Q2 2023 Teledyne Technologies Inc Earnings Call
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Uh huh.
Okay.
Yeah.
Ladies and gentlemen, good morning, Thank you for standing by today's conference assembled and welcome to the Teledyne Technologies' second quarter earnings call.
This time all lines are in a listen only mode.
There will be an opportunity it will give you the replay instructions at the end of the call. If you should require any assistance today. Please press star followed by the zero and an AT&T operator will assist you.
It's my pleasure to turn the conference over to host Jason <unk>. Please go ahead.
Thank you Dan This is Jason <unk>, Vice Chairman I'd like to welcome everyone to Teledyne's second quarter 2023 earnings release conference call will be released our earnings earlier. This morning before the market open joining me today are TV Teledyne's, Chairman, President and CEO, Robert Mehrabian, Senior Vice President and CFO, Sue main and senior Vice President General.
Constant Chief compliance officer, Terry Nobody Civic also joining us everyone rocks executive VP.
After remarks by Robert and Sue we will answer 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 our 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 dial in will be available for approximately one month.
Here is Robert.
Thank you, Jason and thank you for joining our earnings call.
In the second quarter.
Achieved all time, Greg Kurt quarterly sales with overall sales, increasing five 1%. Furthermore, sales as well as GAAP and non-GAAP operating profit.
Operating margin increased year over year in every segment.
For the total company GAAP and non-GAAP operating margins increased 110, five and 72 basis points respectively.
Excluding foreign currency headwind, which negatively impacted second quarter sales growth by approximately 40 basis points growth in local currency would have been five 5%.
GAAP operating margin of 18% was a second quarter record and non-GAAP operating margin was 21, 4%.
Second quarter GAAP earnings per share were $3 87.
And non-GAAP earnings of $4 67.
Also second quarter Records.
And finally.
Including continued debt repayment through July which totaled about $620 million year to date, our constant consolidated leverage ratio declined to two one times.
I will now comment a bit further on the performance of Teledyne Flair, and the announced cost reductions and the outlook for the balance of the year.
In the two years since we launched clear we've resolved the most significant legacy tax matters.
Exiting the consent agreement with the department of state.
Consolidated leadership in marketing and operations towards the FLIR defense portfolio.
Corrected some historical product quality issues.
As far as to this effort. We also took a much more focused view of the defense business.
Similarly, pursuing those opportunities, where we have truly differentiated technology.
I am pleased to report that the order book and backlog of flared, especially player defense significantly inflected during the second quarter for reference the.
The commercial business across digital imaging, both Darcy to VM players grew organically in the second quarters.
Premier Defense sales declined year over year nearly all of this was lost revenue in unmanned drone systems.
We achieved the milestone of shipping our 1000th man transportable robotic system increment two.
So the U S R.
Overall.
Orders at all of the year were 1.18 times sales.
One five times sales I player defense.
Larger orders now it's only included the recently announced Black Hornet nano UAV to the U S military, but also additional uavs where customers in Europe as well.
Red eyes counter UAV systems, and missile defense systems, utilizing both FLIR imaging radar and AI based software systems.
Additionally.
Our surveillance imaging systems for the U S and foreign customers.
Having stabilized the business.
Include including achieving strong stronger backlog it is not a time to focus on execution.
And additional margin improvement.
Thus the charges announced this morning are toward the further reduction in the clear operating footprint and related headcount.
We are accelerating the elimination of three leased sites all of whose activities will be relocated to other defense facilities, most of which are owned locations.
To date.
We are reaffirming our prior 2323 full year sales and non-GAAP earnings outlook, including excluding the 10 to 12 million charges.
That I just covered.
Supply chain challenges have continued to improve.
We were once again able to exceed our original second quarter sales and earnings outlook by pulling forward some revenue from the third quarter.
On revenue specifically.
We continue to see total 2023 growth of approximately 5% or sales of approximately 573 billion with the third quarter being roughly one 4 billion.
We continue to see non-GAAP earnings of $19.10 at the midpoint.
Our guidance excludes excluding the charges referenced above.
I will not further comment on the performance of the four business segments.
Second quarter sales.
In our digital imaging segment increased two 3% with greater sales of X Ray products commercial infrared imaging components and solution and industrial scientific count cameras, partially offset by lower sales of unmanned drones.
<unk> for defense applications.
GAAP segment operating margin increased 51 basis points to 15, 7% and adjusted for reduced intangible asset amortization non-GAAP segment margin was 28 basis points higher at 21 point.
5%.
Turning to our instrumentation segment.
Overall second quarter sales increased five 1% versus last year.
