Q1 2023 Teledyne Techonolgies Inc Earnings Call
Yeah.
Ladies and.
Gentlemen, thank you for standing by and welcome to the Teledyne first quarter earnings call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If you should require assistance. During the call. You can press Star then zero as a reminder, this conference is being recorded I'd now like to turn the call over.
To our host Mr. Jason <unk>. Please go ahead Sir.
Thanks, Brian and good morning, everyone. This is Jason bandwidth as Vice Chairman I'd like to welcome everyone to Teledyne's first quarter 2023 earnings release Conference call. We released our earnings earlier. This morning before the market opened joining.
Joining me today are teledyne's, chairman, President and CEO , Robert Mehrabian, SVP, and CFO , Sylvain SVP General Counsel, Chief compliance Officer, and Secretary Melanie <unk>.
And also Edmund rocks executive VP of Teledyne.
After remarks by Robert and Sue we will ask for your questions of course, though before we get started please be aware 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.
Eric Robert.
Thank you Jason Good morning, everyone and thank you for joining our earnings call.
We began 2023.
First quarter sales operating margin non-GAAP earnings and free cash.
Cash flow.
Overall sales increased four 7%.
With revenue and operating profit growing in every segment.
Excluding foreign currency headwinds, which negatively impacted first quarter sales growth by approximately one 4% growth in local currency would have been six 1%.
Exclude excluding acquisitions core growth in local currency it would have been approximately four 2%.
GAAP operating margin of 17, 5% and non-GAAP operating margin of 21, 1%.
Also first quarter records.
First quarter GAAP earnings per share were $3 73.
Our non-GAAP earnings of $4 <unk> were also first quarter records.
Given record first quarter cash flow, our consolidated leverage ratio.
It declined to two three even after completing the chart world acquisition at the beginning of the quarter.
We also repaid $300 million of debt.
Which matured on April three on the first day of the second quarter.
Turning to our 2023 full year outlook.
We are reaffirming our prior sales and non-GAAP earnings per share outlook.
Our supply chain channel challenges improve modestly we were able to exceed our original first quarter sales and earnings outlook.
By pulling forward some revenue from the second quarter. Consequently by maintaining the full year guidance. We've also modestly de risked the quarterly sequential revenue and earnings slides.
While our short cycle businesses.
Our more economically sensitive.
They were resilient in the first quarter, we are now a little more cautious on the other hand, we are more positive in our longer cycle medical aerospace defense and marine businesses.
On revenue specifically, we continue to see total 2023 growth of approximately 5% or sales of approximately $5 $73 billion with the second quarter being roughly $1 4 billion.
Regarding margin.
Earnings outlook implies approximately 40 basis points of margin improvement for the full year 2023.
Currently we think the instrumentation segment will be above the Irish contributors to this well barges in the other segments may increased more modestly.
I will now further comment on the performance of our four business segments.
Our digital imaging segment.
<unk> was founded on our first acquisition in 2006 of Teledyne Scientific research laboratories and imaging.
Which provides high high end infrared sensors for space and astronomy.
Since then.
This segment has grown organically and through acquisitions such as dolls.
<unk> scientific cameras.
Clear and most recently ETF chalkboard to contribute almost 56% of teledyne's revenue to date.
First quarter sales in this segment increased four 7% on a constant currency basis with foreign currency translation contributing negative one 8%.
Sales increased year over year for industrial and scientific vision systems as well as for our low dose high resolution digital X Ray detectors.
But were offset by lower sales of unmanned ground systems for defense applications.
Our product families increased or decreased more modestly with higher sales of surveillance unmanned air systems and specially.
Specialty semiconductor devices.
Set by some lower sales of certain commercial infrared imaging and marine products says.
GAAP segment GAAP segment operating margin increased 40 basis points to 15, 8%.
And adjusted Florida reduced intangible asset amortization non-GAAP margin.
Decreased 13 basis points and it was lower at 21, 75%.
