Q1 2024 Teledyne Technologies Inc Earnings Call
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Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Teledyne Q1 2024 earnings call. At this time, all participants are in listen-only mode. Later, we will have a question and answer session, and instructions for queuing up will be provided for you at that time. Should you require operator assistance during the call, press star zero on your phone's keypad. As a reminder, this conference call is being recorded. At this time, I'd like to turn the conference over to your host, Jason VanWees. Please go ahead.
Speaker Change: Ladies and gentlemen, thank you presenting by and welcome to the Teledyne Q1 2024 earnings call.
Speaker Change: At this time all participants are in listen only mode. Later, we will have a question and answer session and instructions for queuing up will be provided for you at that time should you require operator assistance during the call Press Star Zero on your phone's keypad and as a reminder, this conference call is being recorded at this time I would like to turn the conference over to your host.
Jason VanWees: Hi, thank you, and good morning, everyone. This is Jason VanWees, Vice Chairman.
Speaker Change: Jason Bandwidths. Please go ahead Sir.
Jason VanWees: Alright, Thank you and good morning, everyone.
Jason VanWees: I'd like to welcome everyone to Teledyne's first quarter 2024 earnings release conference call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Executive Chairman, Robert Mehrabian, CEO Edwin Roks, President and COO George Bob, SAP and CFO Steve Blackwood, and Melanie Cibik, EBP General Counsel, Chief Compliance Officer, and... After remarks by Robert, Edwin, George, and Steve, we will ask you for your questions. However, before we get started, my lawyers have reminded me to tell you that all forward- And, of course, actual results may differ materially. In order to avoid potential selective disclosures, this call is simultaneously being webcast, and a replay, both via webcast and dial-in, will be available for approximately one month.
Chairman I'd like to welcome everyone to Teledyne's first quarter 2024 earnings release Conference call.
Jason VanWees: Released our earnings earlier this morning before the market open joining.
Jason VanWees: Joining me today are.
Executive Chairman Robert Mehrabian.
Jason VanWees: One rock.
Jason VanWees: Bob.
Jason VanWees: And CFO, Steve Blackwood, and Melanie said Maggie.
Jason VanWees: General Counsel, Chief compliance Officer and Secretary.
Jason VanWees: After remarks by Robert Edwin Jordan.
Jason VanWees: We will ask for your questions. However, before we get started attorneys have reminded me to tell you that all forward looking statements made this morning are subject to various assumptions risks and caveat as noted in the earnings release, and our periodic SEC filings and of course actual results may differ materially.
Jason VanWees: In order to avoid potential selective disclosures. This call is simultaneously being webcast and replay both via webcast and Tyler will be available for approximately one month.
Robert Mehrabian: Thank you, Jason. Good morning, everyone, and thank you for joining our earnings call. Today, we reported record first-quarter non-GAAP operating margins, record Adjusted Earnings Per Share, and record Free Cash Flow. While overall orders remain strong, sales were impacted by deterioration in some of our short-cycle imaging and instrumentation markets, as we have previously assumed.
Jason VanWees: Robert.
Robert Mehrabian: Thank you, Jason and good morning, everyone and thank you for joining our earnings call.
Robert: Today, we reported first.
Robert: First quarter non-GAAP operating margin.
Robert: Record adjusted earnings per share and record free cash flow.
Robert: While overall there remains strong.
Robert: Sales were impacted by a deterioration in some of our short cycle imaging and instrumentation market.
Robert: We had previously assumed.
Robert: Full year sales growth in industrial automation as well as <unk>.
Robert Mehrabian: No full year sales growth in industrial automation, as well as test and measurement markets. However, those markets weakened more than planned in the first quarter. We now forecast full-year sales in those product families to decline meaningfully in 2020. Nevertheless, we believe such sales declines will be offset by our marine, aviation, and certain defense businesses, resulting in full-year flat sales compared to 2023. Despite those anticipated sales reductions in what are among our highest margin businesses, we believe overall operating margin will remain flat at 24 versus 20. For example, within the digital imaging segment.
Robert: Measurement market.
Robert: Part of it.
Robert: Those markets we can.
Robert: More than planned and nuclear scored here.
Robert: We now forecast full year sales in those product families.
Robert: Declined meaningfully.
Robert: Meaningfully in 2024.
Robert: Nevertheless.
Robert: We believe.
Robert: The declines will be offset by our marine aviation and defense businesses.
Robert: <unk> full year flat.
Robert: Through 2023.
Robert: Despite those.
Great.
Speaker Change: Talk to you.
Speaker Change: Among our highest margin businesses.
We believe.
Speaker Change: Overall operating margin, we remained flat in 'twenty versus <unk>.
Speaker Change: Within the digital imaging segment.
