukraine, you have to go through one of the others are NATO countries. A similar dose are taking time the flip side is that.

Some of the larger awards that we've had for example, yes.

<unk> family of weapons weapons sight for individuals which are mounted devices that go on.

Rifles.

That's a $500 million award, but we are in the early phase. So we expect that the increased revenue for that will come in future periods rather than immediately.

We got a major award from the Danish Ministry of Defence for mobile sensor system.

And.

We also had.

As we announced we had a really nice awards for large or very small.

<unk> Richard.

Black Hornets from the Norwegian government.

Those awards, while they've been made the shipments are.

Starting to come now and we expect those awards.

<unk> will lead to more revenue in the future and as we move forward from.

Small towards the prototype to production or small scale production to full rate production. So we feel very good about that but the awards that we've had and some that we're going to get especially in Europe .

Okay.

And how much of this new activity is solely dependent on the Russia, Ukraine conflict.

Continuing our.

Put in another way.

That died down do you see some of this.

Activity or interest in your products evaporate.

No.

I think.

Okay.

So the programs we are participating in.

<unk>.

David.

They are really just greater budgets in the U S and NATO countries and I don't think thats going to go away.

[laughter] in any foreseeable future.

As you can judge.

The invasion of Ukraine has been a lesson.

Listen.

To everybody.

That you cannot be in a situation where you are.

Liable.

And I think those budgets are here to stay and.

The NATO alliance is getting.

Title and their budgets are going up U S budgets going up in all domains.

There are programs in the U S that we participate in.

Related to high performance in for Red <unk> space.

To track.

Missiles.

I think I think that's here to stay.

Okay, and maybe one more if I may just because.

The topics you talked a little bit more positively about M&A now that your leverage is at a target.

What area of interest to you is it going to fall under are you targeting areas in defense or is that more outside of the digital imaging.

To broaden your balance of your portfolio.

I would say in all areas I would probably exclude.

Strictly government services businesses type businesses.

If we see things that across our segments. So it's not necessarily pure one segment or another our emphasis has been digital imaging will continue and we like instruments, but there are certain areas of aerospace and defense.

Liking our connector businesses, where our margins are superior to everything else. So we would not exclude that we won't buy something we will not participate in something in the government services business for example.

Yeah.

Okay. Thanks Robert.

Thank you.

And ladies and gentlemen, once again, if you have any questions or comments. Please first one zero.

The next question is from the line of Christine Li Wang Morgan Stanley . Please go ahead.

Good morning, everyone.

Good morning, Tristan.

You've mentioned to return to M&A now that you've hit your target leverage range with a sharp increase in interest rates have you seen asset prices come down to preserve your return thresholds and also in terms of timing Theres a lot of economic uncertainty do you think now's the time.

To look at these assets or.

Wait and see how the economic environment unfolds.

Unfolds.

Great question, Christine Let me, let me first go through the first part of the question I think some of the expectations out there have moderated and we continued to moderate, especially with the stock market down Smp's down almost 15, 16% this year.

So our expectations are moderating somewhat.

Let me go into the second part.

Which has to do if.

If we don't do anything.

Ratio.

Which is now two five will continue going down by year end, maybe two three if you don't do anything by the end of next year, you'll be one seven and so on so forth. So.

We do have by the way the liquidity.

To buy things right now if we look at our liquidity, we can buy it.

Same store margin line of credit going over $1 billion, having said that.

We've always been very careful not to.

Now to overstretch ourselves and not to overpay for things. So I think things are getting better with low crime, Tim bolt ons, but if you look at further forward 12 months or so what happened last time when the markets.

And the economy decline same thing is happening we come out of this stronger.

Some people don't.

That's when we were able to buy them because their markets.

Their market prices have declined so it's a continuing process.

<unk>.

Right now if we look at our debt profile.

We have almost no exposure to.

Increased interest rates at this time.

93% of our debt is fixed the other 7% that's floating where cash against that which is also floating so we have 100% fixed.

Debt at this time.

And we have a good line of credit.

Thank you for all the color.

Thank you Christie.

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

Thank you operator.

I would now ask Jason to conclude our conference call. Thanks, Robert and again, thanks, everyone for joining us this morning.