Turning to our instrumentation segment. It is comprised of marine test and measurement and environmental instruments and contributes about 24% to teledyne's revenue.
Overall.
First quarter sales increased 8% versus last year.
With sales growing in all Ppl's noted above.
Sales of Marine instruments increased a healthy 14, 6% in the quarter, primarily due to strong marine defense sales.
<unk> autonomous underwater vehicles as well as the ongoing recovery in offshore energy markets.
Sales of electronic test and measurement system, which includes our CLO scopes digitize errors and protocol analyzers collectively increased five 3% year over year. Despite a tough comparison with the first quarter of last year.
Some softness in sales of analyzers, and electronic storage and high speed networking applications was more than offset.
By devices for wireless and video protocols as well as very strong sales elfa zillow scopes and related accessories.
Sales of the environmental instruments increased <unk>, 4% compared with last year with greater sales of air quality process gas safety analysis analyzes partially offset by drug discovery and laboratory instruments.
The other two segments of Teledyne.
Our aerospace and defense electronics, and engineered systems that together contribute 20% of teledyne's revenue.
In the aerospace and defense Electronics segment first quarter sales increased four 2% driven by growth of both defense and commercial aerospace products.
GAAP and non-GAAP segment operating profit increased approximately nine 6% with margins at 132 basis points greater than last year.
In the engineered systems segment first quarter revenue increased nine 1% and operating profit increased 6%, resulting in a modest.
25 basis points decline in margin from last year.
Finally.
First because of our unwavering focus on improving on all aspects of teledyne's operation.
And second prudent capital allocation and third the broad geographic and end markets that we serve from short cycle to long cycle commercial to defense.
We're optimistic.
Teledyne, we successfully navigate through today's uncertain economic times as we have consistently.
Done so in the past.
Our record also shows that we have successfully dealt with multiple economic turmoil and during the ensuing recoveries have been able to acquire complementary enterprises for compounded growth I will now turn the call over to Sue.
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 2023 outlets.
In the first quarter cash flow from operating activities was $203 million and primarily reflected higher accounts receivable collections compared with the first quarter of 2020 channel free.
Free cash flow that is cash from operating activities less capital expenditures was $178 $6 million in the first quarter of 2023, compared with adjusted free cash flow of $58 $7 million in 2022 and.
2022, adjusted value excluded a $296 4 million dollar payment to the Swedish tax visibility related to <unk> pre acquisition tax reassessment.
<unk> expenditures were $24 $4 million in the first quarter of 2023, compared with $21 million in 2020 to depreciation and amortization expense was $82 $1 million for the first quarter of 2023, compared with $86 $9 million.
We ended the quarter with approximately $3 $1 billion of net debt that is approximately $3 $18 billion of debt less cash of $665 $2 million.
Stock based compensation expense was $7 9 million in the first quarter of 2023 compared with $9 million.
In 2022.
Turning to our outlook management currently believes that GAAP earnings per share in the second quarter of 2023 will be in the range of $3 76.
$3 88 per share with non-GAAP earnings in the range of $4 56 to $4 66.
And for the full year 2023, our GAAP earnings per share outlook is $15 85 to $16.05.
And on a non-GAAP basis, we are maintaining our prior outlook of $19 to $19 20.
In 2023 full year estimated tax rate, excluding discrete items is expected to be 23%.
I'll pass the call back to Rob.
Thank you Sue.
We would now like to take your questions Brad If youre ready to proceed with the question and answers. Please go ahead.
Thank you, ladies and gentlemen, if you do wish to ask a question. Please press one and then zero on your telephone keypad you can withdraw your.
A question at any time by repeating the ones they will command and using a speakerphone. Please pick up the handset before pressing those numbers. Once again you have a question you May press, one and then zero at this time and one moment here.
We can first go ahead, Jim Ricchiuti with Needham <unk> Company. Please go ahead.
Hi, Thank you good morning.
Robert I'm wondering if you could talk a little bit.
<unk>.
The shorter cycle areas of the instrumentation business I think you gave some color about that digital imaging short cycle business, but.