Robert Mehrabian: Year-over-year sales declined due to significantly lower sales of machine vision sensors and cameras related to industrial automation. This was partially offset by organic growth and significant margin improvement at Teledyne Clear. You've been our Unmanned System Businesses growth and the resiliency of our core infrared imaging. Similarly, in instrumentation.
Year over year sales decline due to significantly lower sales of machine vision sensors and cameras related to industrial automation part of it.
Speaker Change: It was partially offset.
Speaker Change: Organic growth.
Speaker Change: Significant margin improvement.
Speaker Change: Teledyne clear.
Speaker Change: Given our.
Speaker Change: Unmanned system businesses.
Speaker Change: Growth and resiliency of our core infrared imaging.
Speaker Change: Similarly in.
Speaker Change: And instrumentation.
Robert Mehrabian: We were relatively flat, and there were a significant reduction in sales of tests and measurements. However, instrumentation was almost entirely offset by marine electronics and unmanned underwater systems. And despite the overall splashes.., segment margin increased considerably. In our smallest segment, Engineer Systems, which is largely a U.S. government prime contractor, Sales were impacted by the very late approval of the US 2024 budget. We also revised estimated progress and cost to complete on certain contracts, resulting in some revenue and profit reversal.
We were relatively flat.
Speaker Change: We're a significant reduction in sales of test and measurement.
Speaker Change: Instrumentation were almost entirely offset by marine electronics and unmanned underwater systems.
Speaker Change: And despite the overall flat sales.
Speaker Change: Segment margin increased considerably.
Speaker Change: In our smallest segment engineered systems, which is largely a U S government prime contractor.
Speaker Change: That was really impacted by the very late approval of the U S 2020 for budget.
Speaker Change: We also revised estimated progress and cost to complete on certain contracts.
Speaker Change: All opinions some revenue and profit reversal.
Robert Mehrabian: Finally, given that our even stronger balance sheet with quarter-end leverage just at 1.7, combined with record free cash flow, we believe it's the appropriate time for us to add stock repurchases to our capital deployment. I will now turn the call over to Edwin and George to record their comments on the performance of our four thesis texts.
Speaker Change: Finally.
Speaker Change: Given that are you.
Speaker Change: Even stronger balance sheet.
Speaker Change: Quarter end leverage just that one Kevin.
Speaker Change: Combined with record free cash flow, we believe it's an appropriate time.
Speaker Change: For us.
Speaker Change: To add stock repurchases.
Speaker Change: Through our capital deployment plans.
Speaker Change: I will now turn the call over to George who will further comment on the performance of our core business.
Edwin Roks: Thank you, Robert. This is Edwin, and I will report on the digital imaging segment, which represents 55% of Teledyne's portfolio. And like Teledyne as a whole, this segment is a mix of longer-cycle businesses, such as defense, space, and healthcare, combined with shorter-cycle markets, including industrial automation, semiconductor inspection, and infrared components and cameras for applications ranging from factory condition monitoring to maritime navigation. First quarter 2024 sales declined 4.1% compared with last year as certain products declined considerably, but were largely offset by those with meaningful increases.
George: Thank you all about this ethane.
George: On the digital imaging segment, which represents 55% of stabilized portfolio.
George: I'd like Teledyne as a whole.
George: There is a mix of logo cycle businesses, such as defense space and healthcare combined with shorter cycle markets, including industrial automation semiconductor inspection and infrared components and cameras for applications ranging from factory condition monitoring to maritime navigation.
George: First quarter 2024 sales declined 12% compared with last year as certain products declined considerably but were largely offset by dose with meaningful increases for example sales to industrial machine vision markets declined approximately 30% year over year on the other hands.
Edwin Roks: For example, sales to industrial machine vision markets declined approximately 30% year-over-year. On the other hand, unmanned air systems, unmanned ground systems, and integrated counter-drone systems collectively increased nearly 30%. Other year-over-year changes were less significant but included continued growth in our space-based imaging business, resilient sales in healthcare and fierce core infrared and maritime businesses, and declining sales of semiconductor-related microelectromechanical systems, or MEMS. As Robert mentioned, the Fleer businesses grew organically, and for the third consecutive quarter, they were positive contributors to overall segment margin. Finally, segment orders were healthy, with a first quarter booking bill of 1.06 times. George will now report on the other three segments, which represent the remaining...
George: Seven months as systems ground systems, and integrated counter drone systems collectively increased daily plus 30%.
George: Although year over year changes were less significant but included continued growth in our space based imaging business Brazilian sales in healthcare SaaS core infrared and maritime businesses and declining sales of semiconductor related micro electro mechanical systems augment.
George: As <unk> mentioned the <unk>.
George: Businesses organically.
George: On the second quarter.
Were positive contributors to overall segment margin.
George: Finally segment orders were healthy with the first product book to Bill of 1106 times.