Sales of marine instruments increased to healthy 10, 5% in the quarter, primarily due to ongoing recovery in offshore energy markets also greater sales of autonomous underwater vehicles.
Sales of electronic test and measurement systems, which include CLO skirts Digitizes have protocol analyzers collectively increased four 9%.
We encountered some softness in sales of analyzers for electronic storage and data center application, but this was more than offset.
Hi, Selman.
As for wireless and video protocols as well as continued strong sales of our CLO scopes.
Sales of environmental instruments were flat compared to last year with greater sales of air quality process gas safety analyses offset by drug discovery and laboratory instruments.
Overall.
Instrumentation segment operating profit increased 10, 6% in the second quarter.
GAAP operating margin, increasing 123 basis points to 24, 8% and 80 basis points on a non-GAAP basis, excluding reduced in the intangible asset amortization to 25, 9%.
In the aerospace and defense Electronics segment.
Second quarter sales increased 10, 2%.
Driven by growth.
Both defense electronics and commercial aerospace products.
GAAP and non-GAAP segment operating profit increased over 20% with margins approximately 250 basis points greater than last year.
In the engineering systems segment.
Current quarter revenue increased 18, 5% and operating profit increased 33, 7%.
Presenting a 112 basis points increase in margin from last year.
In conclusion.
Our short term more economically sensitive businesses.
Waned resilient in the second quarter collectively drawing year over year although.
Although comparisons for some.
They will become more difficult in the second half.
In addition, our longer cycle medical Aerospace defense and marine businesses continued to perform very well.
Quarterly operating margin.
Instrumentation segment was an all time record.
Operating margin in our.
Aerospace and defense Electronics segment was a second quarter record and just slightly less than the fourth quarter of last year.
And now through a combination of sales growth operating leverage and the model.
Crescive cost actions mentioned earlier I fully expect digital imaging margins to grow considerably over time.
Yeah.
I know I want to turn the call over to Sue Thank you Alan and good morning, everyone.
Let's discuss some additional financials for the quarter not covered by Robert and then I will discuss our third quarter and full year 2023 outlet.
In the second quarter cash flow from operating activities was $195 million.
Free cash flow that is cash from operating activities less capital expenditures was $163 $2 million in the second quarter of 2023, compared with $176 $1 million in 2022.
Capital expenditures were $27 $3 million in the second quarter at 22003, compared with $28 million.
2020.
Depreciation and amortization expense was $80 million for the second quarter of 2023, compared with $82 $7 million.
We ended the quarter with approximately $2 9 billion of net.
That is approximately three <unk> three $5 billion of.
Debt less cash of $364.
All right.
Stock based compensation expense was $8 $4 million in the second quarter of 2023, compared with $6 $4 million in 2020.
Turning to asset management currently believes that GAAP earnings per share in the third quarter of 2023 will be in the range of $3 76 to $3 90 per share with non-GAAP earnings in the range of $4 70 to $4 80.
And for the full year 2023, our GAAP earnings per share of $15 62 15 daily.
And on a non-GAAP basis, we are maintaining our prior outlook of $19 to $19 and 25.
Both the third quarter and full year non-GAAP outlook exclude estimated pretax charges for further integration costs.
The 2023 full year estimated tax rate excluding discrete items is expected to be 22, 3% I will now pass the call back to Amit.
Thank you very much sue.
We would now like to take your questions operator, if youre ready to proceed with the questions and answers. Please go ahead.
Ladies and gentlemen, this phone lines, if you'd like to ask a question today. Please press one followed by the zero one followed by the zero.
And our first question today will come from the line of Jim <unk>. Please go ahead.
Thank you.
Can you hear me okay.
One and two.
Talk a little bit of Robert if I may about.
Digital imaging, if we exclude the acquisitions it looks like your revenues were down year on year and sequentially and some of this may be.
Yeah.
Partly due to what youre seeing at FLIR, but I wonder if you could just expand on what youre seeing in digital imaging just because it's a large category that covers a lot of ground.
Well.
Thank you I think.
What you're referring to is in the organic growth.
Or decline year over year.
A lower 1% decline one five to be exact.
Sure.
We.
We see.
Several things first.
There are government programs that we have in digital imaging.
Especially in flair.
That.
Declined year over year.
On the other hand as I mentioned.
We had a very successful first half, especially second crushers in getting orders for our products both here and in Europe .
We feel that that part of the business.
Stabilized on.
On the rest of digital imaging.
If you look at.
Healthcare, which is part of our business there.
It's been significant expansion in healthcare and medical.
If you look at.
Commercial.
Arrow.
Any parts of digital imaging that let's say satellite communication there has been expansion.
I think there is some headwind.