Hello up questions. Please feel free to call me the number on the earnings release or email me directly.

<unk>, if you could conclude the call and give the replay information we would appreciate it. Thank you.

Certainly ladies and gentlemen, this conference will be available for replay after one P. M Pacific time today through August 27, 2022 at Midnight you may access the AT&T replay system at anytime by dialing 86620710, 401 and entering the access code 386.

<unk> 531 international participants dial four zero to 9700847 again, the numbers are 662071041 and international as far as Theyre all 29700847.

And the access code is 3867531 that concludes our conference today. Thank you for your participation and for using AT&T Conferencing service you may now disconnect.

[music].

Yes.

Okay.

Yeah.

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Okay.

[music].

Yes.

[music].

Okay.

[music].

Okay.

Sure.

Yes.

[music].

Yes.

Okay.

Great.

Yes.

Okay.

Yeah.

Okay.

Yes.

[music].

Okay.

Yes.

Sure.

Okay.

[music].

Yes.

Okay.

Yes.

[music].

Okay.

Sure.

[music].

Yes.

Okay.

[music].

Yes.

[music].

Okay.

Yes.

[music].

Alright.

Okay.

Yes.

[music].

Yes.

[music].

Thanks.

Okay.

Sure.

Okay.

Sure.

Okay.

Yes.

[music].

Yes.

[music].

Yes.

Okay.

Yes.

Okay.

Yes.

Great.

[music].

Yes.

Okay.

Sure.

Okay.

Sure.

Okay.

[music] space.

Okay.

Thanks.

Yes.

Okay.

[music].

Okay.

Yes.

[music].

Okay.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

Systems during the call. Please press Star then zero as a reminder, this call is being recorded.

I'd now like to turn the call over to our host Jason Zhang Li. Please go ahead.

And good morning, everyone. This is Jason <unk>, Vice Chairman and I would like to welcome everyone to Teledyne's second quarter 2022 earnings release Conference call. We released our earnings earlier. This morning, joining me today are teledyne's, Chairman, President and CEO , Robert Mehrabian, Senior Vice President and CFO Sue main senior Vice President General account.

So cheap.

And also 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 drink caveat 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 dial in and webcast will be available for approximately one month.

Here is Robert.

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

In the second quarter.

Sales increased nearly 21% to about 136 billion. In addition, our GAAP operating profit operating margin and earnings per share were all time or second quarter record.

non-GAAP earnings declined slightly but last year's non.

non-GAAP margin and earnings resulted in part from the disproportionate amount of sales are likely to cause near the end of the quarter Teledyne player as well as lower share count, but due to the mid quarter closing of the transaction in may two.

2021.

Including.

Increased foreign currency headwinds, which negatively impacted second quarter sales growth by over one 7% or approximately $23 million organic growth was eight 2% and accelerated from the first quarter of 2000.

'twenty two.

Our short cycle commercial instrumentation and imaging businesses growing strongly in the quarter and sales from our long cycle Aerospace and marine businesses also increased.

Finally, our U S government sales, including Teledyne clear increase from last year, Despite lower defense Department outlays in the second quarter of 2022.

In summary.

Year over year sales increased in all segments and reported product lines.

Overall demand remains strong and.

We achieved.

Record quarterly orders with total company book to Bill of 148.

Orders were particularly strong that teledyne clear book.

Book to Bill was approximately 125.

Free cash flow improved from the first quarter.

But planned inventory levels remained elevated to commentary.

<unk> supply chain risk.

Finally.

Our leverage ratio declined to two five.

And having reached our targeted leverage range. We are again pursuing acquisitions and are pleased to have recently completed our first small bolt on acquisition of Teledyne clear.

Turning to our 2022 outlook.

Given the recent and significant appreciation of the U S dollar.

Ongoing supply chain constraints and inflation.

We believe it's prudent to revise our reported revenue and adjusted earnings outlook modestly for the remainder of the year.

Client and currency translation impacts our three largest segment and approximately 20% of our total sales with digital imaging, particularly teledyne clear impacted considerably more than other segments.

In addition, <unk>.

Supply chain constraints continue to limit shipments.