George: George will now report on the other three segments, which have sent a remaining 45%.
George Bob: Thanks Edwin. The instrumentation segment consists of our marine, environmental, and test and measurement businesses, which contribute a little over 24% of sales. For the total segment, overall first quarter sales decreased 0.9% versus last year; sales of marine instruments increased 15.3% in the quarter, primarily due to both strong offshore energy and subsea defense sales. Sales of environmental instruments decreased 5.8%, with greater sales of process gas, emission monitoring, and Gas and Flame Safety Analyzers, more than offset by lower sales of drug discovery and laboratory investigations.
George: Thanks Edwin.
George: The instrumentation segment consists of our marine environmental and test and measurement businesses, which contributed a little over 24% of sales.
So the total segment overall first quarter sales decreased <unk>, 9% versus last year.
George: Sales of Marine instruments increased 15, 3% in the quarter, primarily due to both strong offshore energy and subsea sale.
George: Sales of environmental instruments decreased five 8% with greater sales of processed emission monitoring systems and gas and flame safety analyzes more than offset by lower sales of drug discovery and laboratory instruments.
George Bob: Sales of electronic custom measurement systems, which include oscilloscopes, digitizers, and protocol analyzers, decreased 18.2% year-over-year on the toughest quarterly comparison of 2024-2021. Overall Instrumentation Segment Operating Process increased, with GAAP operating margin increasing 183 basis points to 26% and 175 basis points on a non-GAAP basis to 27.1% in the aerospace and defense electronics segment, which represents 14% of Teledyn First quarter sales increased 7.2%, driven by growth in commercial aerospace and defense microwave products.
George: Sales of electronic test and measurement systems, which include oscilloscope Digitizes protocol analyzers decreased 18, 2% year over year on the toughest quarterly comparison in 2020 for 2023.
George: Overall instrumentation segment operating profit increased in the first quarter.
George: GAAP operating margin, increasing 183 basis points to 26% and 175 basis points on a non-GAAP basis to $27 one.
George: In the aerospace and defense Electronics segment, which represents 14% of telephone sales first.
George: First quarter sales increased seven 2% driven.
George: Driven by growth in commercial aerospace and defense microwave products.
George: GAAP and non-GAAP segment operating profit increased year over year with segment margin, increasing approximately 80 basis points.
George: For the engineered systems segment, which contribute 7% to overall sales first quarter revenue decreased 10, 5% and operating profit was impacted by lower sales and the cost to complete estimate revision Robert mentioned earlier.
George Bob: Gap and non-gap segment operating profit increased year-over-year, with segment margin increasing approximately 80%. For the engineered systems segment, which contributes 7% to overall sales, first quarter revenue decreased 10.5%, and operating profit was impacted by lower sales and the cost-to-complete estimate revision Robert mentioned earlier. I will now pass the call back to...
Speaker Change: I'll now pass the call backdrop.
Robert: Thanks George.
Robert: Conclusion.
Robert: Orders have been strong.
Robert: <unk> for two consecutive quarters.
Robert: With the increased almost entirely due to our longer cycle businesses, such as defense and energy.
Robert: However.
Robert: Given the nature of these businesses converting much else did great June backlog to Sam will not begin until the second half of 2024.
Robert Mehrabian: Orders have been strong for two consecutive weeks, with the increase almost entirely due to our longer cycle businesses, such as defense and energy. However, given the nature of these businesses, converting much of the greater backlog to sales will not begin until the second half of 2024. At the same time, the pace of orders in our short-cycle instrumentation and imaging businesses did have a near-term sales impact in the first quarter and likely will continue to impact total sales in the second quarter of 2024.
Robert: At the same time.
Robert: Hey, so forward dosing, our short cycle instrumentation and imaging businesses.
Robert: You'd have a near term sales impact in the first quarter.
Robert: And likely will continue to impact today.
Robert: In the second quarter of 2012.
Robert: Going forward.
Robert: So.
Robert: While our current outlook for full year sales.
Robert: With 2023.
Robert: We expect second quarter sales to be sequentially flat with the first quarter and then increased in the second half of the year.
Robert: The current market environment.
Robert: Is reminiscent of.
Robert: After 2014.
Robert: <unk> 16 period.
Robert: <unk>.
Robert Mehrabian: So, while our current outlook for full-year sales is flat for 2023, we expect second quarter sales to be sequentially flat with the first quarter and then increase in the second half of the year. The current market environment is reminiscent of the 2014 to 2016 period, that is, when total Teledyne sales and earnings were flattish, except market dynamics were the opposite of what we are experiencing today. Specifically, growth in certain short cycle markets was partially offsetting declines in our longer cycle defense and energy business. Hopefully, this time.
Robert: When tailored total teledyne sales.
Robert: Earnings were flattish.
Robert: Except market dynamics, where the opposite of what we are experiencing to date.