In the commercial part of digital imaging and the priorities, but our exposure there is not that high.
We're making that up with new products.
<unk>.
That includes some of our artificial intelligence capabilities, so we feel comfortable with our commercial aspects.
In imaging.
In summary.
I would say that.
There is a little pressure on parts of our digital imaging in the priority, especially China.
But this is offset.
Bye.
This is offset by others products that we manufacture.
Europe and the U S. So I would say machine vision, which is what I am referring to is going to be relatively flat.
Maybe a little down year over year, but the other parts of digital imaging are going to be healthy.
And we feel pretty good about that so all in all.
It is a big part of our portfolio, but it's a pretty varied.
Portfolio ranging from phase two medical to machine vision for.
Automated semiconductor inspections flat panel displays et cetera. So it's like Teledyne is pretty resilient to various economic conditions.
Okay.
Thank you for that and follow up question.
I'm wondering if you could talk a little bit.
<unk>.
Just an update on the rate at which you may be burning through some of that higher cost component inventory that you had and just in general it sounds like supply chain has gotten better and how youre seeing that part of the.
The business.
Yes, I think youre right.
I mentioned earlier, our supply chain issues have significantly moderated were still paying some premiums.
But.
Perhaps as.
As much as a year to date.
65% to 70% lower than we did at the first quarter second quarter of last year. So that's a positive but were still paying some premium.
And our inventory remained fairly flat between first quarter and second quarters, but as these supply chain issues to relax.
We are trying to reduce our inventory for the remainder of the year. So.
Feel good about.
We've dealt with the supply chain, we really didn't lose a whole lot of revenue because of that.
And if I could just slip one more in.
Apologies, but you did talk about some pull in from Q3 I Wonder if you would size that for us.
I'm going to say approximately $10 million not a whole lot, but you know when we have the opportunity on our hope we will have in the future quarters, we're going to try and do that.
The flip side of that Jim is that a lot of our customers.
Also there is a lot of inventory anticipating shortages, so they're a little resistance.
About.
Letting us ship all the stuff that Dave.
I have ordered it before but we're balancing that because again, our balanced portfolio help us along.
All of those directions.
Got it thanks very much.
Thanks.
Our next question will come from the line of Joe Giordano, representing TD Cowen. Please go ahead.
Hey, good morning, guys.
I want to continue first on D I guess.
I would say 90 plus percent of the questions I get from investors are about the margins there.
So I think over the last couple of quarters, they probably come in and the outlook has come in a little bit below what you thought.
I know theres some elements high margin machine vision poly market decline there, but can you talk about what's been slightly different than you thought on the margin side and how should we really think about that.
<unk>.
Into 2020 into 2020 for like what's realistic.
For like a baseline margin assumptions.
Let me start with <unk>.
Second quarter margin.
Actually second quarter digital imaging margin is up about 28 basis points, let's say 30 basis points year over year.
And.
We think for the year it might it will be probably flat, maybe down about 10 or 15 basis points, but relatively flat.
<unk>.
I think what.
What what's going to happen is that the flare margins are going to increase somewhat.
<unk>.
Historic our legacy digital imaging theyre going to decline a little bit basically we think year over year, it's going to be flat.
We've had as I mentioned before we've had a slower revenue.
And lower revenue in defense in the first half of the year.
But as I mentioned earlier, that's turning around.
So I think that's going to help us for the rest of the year.
That's about really all I can say about the margins I think.
Second quarter year over year, we saw an improvement.
About 28% to 30 basis points for the whole year, it might be flat or down maybe 15 basis points, but not much.
Again, the balanced portfolio is really going to help us there.
Flip side of it is if you look at our.
Aerospace and defense segment.
There.
Second quarter margins increased 247 basis points for the year, we're projecting 80 basis points of expansion. So sometimes when we look at defense, yes, we differentiate defensive thats in digital imaging.
But I've talked about before and then but we have a whole bunch of defense programs in our aerospace and defense portfolio, which are doing really well so.
Overall I think we're okay.
Just one quick clarification, I know margins are up year on year, but.
Sequentially they were down on higher revenue. So is there like a mix change going on there and then I have a quick question on test and measure.
Ah.
I don't know they were down sequentially about 20 basis points.
Im not so concerned about that.
So many moving parts in the edge.
It just balances itself, that's not something that worries me.
Okay.
That's all I'll say about that go ahead with your others area. Please.
Just curious on.
If you have any color on like the order the order intake for things like a solar scopes versus the revenue delivery now like I know.
The revenue strong our orders starting to slow there.
Just curious like what that revenue trend looks like like how much backlog do you have how fast is that kind of coming out and is it being replenished at the same pace.