If you look at instrumentation any changes that youre seeing in that shorter cycle business.
Not much.
A little bit.
In one of our businesses, which is our test and measurement we make.
Protocol.
Protocol solutions provide protocol solutions to the electronics industry.
We have some new product protocols coming out so people are a little waiting for the new ones and maybe not buying the old ones other than that.
The book to Bill is almost one.
CLO scopes are doing well.
In the Tms, we feel we feel all right.
The environmental.
The only thing that there's a little softness we are experiencing in the pharmaceutical market, where we supply a broad range of products.
There, but we are making that up.
Some of our air quality and other products that are doing well in this in this environment. So overall I think we're doing okay.
Got it since you were good enough to give us a book to Bill, which I think it was for the entire instrumentation business I'm wondering if you could provide some book to bill.
Color on digital imaging, and aerospace and defense and maybe the company as a whole. Thank you.
Jim on the.
Instrumentation, and if you've put marine.
Which we didn't talk about marine has got a book to bill of 112.
So its very healthy so because of that deploy instrumentation as a whole above one to one point to go forward.
Going to the digital imaging book to Bill is less than one.
Substantially but less than one primarily I think because of some of the growing base defense systems that we have.
Which is about a little over nine.
But having said that.
We have we have some really large orders coming and we've also post quarter had a larger and therefore are black Hornets.
Small.
Oh.
Small uavs.
When we had the right after the quarter Resident example, we added $94 million.
<unk> for those.
And by the way those are also in high demand in the Ukraine conflict. So.
Overall, I'm encouraged with what's happening in digital imaging has been a little lagging the defense part, but thats coming up as the backlog is filling in.
We had better orders this quarter first quarter than we did last year and then on the <unk>.
Right.
Book to Bill is one point go five engineered systems is close to one but thats lumpy. So I think we're going to be fine there overall for the company.
When you add all those numbers up it's slightly less than one maybe <unk> 90, 697, but thats not a very great.
Great concern at this time.
We're just being cautious as we always are.
Because of the uncertain times that everybody's facing.
Other than that.
Pretty good about our portfolio and its resilience.
And then just final question if I may just in light of that some of the uncertainty.
It's out there and I think you've talked about M&A should we still think mainly about M&A. This year is more tuck in related and then potentially as we come out of this there might be some opportunities for larger deals and 24 is that the.
The better way to think about M&A again without being specific which I know you can't be.
So I understand Jim I think I think that's a good analysis.
That might.
We'd obviously chasing smart some what we call the <unk>.
String of pearls M&A.
It's possible that we might end up with something more mid sized near the end of the year, but definitely we do our job.
With our balance sheet.
We have right now we have drawn down on our.
Line of credit, which is about 1.15 billion, we've only drawn down $25 million and its sitting there with <unk>.
All of our debt Thats coming due.
And we don't have any debt payments until 2024.
And we have a.
A lot of capacity for to do larger deals.
The opportunity comes in of course.
Looking at things, but you are right.
Judy deals take time.
And.
It would probably be more like early 'twenty four or sometime in 'twenty four.
Got it thanks very much.
Thanks, Jim.
And next we can go to Greg Konrad with Jefferies. Please go ahead.
Good morning.
Morning, Greg.
And maybe just two.
To revisit digital imaging is there any way to kind of decompose the organic growth just given your short cycle commentary.
Do you think about health care machine vision space and maybe the legacy player business, just kind of what trends youre seeing in <unk>.
You mentioned being more cautious on short cycle like how are you thinking about digital imaging for the year.
Well first let's start with.
Q1.
Organic.
That's also do what you suggested which is stay with the first one.
We would call large historical digital imaging, which is also a to b and that associated companies.
There, we had a healthy organic growth in Q1 of six 2%.
Healthcare.
Grew nine 2%.
And <unk>.
<unk> grew eight 8% so overall.
Very happy with that given you know some of those smaller cycle vision systems had a healthy growth rate there.
On the flip side of the.