Robert: Typically.
Robert: Growth in certain short cycle market.
Partially offsetting declines in our longer cycle defense and energy businesses.
Robert: Hopefully this time.
Robert: The recovery in the short cycle businesses.
Robert: Would be shortly.
Robert: In any event.
Robert: During the 2014.
Robert: 2016.
Robert: We executed approximately $400 million sales.
Robert: The opportunistic share repurchases.
Robert: Completed 10 acquisitions.
Robert: And subsequently experienced significant sales and earnings growth when markets normalize.
Robert Mehrabian: The recovery in the Short-Cycle Businesses would be short, in any event, during 2014 to 2016. We executed approximately $400 million of opportunistic sharebroker purchases. We completed 10 acquisitions and subsequently experienced significant sales and earnings growth when markets normalized. Today, we're pleased to renew our stock repurchase authorization and plan to begin repurchasing shares this quarter. At the same time... Because of our strong balance sheet, we're continuing to evaluate a number of acquisition opportunities. I will now turn the call over to Steve.
Robert: Today, we're pleased to renew our stock repurchase authorization.
Robert: To begin repurchasing shares this quarter.
Robert: At the same time.
Robert: Because of our strong balance sheet, we're continuing to evaluate a number of acquisition opportunities.
Robert: I will now turn the call over to Steve.
Stephen Finis Blackwood: Thank you Robert and good morning, I'll first discuss some additional financials for the quarter not covered by Robert and then I will discuss our second quarter and full year 2020 for outlook.
Stephen Finis Blackwood: In the first quarter cash flow from operating activities was $291 million.
Stephen Finis Blackwood: Thank you, Robert, and good morning. I'll first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our second quarter in the full year 2024 outlook. In the first quarter, cash flow from operating activities was $291 million, compared with $203 million in 2023. Free cash flow, that is cash from operating activities less capital expenditures, was $275.1 million in the first quarter of 2024, compared with $178.6 million in 2023. Cash flow increased in the first quarter due to stronger working capital performance.
Stephen Finis Blackwood: Compared with $203 million in 2023.
Stephen Finis Blackwood: Free cash flow that is cash from operating activities less capital expenditures was $275 1 million in the first quarter 2024, compared with $178 6 million in 2023.
Stephen Finis Blackwood: Cash flow increased in the first quarter due to a stronger working capital performance.
Stephen Finis Blackwood: Capital expenditures were $15 9 million in the first quarter of 2024, compared with $24 $4 million in 2023.
Depreciation and amortization expense was $78 million for the first quarter of 2024, compared with $82 1 million in 2023.
Stephen Finis Blackwood: We ended the quarter with approximately $2 three 3 billion of net debt.
Stephen Finis Blackwood: Capital expenditures were $15.9 million in the first quarter of 2024, compared with $24.4 million in 2023. Appreciation and amortization expense was $78 million in the first quarter of 2024, compared with $82.1 million in 2023. We ended the quarter with approximately $2.33 billion of net debt, or approximately $3.25 billion of debt and left cash of $912.4 million. Now turning to our outlook, management currently believes that GAAP earnings per share in the second quarter of 2024 will be in the range of $3.57 to $3.70 per share, with non-GAAP earnings in the range of $4.40 to $4.50 per share.
Stephen Finis Blackwood: That is approximately $3 billion to $5 billion of debt.
Stephen Finis Blackwood: At less cash of $912 4 million.
Speaker Change: Now turning to our outlook.
Speaker Change: Management currently believes that GAAP earnings per share in the second quarter of 2024 will be in the range of $3 57.
Speaker Change: The $3 70 per share.
Speaker Change: With non-GAAP earnings in the range of $4 40.
Speaker Change: The $4 50 per share.
Speaker Change: And for the full year 2024, our GAAP earnings per share outlook is $16 and <unk> $16 in 2007.
Speaker Change: And on a non-GAAP basis $19 25.
Speaker Change: To $19 45 per share.
Speaker Change: The 2020 for full year estimated tax rate, excluding discrete items is expected to be 22, 5%.
Speaker Change: I will now pass the call back to Robert.
Robert: We would now like to take your questions.
Robert: Operator, if you're ready to proceed with the questions and answers.
Speaker Change: Please go ahead.
Operator: Ladies and gentlemen, if you would like to ask a question that I have not already done. So please press one than zero on your phones, keeping up if you're on a speaker phone switch over to your handset before pressing the numbers if available. So the system can hear the touchstones accurately once again for your questions.
Stephen Finis Blackwood: And for the full year 2024, our gap earnings per share outlook is $16.02 to $16.27, and on a non-GAAP basis, $19.25 to $19.45 per share. The 2024 full-year estimated tax rate, excluding discreet items, is expected to be $22.5.
Speaker Change: Zero at this time, our first are.