Yes, as you know on the test and measurement.
Have two distinct product lines.
One is a zillow scopes to the other.
These protocols.
Both of those are relatively short term revenue so big backlog with it doesn't make a whole lot of difference.
Or a similar scope revenue in Q2 was outstanding really good.
Our.
Protocol revenue was relatively flat and partially that's because new protocols are coming out in September and we expect that revenue to pick up.
If you look at the whole year.
We think that.
We're going to have something like 3.5% to 4% growth in RF, Sudan scope and protocol.
Product.
Zinc.
Third and fourth quarters are going to be alright, then they may not expand as much as the first quarter, but year over year, we're going to be fun.
In terms of just answering your question on backlog.
Book to Bill in that test and measurement is very close to one it's <unk> 98, So I would say it's one so again, it's not something that concerns me right now.
Yeah.
Thanks.
Thank you.
Our next question will be from the line of Greg Konrad with Jefferies. Please go ahead.
Good morning.
Good morning, Greg.
Maybe just one clarification I mean.
It seems like you brought down you didn't change guidance for the year, but brought down digital imaging you talked about the strength in A&D.
Has there been any change to the overall company margin guidance for the year just given it seems like A&D is tracking ahead and instrumentation continues to be maybe slightly above expectations.
Yes.
Hey.
If you went back to April .
Guidance.
<unk> today.
Probably margin is going down 10 basis points again, nothing significant tonnes for the full year, we expect margin to go up about.
About 26% to 30 basis points year over year, So overall I'd say.
Yes.
That's not something that concerns me.
Because.
As I've mentioned several times.
Because of our diversity our forge products.
For example instruments margin will go up 80% 80 basis points.
Year over year, Aerospace and defense similarity 80 basis points.
Even in engineered systems will go up about 38% to 40 basis points. So a flat digital imaging doesn't change anything at this time.
Okay, and then I mean, you talked about full year defense and kind of what youre seeing on the order front.
A&D performance top line was.
Strong in the quarter I mean, what are you seeing that across teledyne as it relates to the spend and how you're kind of thinking about runway just given orders in some of the 'twenty three budget money coming through.
Yes, as you mentioned.
There has been a change in the budget for a long time, the budgets look healthy, but money coming through and it started to come through more recently.
Overall I would say.
We are.
Fairly comfortable with our defense business is probably across everything.
Mid single digits growth year over year.
Sure.
Right.
Are enjoying actually pretty good margins and orders in our legacy defense businesses and as I mentioned.
<unk> defense businesses are turning around and had a good book to Bill in Q2.
It's not just the U S defense.
You look at defense also in NATO countries.
The expenditures are increasing and we have a significant amount of sales overseas.
Our defense as well as smear defense.
Including things like traveling wave tubes for Mitchell.
Defense products in.
In places like South Korea, So, it's a pretty pretty healthy environment right now.
I'll leave it at that thank you.
Thank you.
And we will get one another reminder, one followed by zero. If you have questions on today's call and let's go to the line of Jordan My knowledge.
Yeah.
Please go ahead.
Hey, Good morning. This is David with Bank of America.
So I just had a quick question on the backlog.
Defense.
Are you guys seeing any specific constraints.
I can put the deliveries that rent.
And also Q quarter win.
Should we expect the majority of them to come through for 'twenty, three or extend out into the out years.
Some will come through in 2008, three and some will come through in starting in Q4.
For example, let me just give you one example, or two.
We do have some.
Content drawn.
Products that are going to Europe .
Probably about $25 million $26 million most of that will come in 'twenty three on the other hand.
The Black Hornet, three that we just announced for the U S Army.
$94 million only about 10% of it this year the rest will come in future years. So it's a balance I think we'll get some of it this year.
<unk>.
A lot of it in future years.
Got it thank you.
Thank you.
Go to the line of Guy hardware with Credit Suisse. Please go ahead.
Hi, good morning.
Good morning, Robert.
Robert I think you said in your prepared remarks that digital imaging margins should grow considerably over time.
Could you flesh that out a little bit for us.
What is that at the time and could this mean that tis Tau imaging margins succeed so 24% levels delivered in 2021.
Yes, the answer is yes.
And the.
The reason I say that is the margins in our.
Our legacy.
Businesses.
Our already around that.
And even higher than that.
I think flare margins.
<unk> will increase.
As we especially as we take the cost out that I just mentioned.
And overall margins for our digital imaging this year.
We are projecting to be 22, 3% to go to 24 to 170 basis point expansion, yes, we can do that.
I think last quarter, you had pointed out negative mix lack of price increases in the medical business. So was there any of that mix effects other than defense that you talked about in Q2 is there anything else that we should be aware of which may have held back margins because I think three months ago, you did expect sequential improve.