On a component in other material shortages negatively impacted second quarter sales by approximately $60 million.

We're assuming that as similar shortfall will continue.

Remainder of the year.

We have content volatile these headwinds through our various procurement initiatives and strong execution.

Nevertheless.

We expect total company year over year reported organic sales growth.

About 4% in each of the third and fourth quarters of 2022.

Paired with our prior outlook of roughly 5% to 6%, resulting in a few full year estimated sales of about $5 four 7 billion.

Despite these headwinds.

We continue to see full year organic sales growth, which excludes flair.

Just over 6% and full year sales from Teledyne for the year slightly greater than the peak sales in 2020, which included over $125 million from cameras for elevated skin temperature testing.

Okay.

Finally.

While foreign currency sales and costs are reasonably balanced at teledyne that is less of an impact on earnings.

We also remain a bit cautious regarding cost impact of inflation.

Therefore, we are modestly revising our full year adjusted earnings outlook by 30 <unk>.

At the midpoint or approximately one 7% lower than April .

I will now turn the call over to <unk>.

No sorry, I haven't I'm willing to continue with our performance of our business segments.

In digital imaging second quarter sales increased 32, 9%.

Largely due to FLIR acquisition, but organic growth.

Combined commercial and government imaging businesses was also very strong at 10, 3%.

Sales growth was strongest core industrial and scientific vision.

Sensors and systems as.

As well as for our low dose hydro elusive.

Resolution digital X Ray detectors.

Operating margin was 16, 2% adjusted.

Adjusted for intangible asset amortization segment margin was 21, 2%.

In our instrumentation segment overall.

Overall second quarter sales increased seven 4% versus last year's.

Sales of electronic test and measurement systems, which include a pseudo scopes Digitizes protocol analyzers remained strong and increased 11, 2% year over year.

Sales of Marine instrumentation increased nine 9% in the quarter.

Due to improved energy.

Record sales of autonomous underwater vehicles for both defense and commercial Oceanography application.

Overall instrumentation segment operating profit increased 13, 9% in the second quarter with operating margin, increasing 136 basis points.

For the 108 basis points, excluding intangible asset amortization.

In the aerospace and defense Electronics segment second.

Second quarter sales increased 10, 8% driven by a two 4% growth in defense space or an industrial sales combined.

43, 9% increase in sales of commercial aerospace products, yes.

GAAP operating margin increased 55, 2%.

With margin 749 basis points Greg.

Finally.

In the engineered systems segment.

Second quarter revenue increased slightly but the operating profit margin declined primarily due to lower sales of fixed priced electronics systems.

Before turning the call over to Sue I want to make a few concluding remarks.

We continue to focus on strong execution in order to minimize ongoing supply chain increased inflation and now increased currency headwind.

While the operating environment remains challenging we are highly confident of.

Our balanced and resilient makes our commercial and government businesses.

It's a broad range of geographies and end market.

Furthermore.

Uncertain times have traditionally created opportunities for teledyne.

For example.

The change in interest rates, we were able to repurchase speak straight debt issued just last year at a substantial discount.

And while relatively small the.

Cash paid towards the first acquisition for Teledyne player was negotiated and paid in euros.

Given the strength of our management.

Operations and balance sheet now.

Specifically with our leverage ratio.

At $2 five which.

Which we expect to be further reduced.

And the balance out of the year.

To continue to seek similar.

And larger acquisitions in the future.

And now with kind of color.

Thank you Robert and good morning, everyone I will first discuss some additional financials for the quarter and that product by Robert and then I will discuss our third quarter and full year 2022 outlet.

In the second quarter cash flow from operating activities was $196 9 million.

Compared with cash flow of $211 3 million.

At the same period in 2021, the second quarter of 2022 reflected higher purchases of inventory and higher income tax payments compared with the second quarter 2021.

Free cash flow that is cash from operating activities less capital expenditures was $176 1 million in the second quarter of 2022.

$195 million in 2021, which included $66 $7 million of after tax cash payments related to the affiliate contract transaction.

Capital expenditures were $28 million for both the second quarter period, depreciation and amortization expense was $82 7 million for the second quarter 2022, compared with $59 7 million in 2021, which reflected the timing of the FLIR acquisition midway through.