Speaker Change: Our first question is going to come from Jim Ricchiuti with Needham <unk> Company. Please go ahead.
James Ricchiuti: Hi, Thanks, good morning.
James Ricchiuti: First question, just given the weakness that youre seeing in some of the.
Robert Mehrabian: I will now pass the call back to Robert.
James Ricchiuti: Higher margin areas of the short cycle business.
Robert Mehrabian: We would now like to take your questions. Operator, if you're ready to proceed with the questions and answers, please go ahead.
James Ricchiuti: Wonder how youre thinking about gross margin.
James Ricchiuti: Over the next couple of quarters.
James Ricchiuti: In terms of the gross margin.
James Ricchiuti: No king at relatively flat gross margins.
Operator: Ladies and gentlemen, if you would like to ask a question and have not already done so, please press 1 then 0 on your phone's keypad. If you're on a speakerphone, switch over to your handset before pressing numbers, if available, so the system can hear the touch tones accurately.
James Ricchiuti: Somewhere around 40.
James Ricchiuti: 3%.
James Ricchiuti: Okay.
James Ricchiuti: Yes.
Alright.
Robert.
James Ricchiuti: With the shift.
James Ricchiuti: And.
James Ricchiuti: And capital allocation I'm wondering.
What is what does this imply just in terms of the M&A pipeline are you still.
James Ricchiuti: Seeing more opportunities for the smaller deals as opposed to the larger M&A is that fair.
Operator: Once again, for questions... Press 1 then 0 at this time. Our first question is going to come from Jim Ricchiuti with Niedermann Company. Please go ahead. Hi, thanks. Good morning.
James Ricchiuti: Fair way to characterize the environment right now.
Speaker Change: Hi, Jim.
Speaker Change: Uh huh.
Speaker Change: Kai now, but let me let me just start with.
James Ricchiuti: Hi, thanks. Good morning. First question, just given the weakness that you're seeing in some of the higher margin areas of the short cycle business, I wonder how you're thinking about gross margins over the next couple of quarters.
Speaker Change: Some numbers that are significant.
Speaker Change: Our debt to EBITDA has gotten smaller.
Speaker Change: No.
Speaker Change: We have one acquisition in the pipeline.
Speaker Change: Once we make that.
Unknown Executive: In terms of the gross margin, we're looking at a relatively flat gross margin of somewhere around 40... Okay, yeah.
Speaker Change: We would add spend over $300 million.
Speaker Change: Since we bought <unk> in acquisition.
Speaker Change: If we don't do anything else.
Robert Mehrabian: All right, Robert, you know, with the shift in... Capital Allocation. I'm wondering... What is this? What does this imply just in terms of the M&A pipeline? Are you still seeing more opportunities for the smaller deals as opposed to the larger M&A? Is that a fair way to characterize the environment right now?
Speaker Change: By the end of the year.
Speaker Change: Our debt to EBITDA ratio would be closer to one point retreat, where it is at one seven today.
Speaker Change: No.
Speaker Change: We think that it's an appropriate time first.
Speaker Change: So look at our stock.
Speaker Change: And repurchase some shares because we.
Speaker Change: We bought clear.
Speaker Change: Our shares have increased by almost 700000.
Robert Mehrabian: Kind of, but let me just start with some numbers that are significant. Our debt to EBDA is at 1.7 now. We have one acquisition in the pipeline. Once we make that, we would have spent over $300 million since we bought Flickr. If we don't do anything else, by the end of the year, our debt-to-debt ratio will be closer to 1.3, where it is at 1.7 today.
Speaker Change: Sure because of <unk>.
Speaker Change: Option exercises and restricted stock award wed like to get that off the table first.
Speaker Change: At the same time, we have a lot of capacity.
Speaker Change: Foreign acquisition.
Speaker Change: We can spend up to date.
Speaker Change: We're going to have $2 billion, because we haven't touched our line of credit at all and we have cash on hand.
Speaker Change: So we are looking at acquisitions.
Speaker Change: The issue is that.
Speaker Change: Smaller acquisitions, we may be able to complete this year.
Speaker Change: Larger acquisitions, even if we find it.
Speaker Change: With all of the various regulatory.
Speaker Change: Those that you have to go through we won't happen until next year, but the answer is we're going to do both we're going to do exactly what we did in 2014 to succeed with <unk>.
Robert Mehrabian: We think that it's an appropriate time, first, to look at our stock and repurchase some shares because since we bought FLIR, our shares have increased by almost 700,000. We would like to get that off the table.
Speaker Change: Bought our shares back.
Speaker Change: We bought 10 companies.
Speaker Change: And then some of our competitors they didn't do as well in that particular.
Speaker Change: Period, we were able to acquire it to be right.
Speaker Change: Because we had to.
Speaker Change: Financial Wherewithal.