Equation, which would be the newer digital imaging.
Both positives and negatives.
Overall, we had a contraction.
About four 8%.
But that was primarily driven by our unmanned systems and primarily in the us.
Unmanned drone vehicle systems as I said after the quarter, we've had some very healthy awards.
Our.
Uavs.
Which are unmanned air vehicles.
Surveillance. This line it was plus 5%.
Tomography was done a little bit.
A little under 4%, but unquote cool.
The cores, which are our infrared cores, they were up 3% and industrial vision system.
It was up almost 19 over 19% so it's a mixed bag that dragged on.
That business was primarily.
In the.
Defense and primarily Undrawn.
<unk> grown systems now we have <unk>.
Softness in tomography beyond Merit maritime.
Which is our marine marine businesses.
But.
Overall, I think we will okay. We just have to fill out the backlog.
For our unmanned vehicles.
Vehicles will be fine.
And this might just be missed.
Modeling on my part.
But I mean margins seemed a little light in digital imaging in the quarter can you maybe talk about Christ mix going forward and how you're expecting margins to trend for the year given your commentary.
Do you still expect them to be up just a lesser degree than the total of 40 for the company.
Well.
No.
Fifth.
I expect the margins to be up about 30 basis points for the year, but start with the year.
This is the.
Overall digital imaging margins, so that'd be.
That on one side.
I think in Q2.
With improved sequentially on our margins.
And.
We should be fine.
We are also going to take some price actions to.
To make sure that we get there.
Also overall for the company.
We think the margins will increase 40 basis points for the year and if we can have better price increases going forward, we should improve on that.
So.
But I look at it I would say not.
<unk> businesses, we're going to have margin improvement for the year of almost 80 basis points.
<unk> imaging about 30 basis points aerospace and defense is so healthy that I'll be happy to just keep park.
<unk> 27, 1%.
Operating margin engineered systems will probably increase at 50 basis points and overall the segments 40 basis points on the company about 40 basis points.
That I hope that helps you.
That was perfect I'll leave it at two thank you.
Thank you.
And next we have Elizabeth Grenfell with Bank of America. Please go ahead.
Hi, good morning.
Thank you.
Could you give us some color on the spin on a consolidated basis.
The quarter and then what your expectations are for defense growth.
On a consolidated basis for the year.
Thank you.
Sure.
I think.
Overall.
In Q1.
Okay.
Defense was flat year over year.
Yes.
We think for the year.
It'll be probably low to mid single digit growth.
Our defense businesses.
The primary reason again, I'm, saying the U S government programs were flat, primarily driven as I said, but.
The.
Homegrown.
<unk>.
John vehicles unmanned ground vehicles, we think towards the year would probably grow in the mid single digits into all defense.
Great. Thank you very much.
Good afternoon.
And next we can go to Joe Giordano with Cowen. Please go ahead.
Hey, good morning, guys.
Thank you.
You talked about pulling forward some revenue from <unk> into <unk> can you give us some detail there.
Where it was and what that means for that business from here.
I think.
We pulled in about $10 million.
And most of that was in these two months.
Most of that was in our marine businesses.
We shipped more underwater vehicles in Q1 that we'd anticipated we had some really good orders as you actually have good orders for Q2 also so that that's that was just add.
To ensure that.
We hit what we expected to.
And also as I said.
That was affected by the fact that we are having improvements in our supply.
Supply chain, we are seeing improvement significant improvement and I expect that to continue the rest of the year based on what we're seeing and based on what the cheaper.
<unk>.
He is doing with various companies.
Companies so.
That's why we pulled it forward, we felt we could and did.
No that makes sense now.
When I think about the full year guide so you come in you know.
It's really at the high end of your guide here, you're guiding the second quarter High end is basically in line with consensus you guys tend to be.
We are holding our full year understanding that the macro is uncertain Mike.
Are you trying to give the impression that the second half is weaker than you thought three months ago or are you kind of like de risking that full year guide like how should we how should we think about the.