In the second quarter of 2021.

We ended the quarter with approximately $3 6 billion $3 $67 billion of net debt that is approximately $3 $95 billion of debt less cash of $278 eight.

$8 million.

Stock option compensation expense was $3 6 million for both the second quarter period, turning to our outlook management currently believes that GAAP earnings per share in the third quarter of 2022 will be in the range of $3 36 to.

The $3 54 per share with non-GAAP earnings in the range of $4 20 to $4 35.

And for the full year 2022, our GAAP earnings per share outlook is $15 13.

To $15 45.

And on a non-GAAP basis $17 45 to.

To $17 77.

The 2022 full year estimated tax rate, excluding discrete items is expected to be 23, 1%.

Now pass the call back to Alex.

Thank you Sue we would now like to take your questions operator, if you're ready to proceed with the questions and answers. Please go ahead.

Thank you, ladies and gentlemen, if you would like to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating Mcmahon of one zero. Once again, if you have any questions or comments. Please press one zero.

And our first question comes from the line of Greg <unk> with Jefferies. Please go ahead.

Good morning.

Great.

Interesting last name there.

Yes.

Right.

Ahead of your guidance digital imaging below can you just maybe give us more color around how youre thinking about the growth and margin outlook for the segments.

Right. It is uncharacteristic, Greg you're right.

I admitted.

There are three things that have happened to <unk>.

We're dealing with fairly successfully.

And that would be overall inflation.

And basically parked short stages would seem to be rolling $60 million and required it over and over.

And over so in total they continue at that level, but one that just hit us very hard was foreign currency.

Foreign currency translation, basically FX, 20% of our business and there isn't a digital imaging the hardest that's where we have most of our foreign currency transactions.

Right.

And we did well.

Instruments did okay engineered systems was down slightly with engineered systems nice only 8% of our portfolio.

Its the foreign currency.

That hit Us about one 7% in Q2 or about $23 $25 million in revenue and we expect it to continue in Q3 and Q4.

That's the fundamental change that we saw.

And it was mostly of course in digital imaging.

We have not changed our guidance.

This the four times in 22 years.

It's.

Something we do not do accept.

The trees.

Continuing headwinds that we see we could handle two but the third one just is too much at this time, hopefully, we'll execute better as we move along in the rest of the year.

And I appreciate that.

I guess.

Youre, saying is more on the supply side, let's say rather than the demand side and you mentioned the book to Bill, but maybe there are areas that have rescue me I'm thinking about tech spending and what we've heard from some of the tech companies.

Any way, where you have seen any demand deterioration or kind of concerns or is this really all more supply in FX driven.

Yes, I think.

The quick answer is no.

Our demand is.

That's been very strong.

Maybe.

As a function of our time.

We may have some demand.

Declined, especially in our discretionary businesses.

They are really primarily raymarine.

So there I think demand was softer but across the board the demand has been pretty good.

And then just last one for me I mean, you mentioned FLIR booking.

They were 25% above sales we've seen some nice award there.

How does that maybe intersect with the supply chain and kind of ability to deliver on these and let me just think about defense getting better or is that more of a 2023 items, just given supply chain or how youre thinking about the kind of the cadence there.

Okay.

I think we have supply chain challenges there.

<unk>.

We have across our businesses.

I think what we're looking at is.

Improving our revenue there in.

In the fourth quarter in the third and fourth quarter better than we have.

As the first two quarters and mostly in the fourth quarter. So.

We have we have the same problems across the board.

As clear.

The unusual situation that we've had to slowly and we are correcting Edwin <unk>, who runs our digital imaging businesses is working very hard on it is to linearize the sales over to core <unk>.

And that's been hard because flares historically always sold more in the last month in the last week of the course theres been early on and that causes issues, especially if you have some supply chain issues that can cause you to miss last maintenance revenue. So we're taking all of that into consideration.

And what we've put out in our earnings release.

Thank you.

Our next.

And as from gel Gerdau Cowen. Please go ahead.

Joe how are you.

Hey, I'm doing well thanks, guys good morning.

Can you just talk a little bit about price and what you guys have been doing.