Robert Mehrabian: But at the same time, we have a lot of capacity for acquisition. We can't, up to, a billion and a half $2 billion because we haven't touched our line of credit at all, and we have cash on hand. So we are looking at acquisitions. The issue is that smaller acquisitions we may be able to complete this year. Larger acquisitions, even if we find them, with all the various regulatory. Thank you very
Speaker Change: I don't know if that answers it helps I mean in the past we've more recently you've talked about valuations stoping.
Speaker Change: A bit on the rich side are you.
Speaker Change: Are you do you see as you look at the pipeline for some of the larger M&A have you seen.
Speaker Change: Any change.
Change in in terms of.
Speaker Change: The prices out there.
Speaker Change: Right.
Speaker Change: It's going to take to do some of these larger deals.
Robert Mehrabian: We bought 10 companies. And then some of our competitors didn't do as well in that constricted period, and we were able to acquire them to be right after that, because we had the cash. I don't know if that answers your question. It helps.
Speaker Change: Not yet on the other hand I have to tell you Jim.
Speaker Change: They haven't come out with the earnings [laughter] data.
Speaker Change: In this market.
Speaker Change: Kind of a bifurcated market.
Speaker Change: That some of those.
Robert Mehrabian: I mean, in the past, more recently, you've talked about valuations still being a bit on the high side. Are you, do you see, as you look at the pipeline for some of the larger M&A, have you seen any change in terms of the prices out there that it's going to take to do some of these larger deals? Not yet. On the other hand, I have to tell you, Jim; they haven't all come out with their earnings yet.
Speaker Change: We've come down and there'll be just like it did before interestingly enough history does repeat itself it.
Speaker Change: It doesn't repeat itself on the time scale.
Speaker Change: We always expect but repeat yourself.
Speaker Change: Got it thanks very much.
Thank you Jim.
Speaker Change: Our next question is going to come from Greg Conrad with Jefferies. Please go ahead.
Greg Konrad: Good morning.
Greg Konrad: Good morning, Gary.
Greg Konrad: It is a bit of.
Robert Mehrabian: In this market, it's kind of a bifurcated market. I expect that some of those will come down, and there'll be, just like it did before. Interesting enough, history does repeat itself. It doesn't repeat itself on the time scale that we always expect, but it does...
Greg Konrad: Unusual question, but one I've been getting from investors in light of the uncharacteristic guidance cut.
Greg Konrad: There hasn't really been many over the past 20 years.
Greg Konrad: Is teledyne different today than what has made it so successful thinking back over the past 20 years.
James Ricchiuti: Got it. Thanks very much.
Operator: Our next question is going to come from Greg Konrad with Jefferies. Please go ahead.
Greg Konrad: Or what's really changed just given some of these uncharacteristic items or is this just you would think about it as part of the normal cycle.
Greg Konrad: This is a bit of an unusual question, but one I've been getting from investors. In light of the uncharacteristic guidance cut, which there haven't really been many over the past 20 years, is Teledyne different today than what has made it so successful, thinking back over the past 20 years? Or, is this just you think about it as part of the normal cycle?
Speaker Change: Well two things first.
Speaker Change: In the 25 years or so.
Speaker Change: We've only had this okc linked quarter.
Speaker Change: Almost 100 earnings calls.
Speaker Change: And releases.
Speaker Change: <unk> four times, 4% so.
Speaker Change: No.
Speaker Change: Something that happens very frequently.
Robert Mehrabian: Well, two things. First of all...
Speaker Change: The flip side of that.
Robert Mehrabian: In the 25 years or so, Greg, we've only had this occasion in four earnings, almost 100 earnings calls and releases. We've experienced this four times, four percent. So it's not something that happens very frequently.
Speaker Change: The economy in the market.
Speaker Change: We're not quite predictable.
Speaker Change: Some parts of the car.
Speaker Change: <unk> are doing well.
Speaker Change: Like our marine businesses are hitting the ball out of the car.
Speaker Change: And defense of course is doing well.
Robert Mehrabian: The flip side of it is that... The economy and the market are not quite predictable. Some parts of the economy are doing well, like our marine businesses are knocking the ball out of the park. And defense, of course, is doing well now with that recent passage, et cetera.
Speaker Change: Recent passage et cetera, we intend, we expect that to continue.
Speaker Change: What is <unk>.
Speaker Change: As you all.
Speaker Change: Is that the prediction of the slowdown in industrial automation took us by surprise.
Robert Mehrabian: We intend, and we expect that to continue. What is unusual is that the prediction of the slowdown in industrial automation took us by surprise. We thought in January that we would be relatively flat for the year in our machine vision business. And now we're suddenly faced with, in April, projecting a 20% decline. Now, that sounds like a lot, but it's only $120 million.
Speaker Change: We talked in January.