<unk> 30 basis points up for full year.
Yes.
I think.
In the healthcare business.
Things are really good for us we've had significant expansion both in our X ray products that these panels as well as <unk>.
Components that we put out for X Ray systems.
And as I said before.
There is there is some slowdown.
In China.
If you look at China as a whole.
They.
They have.
Had some contraction, even though you don't hear about it.
There has been some contraction there.
On the other hand.
Less than 10% of our.
Portfolio is sold to China, So again that our balanced portfolio.
<unk>.
The flip side also is that we've gotten some really good.
Higher margin.
Product.
Development programs that are healthy and overall digital imaging.
<unk>.
Shipments have been a little slower, but I think bookings are okay. So again.
Not something that worries me.
We don't have let's say a commercial product.
Imaging system that somebody would buy in China.
On the flip side, we have custom products that we are developing which are very profitable I should be more profitable than commercial.
As it is today and I'm, just looking at our portfolio and.
I wouldn't change it with anybody else's considering all of the uncertainty around the world. Once area May go down a little bit, but we pick it up at somewhere else and the resilience of our earnings year over year quarter over quarter.
Thank you just one last one for me and Aerospace and Defense Electronics I think previously you had mentioned that you benefited from a particularly good mix. There is that assume presumably that has continued in Q2 and assume that continues in the second half given guidance.
Guidance for the margin.
Yes, we think.
We may have a little lower.
Revenue in the second half on the other hand.
The.
Products that were making aerospace score primarily in commercial aircraft.
That market's expanded as you well know very close to pre COVID-19.
Q3, Q4 margins for aerospace and defense might be a little lower than Q2, but it would be higher than in Q1. So again I don't see major job.
Inflections.
In the in that area.
Thank you.
Thank you.
And we'll go to line of Jim Ricchiuti with a follow up from Needham. Please go ahead.
I believe you gave us some book to bills and I'm just wondering if you could perhaps provide us the book to bill in the different segments I feel like I've got pieces of it.
Sure.
Jim.
Instruments.
Our book to Bill is about one point to five so over one led by our marine businesses, which are doing really well both.
In underwater vehicles has been.
As well as the oil discovery on.
Production.
Sure.
In the digital imaging as a whole.
Hmm.
The book to Bill is about one point to seven.
In aerospace and defense, that's a little more and engineered systems those are much more lumpy orders.
So quarter over quarter.
Book to Bill May change, but it's not affecting our.
Revenue that much because we expect booked revenue in both segments to grow overall across the company.
Book to Bill is above one.
Okay.
And then last question for me.
Just Kevin.
The debt pay down.
I'm wondering how we.
Anything has changed with respect to thinking about quick.
<unk>.
Including any change in areas that you might be pursuing and I know you can't be specific but I'm just wondering.
Just in general what.
Your appetite is full.
And then Andy as you look out over the next several quarters.
Well.
As I may as I mentioned earlier John Jim.
We paid down $620 million this year effective today, let's say.
That is taken out.
Net debt to EBITDA ratio to two one.
We have.
About <unk>.
$60 million of that left.
Thats variable, which we pay 6% out of the $3 billion.
3 billion plus that Sue mentioned, the rest of our debt.
Is all fixed so other than that $60 million, our interest payments are two 1%.
In future years, which is a very healthy place to be because we haven't really touched.
Our line of credit so we have a lot of <unk>.
Capability to do acquisitions.
Last year, even as we were paying our debt down last year, we did three bolt on acquisitions and spend about $160 million.
I expect to continue that bolt on acquisitions on the flip side is that.
Because if we don't do anything else, if we don't make acquisitions, if we don't.
Uh huh.
Doing anything.
Our debt to EBITDA ratio is less than one in about a year.
So.
We're bullish about acquisitions, including larger ones, if we can find them and of course wish.
Tenuously looking at that the last question was what areas right now I would say.
In the general instrumentation area is what.
What is very attractive.
We have done some digital imaging acquisitions as you know we made the ATM acquisition, we made.
Acquisition for our job Char, Florida acquisition.
I think it.
It'd be nice if we could find some things in our <unk>.
Instrumentation area.
Got it thanks very much.
Yes.
Okay.
And we have no other participants queued up at this time.
Thank you operator.
I'll ask Jason to conclude our conference call.
Thanks, Robert and Thanks, Tom if you could give the replay information to the audience I would appreciate it.
Again, all our news releases are available and for those who want to talk to me. Please feel free to call me at the number on the earnings release. Thanks, everyone.
Absolutely. Thank you ladies and gentlemen.
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