In the quarter and maybe more recently given FX changes is this changing the way you are you're going to market a little bit.

Yes.

Yeah.

Our price increases.

For the year.

We anticipate it to be about 3% of sales.

It's a little more.

<unk>.

In the.

Q3, and Q4 than it was in Q2.

In <unk> toys was less than 3%.

Which has not been greatly.

We just put in some increases in prices, especially in some of our instrument businesses, where we could.

And that would be in Q3, so overall I'd say, Joe it's about 3% the flip side is that.

The.

Cost increases due to inflation and also wages.

That we have have exceeded that.

I'm going to say by five 6%.

And that's causing some issues, but we will.

We kind of knew that would happen.

And we kind of worked on that very hard to think that kind of suddenly came out of <unk> was the change in the exchange rates starting in April .

And that will establish the hardest part.

So when I look at margin.

Running running hot.

<unk> just on on the mix with the lower Roe.

Content, and then running now lower than people would have thought in and imaging.

As you start thinking about the next couple of quarters Whats a good.

None of those are probably totally representative of like the normalized so like can we think about margins.

Coming out of this in a more normal situation.

Well let.

Let me start with versus April , which would be a good way to go.

Sure.

As I said before in instruments.

For the full year, we expect margins to improve about 50 to 55 basis points.

In digital imaging now.

We expect it to.

<unk> be lower by 130 basis points.

Bob.

Okay.

From.

For the full year.

In aerospace <unk> defense.

We have a good <unk> news and primarily because.

Commercial aerospace is coming back and so we expect improvements in margin of 150 basis points.

And lastly, as I've said in a smaller segment, which is our engineered segment, maybe 60 basis points decline when you add all of that.

It's about 45 basis points declined.

Across the company.

That I think Thats versus April .

But the summaries.

And if I were to think about coming out of this though like I know, it's too early to look at 'twenty three guidance, but like if I was to think about coming out of this versus the second half run rate that imaging and aerospace specifically youre going to have.

Is the aerospace margins.

Level from which to grow from or is that like too hard of a comp and vice versa. The imaging second half provide a pretty attractive like exit rate for you to improve on.

Thanks, I think I think you are correct on aerospace and defense, it's already passed full year margins.

25, 5%, which is pretty high he could go up a little bit.

I think.

The opportunity is going to be in digital imaging and also in.

Engineered systems the margins in instruments are already pretty healthy approaching 25%.

Thanks, guys I'll pass it along.

Okay.

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

Hi, good morning.

Hi.

As we think about things that have slipped to the right because of supply chain challenges are those going to be able to be shipped later at a later date.

Or yes.

Yes. Good question very good question first let me, let me back up a second.

When we started.

Q2.

We have supply chain challenges, we have a very strong program and procurement.

We were able to offset that bought 123 plus million dollars of supply chain challenges by buying through brokers by buying our own.

<unk>.

Buyers in Asia by a variety of techniques and so we offset the $120 million plus of revenue that was in danger that left us with 60 million that we couldn't but that 60 is rolling in a way.

Quarter to quarter is not additive and what happens is that.

We think that.

Right now that's going to continue.

For the next two quarters, and Thats, where our estimates are coming from but having said that.

Because we have elevated our.

Inventory over time that this is going to dissipate.

There's no question about that whether the over time is going to be early next year or later next year, but over time. This is going to this is not loss revenue on its not lost inventory is just lost.

Revenue for the time being so it's going to improve.

Great. Thank you very much.

Thank you.

Yes.

Our next question is from Jim Ricchiuti Needham and company. Please go ahead hi.

Thank you good morning.

Robert I can appreciate the.

Sudden change in currency, but I wanted to go back to supply chain.

Have you.

Do you guys, perhaps underestimated the impact of supply chain.

That maybe you thought it would improve a little sooner or is this just something that you know.

You've been tracking and it's just not get better and this was in line with what you expected.

Jim.

Yes.

It's.

It has improved.

Only because we were able to find more parts.

We have for example, if you look at year to date, we have bought were missing about 900, what we call important critical part.

Mark.

Date range from computer chips.

Going to <unk>.

Vision systems too.

<unk> et cetera.

And all of the 900 that we've actually relocated 800.