Speaker Change: We would be relatively flat for the year in our vision machine vision businesses.
And now we suddenly phase III in Haynesville projecting.
Speaker Change: The 20% decline.
Speaker Change: That sounds like a lot.
Speaker Change: But it's only $120 million.
Robert Mehrabian: What is different today from the past is that Teledyne can absorb those kinds of shocks much more easily than it could before. For example, in 2015-16, when oil went from over $100 down to $30. That was a shocker to Teledyne because our revenue was only $2.5, $2.6 billion. And that decreased our marine businesses by almost a third over a very short period of time. So what is different is that the shock absorber in Teledyne is a lot stiffer and can absorb shock like that.
Speaker Change: What is different today from the past.
Speaker Change: Teledyne can absorb.
Speaker Change: Those kinds of shop much more easily.
Speaker Change: It could be for you.
Speaker Change: In 2015 16.
Speaker Change: And went from over $100 down to $30.
Speaker Change: That was a shocker to teledyne because our revenue is only two.
Speaker Change: 252 6 billion.
Speaker Change: And we do.
Speaker Change: Decreased our marine businesses by almost a third over a very short period of time.
Speaker Change: So what is different is that.
Speaker Change: The shock absorber in Teledyne.
Speaker Change: Is that a lot safer and can absorb shock shock like that and we did this quarter everything else being equal.
Robert Mehrabian: And we did this quarter, everything else being equal. But when I look at it, I say, look, we have two kids that we took on in one course. One of them was the significant decline in industrial automation and some semiconductors, but the semiconductor seems to be recovering slowly, so we see signs of that. And I think the machine vision business will come back. We took another hit in our engineer system business, which was unexpected.
Speaker Change: When I look at it I say luck.
Speaker Change: We had two.
Speaker Change: Hit that we took in long course every one of them was.
Speaker Change: Significant decline industrial automation.
Speaker Change: And Tim semi conductor been semiconductors seems to be recovering slowly so we see signs of that.
Speaker Change: And I think the machine.
Speaker Change: Machine vision business will come back with you can either hit in our engineering systems business, which was unexpected.
Robert Mehrabian: But we had to go in and look at everything and do some estimates and change our estimates to complete. That was a one-time event. So I'm not going to worry about that too much. What I am saying is that, look.
Speaker Change: While we had to go in and look at everything and do some estimates unchanged yard estimates to complete that was it.
Speaker Change: One time events.
Speaker Change: I'm not going to worry about that too much.
Speaker Change: I am.
Speaker Change: Saying is that look.
Greg Konrad: Yes, we took a hit, and we're taking our revenue down by $220 million from 5.9 to 5.7. In the old days, in those days, if we'd taken a $220 million hit, that would have been just devastating. We recovered from those times, those kinds of shocks; I think we'll recover this time, too, just as well, if not better, because we have the muscle and the ability and the credit to buy companies and, when necessary, buy back our stock.
Speaker Change: Yes, we took a hit and we're taking our revenue down by $220 million.
Speaker Change: On a 5.9 to $5 seven.
Speaker Change: In the old days those days, we had taken at $220 million hit that would have been devastating.
Speaker Change: We recovered those time.
Speaker Change: Those kinds of shock I think will recover this time.
Speaker Change: Just as well if not better because we have the muscle to.
Speaker Change: And the ability and the trends.
Speaker Change: By companies and when necessary buyback our stock.
Robert Mehrabian: And then I appreciate that. And maybe just kind of a follow up to that. I mean, just thinking back to what Teledyne did during the oil and gas downturn, and there was the sequester before that, and impact to defend. I mean, if I remember back, you took pretty aggressive actions, and we saw what margins and growth did during those two downturns. I mean, are there similar actions that you're undertaking on the short cycle side? Does that offer an opportunity, maybe, to examine the margins where you have an even better kind of trajectory coming out of market recovery?
Speaker Change: And then <unk>.
Speaker Change: You hit that and maybe just kind of a follow up to that I mean, just thinking back to what teledyne did out of the oil and gas downturn and that was the sequester before that and the impact of defense.
Speaker Change: Remember back when you talked pretty aggressive actions and we saw what margins and growth out of those two downturns I mean is there a similar actions that you are undertaking on the short cycle.
Speaker Change: Size does that offer opportunity may be to examine the margins, where you have an even better kind of trajectory coming out of market recovery.
Speaker Change: Yes.
Speaker Change: First.
If you look at the clear businesses.
Robert Mehrabian: If you look at the Flair Businesses year-over-year, the margins are up almost 200 basis points year-over-year. And the reason that happened is very simple.
Speaker Change: Year over year the margins are.
Speaker Change: Almost.
Speaker Change: 200 basis points year over year, and the reason that happened.
Speaker Change: It's very simple we took about a peak.