Read between the lines there.
Between the lines I don't think it's going to be weaker and except if something terrible happens.
It's.
I feel good as.
As you know we are always more conservative I can't go out and say, we're going to make a lot more in our <unk>.
Earnings per share that will be probably could on the other hand.
Uncertain environment that we're facing with semiconductors being down everybody is projecting semiconductors, we recovered 24 of this year.
Both equipment and supply.
Obviously, we serve those markets I'm being cautious as we always are.
But I don't think the second right now I don't think the second half is going to be weaker I think it's going to be actually stronger. If you look at the earnings per share.
They have to improve in the second half of the year for us to make the 1910 that we projected the 1920, if you want to take the high end.
Yes, okay.
Two more quick ones for me you started off the year free cash flow is pretty high like what are your expectations for the year now does that go up.
Higher than what you thought before and then just curious on the supply chain improvement and the lack of having to pay as much grain market like how much benefit is that all of that 40 bps like how much you're getting from there and where is it getting offset from and other elements of cost. Thank you.
Let me start with the.
Free cash flow, we're going to beat last year's free cash store by a couple of hundred million dollars led to say 850.
Current estimates are.
We can do better than that.
We have just continued deleveraging the company gets ready for.
When all of this is.
Uncertainty is behind us.
Use our job.
Use our capability.
Relative to buy things that have not that perhaps has done us well in this environment coming back to the supply chain.
We've seen improvement in Q1.
Last year in Q1.
We are brokerage, we bought about $23 million.
Good.
From brokerage and.
That those we pay 770% premium let's say this year first quarter. The same type of thing cost is about half as much as that.
And so that's the savings obviously, but more importantly, if you look at.
Revenue.
That's being affected by the shortages.
That is improving which is much more comforting to me because it makes our revenue projections a little more predictable.
Because we don't have we're not missing a lot of revenue because we don't have parts.
So there is improvement in the supply chain, we're seeing that as improvements in the.
The.
Premium that we are paying and also the fact that.
We are not going to miss as much revenue because we can ship products because they are sitting on the shelf waiting for one or two partners.
Thanks very much.
For sure.
And next we've got Guy hardwood with credit Suisse. Please go ahead.
Hi, good morning.
I think the previous good morning, all I think the previous guidance full at group level was a 50 basis points improvement in the adjusted March.
So you can now guiding to 40, so what are the kind of the main parts of the change.
And is it fast will switch to imaging.
Actually.
What.
What we have is the mixtures.
January .
Sure.
Perfectly correct.
<unk> did 50 basis points and now we're guiding 40 basis points.
We are.
We are taking.
Some guidance down in instrumentation.
From January .
Today.
We had over 100 basis points, we've processed to AED.
Digital imaging.
We're taking down about 10 basis points.
All in.
Aerospace and defense, we're actually guiding guided guiding flat and we had it going down.
And so that's good.
And then in engineered systems, we have.
Moderate up it's a smaller business, but we still have a moderate.
Five basis points or so up so overall I think we'd be at 40.
Again.
We hope to do better than the way to do better than that is if we can stick some more price increases in our portfolio because.
Inflation is moderating.
Nevertheless.
Our.
Wages are going up four and a half two 5%.
Purchasing of direct and indirect goods.
Is growing up.
With inflation.
And.
So we have to catch up a little more with price increases to make up for those in order to keep or be able to increase our margins.
That that's the kind of uncertain part how much can we gain.
From price increases first quarter, we will okay.
Made up where we what we paid out.
And.
We had a little positive actually so.
Rest of the year can we keep that pace up.
Reasonable price increases to make up for inflation.
In both good as realized wages.
And is the intention to be price cost neutral or do a little bit better than that and then I'll ask 10 competitors.
I'd like to do better than that.
Sure last year were negative by 60 basis points. This year I hope to be positive.
And just to follow up on the the broker purchase I believe that you said that it was $17 million incremental last year.
What does your guidance imply in terms of learning that $17 million in 2023.