And through the various processes.

Sometimes we redesigned the product if we can if it says earnings include redesign sometimes we.

Buy a part and we have obviously qualified.

So and sometimes we just buy parcels to brokers.

I estimate we did that in may.

Does that the.

Broker purchases would be as expensive as they are we're paying sometimes as much as 70% premium for it in the same part when we buy through a broker because they're going out and finding the part.

But.

That's <unk>.

Nothing unusual as you create a vacuum eventually air comes in right. So you've got these brokers that are doing really good work and making a lot of money.

When that happens supply chain is going to change eventually and it is.

The only places that I would say.

We may be underestimated.

Some of the very high end and complex components with.

Orders.

The suppliers.

Suppliers are quoting guard 12 to 24 months out and they're also asking to progress to put a noncancelable orders.

So you have to be very careful in the ladder of course, so I don't think we underestimated it.

It just got things Didnt get better at all.

Not counting on it getting better in the rest of the year I think 2023 is going to be defensive some of this stuff continues the way. It is really designed more products.

Just the way it is with a designer and debenture to come out of it but I don't think he is going to go away beyond 2023.

Got it.

One of the things I was struck by.

Was the defense business.

I thought you might have a little bit more growth in Q2 is this just more indicative of the pattern. We've seen it's clear over the years, where it's just going to be skewed more toward the Q4 period.

Yes.

Here's the problem was defense budgets are up.

Outlays are not it's kind of like a.

Constricting dam, that's constricting the slow.

The flip side of it is that if you look at the second core fish and you look at clear particularity.

Fence side of player actually increased 8% is.

Is the commercial outside of player that was flat.

Flat or just slightly down primarily due to raymarine the maritime that I mentioned, which is discretionary.

But the defense side, the increase year over year actually if you looked at clear Q2 of last year Q2 of last year.

<unk> Q2 of this year that is look at how much they sold before we acquired them how much. They saw after we acquired them versus how much. They saw this quarter overall <unk> revenue was up two 8% primarily because of their defense business being up 8%. So.

With these recent awards.

We feel very good about that and we have very strong leadership in our defense businesses in their defence, who used to be with us when the department of defense ended up at the very end of her career there to be acting Deputy Secretary of research and engineering. So.

We feel good about that and we are expecting things to improve that.

And then last question for me and I'll go back into the queue is just.

You mentioned raymarine potentially as the macroeconomic environment deteriorates that could be impacted but just given the way. The portfolio has changed now with as you look at the broader portfolio, which areas of that business might potentially be precursor.

Sure some change.

Demand that you might see.

Economic environment changes.

We're quickly.

I think.

The <unk>.

Canary in the mine if you wanted to say put it that way.

Is going to be some of our commercial.

Digital imaging products.

We saw some declines in certain areas. There is different reasons for it for example in our healthcare digital imaging because of clothing things went soft, but nights growing very fast and doing really well on taking market share, but I would say some of our commercial digital imaging would.

B a good signal for our strong <unk> market perspective.

But we have because we overall because we have relatively small very limited exposure to consumer demand.

We don't see that FMC is we're not we're not.

50%.

Percent of our portfolio is defense aerospace medical and energy those markets are going to be fine.

Alright, thank you.

And our next question comes from the line of Andrew The Stockyard Bahrenburg. Please go ahead.

Good morning, good morning, guys.

Hey.

So last quarter, you guys sounded a little bit more net positive on.

Yes look and defense, obviously with what's going on in the world.

Yes.

In your view at this point.

<unk>.

Do you foresee some potential awards there are <unk>.

Projects that arent currently embedded in your guidance moving forward, maybe before year end.

Well.

Yes, so as you know.

Andrew we have had a succession of awards recently.

In defence that have been.

We've put news releases down most of them.

And then most of them.

By in the clear area.

We think.

Some of our European.

Rewards.

A little delayed.

As you know to get for example, if you are to get.

Thanks to Ukraine, you have to go through one of the others NATO countries at similar dose.

Taking time, the flip side is that.

Some of the larger awards that we've had for example, yes.

<unk> family of weapons weapons sight for individuals which are small.

Devices that go on.

Rifles.

That's a $500 million award, but we are in the early phase. So we expect that the increased revenue for that will come in future periods rather than immediately.

We got a major award from the Danish Ministry of Defence for mobile sensor system.

And.

We also had.

As we announced we had a really nice award for large or very small.

<unk> Richard.

Black Hornets from the Norwegian government.

And those awards, while they've been made the shipments are starting to come now and we expect those awards.

<unk> will lead to more revenue in the future as we move forward from.

Okay.

And how much of this new activity is solely dependent on the Russia, Ukraine conflict.

Continuing our.

Put in another way.

That died down do you see some of this.

Activity or interest in your products evaporate.

No.

I think.

Okay.

So the programs we are participating in.

<unk>.

David.

They are really just greater budgets in the U S and NATO countries and I don't think that's going to go away.

Huh.

Any foreseeable future.

As you can judge.

The invasion of Ukraine has been a lesson.

To everybody that you cannot be in a situation where you are.

<unk>.

I think those budgets are here to stay and.

The NATO alliance is getting.

Title and their budgets are going up U S budgets going up in all domains.

There are programs in the U S that we participate in.

Related to high performance infrared say sensors space.

To track.

Missiles.

There is.

I think that's here to stay.

Okay, and maybe one more if I may just because on.

On the topic, you talked a little bit more positively about M&A now that your leverage is at a target.

What area of interest to you is it going to follow on there or are you targeting areas in defense or that morry.

Outside of digital imaging.

To broaden your balance of your portfolio.

I would say in all areas I would probably exclude.

Strictly government services businesses type businesses.

Are liking our connector businesses, where margins are superior to everything else. So we would not exclude that we won't buy something we will not participate in something in the government services business for example.

Okay. Thanks Robert.

Thank you.

And ladies and gentlemen, once again, if you have any questions or comments. Please first one zero.

Our next question is from the line of Christine Li Wang Morgan Stanley . Please go ahead.

Hey, good morning, everyone.

Good morning Christine.

You've mentioned to return to M&A now that you've hit your target leverage range.

The sharp increase in interest rates have you seen asset prices come down to preserve your return thresholds and also in terms of timing Theres a lot of economic uncertainty do you think now is the time to look at these assets or wait.

Wait and see how the economic environment unfolds.

Unfolds.

Great question, Christine Let me, let me first go through the first part of the question I think some of the expectations out there have moderated and we've continued to moderate, especially with the stock market down SMB is down almost 15, 16% this year.

So our expectations are moderating somewhat.

Let me go to the second part.

Which has to do if.

If we don't do anything.

Ratio.

Which is now two five will continue going down by year end, maybe two three if you don't do anything by the end of next year, you'll be one seven and so on so forth. So.

We do have by the way the liquidity.

Two by teams right now if we look at our liquidity, we can buy it.

<unk> from our line of credit going over $1 billion, having said that.

We've always been very careful not to.

Now to overstretch ourselves and not to overpay for things. So I think things are getting better we'll look at some bolt ons, but if you look at further forward 12 months or so what happened last time when the markets.

And the economy decline same thing is happening we come out of this stronger.

Some people don't.

That's when we were able to buy them because of their markets.

Their market prices have declined so it's a continuing process.

We right now if we look at our debt profile.

We have almost no exposure to.

Increased interest rates at this time, because 93% of our debt is fixed the other 7% that's floating where cash against that which is also floating so we have 100% fixed.

Debt at this time and we have a good line of credit.

Thank you for all the color.

Thank you.

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

Thank you operator.

I would now ask Jason to conclude our conference call. Thanks, Robert and again, thanks, everyone for joining US. This morning. If you have follow up questions. Please feel free to call me the number on the earnings release or email me directly.

If you could conclude the call and give the replay information we would appreciate it. Thank you.

<unk> 531 international participants dial four zero to 9700847 again, the numbers are 8662071041 and international as far as Theyre all 29700847.

And the access code is 3867531.

That concludes our conference today. Thank you for your participation and for using AT&T Conferencing service you may now disconnect.

Q2 2022 Teledyne Technologies Inc Earnings Call

Request a DemoDemo

TDY

Teledyne Technologies

Earnings