It's hard to tell at this point, but if I were to take the first quarter and project it out.
Good.
Say half.
So.
<unk> 32.
$4 million an hour.
Yes 35.
75 million lower broker purchases, yeah, yeah, Brendan approximately but again, that's a moving target so far we've been successful as the semiconductor industry has gone down as you can expect.
The par statuary short days some of them have become available some of them are at the heart of their parts to get the FPGA et cetera are seeing hardeners to get so it's a mixture.
But things are improving which which makes me feel positive.
And just one final one for me is there any sort of mix effect, either positive or negative in digital imaging.
In terms of the margin.
No I don't I don't believe so.
Okay. Thank you.
For sure.
And do you have any further questions. Please press one zero at this time, we'll go to Kristine <unk> with Morgan Stanley .
Hey, good morning, everyone.
Good morning Christine.
Robert on the supply chain just wanted to follow up on the premiums paid to brokers for component sourcing. So you've talked about how that's declined and is that because traditional sources have reopened and therefore, you're now sourcing less parts from these brokers or are you seeing more availability of parts.
Theres not as much of a scarcity and therefore their premiums have declined can you provide more color on what's driving the dynamic there.
Yeah.
Big picture is that we're able to buy more from the Oems.
Dan from.
From brokers.
We prefer to buy from Oems because the prices are stable.
It might be price increases versus last year, but brokers.
Good day, you end up paying premiums of 70% to them. So.
That's the Big picture Church and.
The availability is improving it's very interesting good just anecdotally there have been a few brokers that have called us asking us if we want some of their parts last year, we were out there begging for parts and obviously if that were to happen I look at that as they have.
Some obsolete.
Some excess supply.
But with biomet, a discount to what we pay to the OEM. So the market's improving I like that.
Great and then you mentioned that you anticipate that you can pass on.
Whatever inflation cost that you have into pricing so that should be a net positive for you, but can you talk about the demand environment, what's been the customer sensitivity to pricing.
And right now if you look at the financial markets. We've had two regional bank failures last month and Theres more uncertainty today is that macro environment affecting your customers' decision for capital purchases or to have some sort of pricing sensitivity.
Yes, the answer to it is yes.
On the other hand.
<unk>.
Because we're in such a diverse market.
If you look at some of our longer cycle businesses as I mentioned like marine.
Energy dependent.
Some of our defense businesses.
There is they're not as price sensitive.
To what's happening in the financial market some of our shorter cycle businesses, yes, we have to be careful that we don't increase prices and lose to those through the competition lose market share to the competition, but in some areas like health care.
Where we make X ray panels that are very high resolution a very.
Low dosage, there we have pricing power and so it's a mixture, but overall when I say uncertainty about the economic uncertainty I'm speaking exactly to what you pointed out.
Some of the uncertainty in the financial market that shipping.
Into other markets as well.
Great. Thank you for the color and if I could sneak a last one and when you look at your overall portfolio what percent would you say you have more pricing power versus what percent would have more pricing sensitivity.
I think about 40% of our portfolio, we have more pricing power at 60% is more sensitive.
Because the 60% in some ways it depends on the global macro environment.
You may know.
The way our portfolio has evolved.
Today, we sell.
<unk> about 22% to the government.
28%.
U S commercial.
50% commercial and defense outside the U S. So the macro global macro environment.
What we are more sensitive to a 40% not sure.
Great. Thank you very much.
Sure.
And currently we have no further questions in queue.
Thank you Brad.
I appreciate that I am now ask Jason to conclude our conference call.
Thanks, Robert and thanks, everyone for joining us. This morning of course, if you have follow up questions. Please feel free to call me at the number on the earnings release or E. Mail me for those who have my contact information right. If you could give the replay information we would be greatly appreciated. Thank you.
Certainly thank you ladies and gentlemen, the conference will be available for replay after 10 o'clock today and running through May 26 at midnight you can access the AT&T replay system at anytime by dialing one 806, 20710 401 and entering the access code 890 899.
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