Robert Mehrabian: We took about $52 million worth of cost dot last year, and we're taking an additional $10 to $15 million cost dot this year early on. So that is affecting the margin. If you look at the DALSA EQV, which is our traditional business, our estimates are that by the end of the second quarter, we'd have taken another $40 million out of that. All together, we're talking about almost $100 million in costs, and we anticipate that A2B margins were the lowest they have been for a long time; they were at 19.5% in Q1.
Speaker Change: $52 million worth of cost out last year.
Speaker Change: We're taking additional $10 million to $15 million cost us this year early on.
Speaker Change: So that is affecting the margin if you look at that also <unk>, which is our traditional.
Speaker Change: Businesses.
Speaker Change: Our estimates are that by the end of second quarter <unk> taken another $40 million out of that.
Speaker Change: Yes.
Speaker Change: Altogether.
Speaker Change: We're talking about almost $100 million in cost.
Speaker Change: We anticipate.
Speaker Change: Yes.
Speaker Change: So I will say to be margins were the lowest they have been for a long time there at 19, 5% in Q1, we expect that to recover.
Robert Mehrabian: We expect that to recover, and frankly, we expect the overall margins for digital imaging to be flat with last year on much lower revenues. It basically says that... We have taken the costs off, and if need be, we'll take more, but I think right now we're doing okay. We're just not very aggressive in our hiring.
Speaker Change: Frankly, we expect the overall margins.
Speaker Change: For digital imaging to be flat with last year on much lower revenue so.
Speaker Change: It basically says that.
Speaker Change: We have taken the costs out.
Speaker Change: And if need be we'll take tomorrow, but I think right now we're doing okay.
Speaker Change: We are just not very aggressive in our hiring.
Speaker Change: Thank you.
Joseph Giordano: Our next question comes from Joe Giordano with TD Cowen. You may begin.
Speaker Change: Our next question comes from Joe Giordano.
Joseph Giordano: With the T D Cohen.
Joe Giordano: Again.
Joseph Giordano: Hey guys, how are you doing? I'll start on DI as well. I'm curious about the timing of this, right, because if you look at some of the pure players with InVision, you know, they had huge declines last year, and you guys did okay relative to them last year, and now this year, it seems like, well, they are yet to report largely, but it sounds like they're going to be sequentially improving off low levels starting now. And it seems like now is when you guys are starting to see So I'm just curious about your thoughts on what that timing mismatch is because it's, you know, pretty short cycle stuff.
Joseph Giordano: Hey, guys How're you doing.
Joseph Giordano: Hi, Nathan.
Joseph Giordano: I'll start on <unk>, well, just im curious on the timing of this right because if you look at some of the pure players with envision and they had huge declines last year.
Joseph Giordano: And you guys did okay relative to them last year and now this year it seems like they're yet to report largely but.
Joseph Giordano: It sounds like Theyre going to be sequentially, improving off low levels, starting like now and it seems like now is when you guys are starting to see decline. So I'm just curious your thoughts on what that timing mismatches.
Joseph Giordano: Pretty short cycle stuff.
Joseph Giordano: It is.
Robert Mehrabian: It is. We know a couple of businesses that took a pretty good hit, but their quarters are kind of a little different, and their years are a little different from ours. They took a pretty big hit and lowered their numbers significantly, so now they're coming up from the bottom slightly better. We didn't take a hit because we didn't have to, due to short cycle declines of the magnitude we saw. We anticipated it would happen, but it happened fast. The flip side of it is that, uh...
Joseph Giordano: We know a couple of businesses that joke.
Speaker Change: Pretty good.
Speaker Change: But the quantities are kind of a little different than their years are a little different from ours that you get paid they can't and lowered their numbers significantly. So now they are coming up from the bottom slightly better.
Speaker Change: We didn't take a hit because we didn't have.
Speaker Change: Short cycle declines of the magnitude we saw we anticipated it would happen, but it happened fast.
Speaker Change: And.
Speaker Change: We took the Costco.
Speaker Change: So I don't see it is that.
Robert Mehrabian: In digital imaging, we have, of course, the short cycle business. Well, we also have long cycle businesses like space and defense, and those markets are doing really well. So I have to be a little careful when we designate what is digital imaging, which is basically the average. We think in the second half, we will recover because of the space and defense system.
Speaker Change: In even digital imaging.
Speaker Change: Of course, the short cycle businesses, but we also have long cycle businesses like space and defense and those markets are doing really well so I got to be a little careful when we do.
Speaker Change: Designates what is digital imaging.
Speaker Change: Basically.
Speaker Change: Yeah I agree.
Speaker Change: We think in the second half.
Speaker Change: We will recover because of the space and defense.
Joseph Giordano: And then just to follow up on the question earlier about, you know, is Teledyne different today? You know, I think what you guys have been known for for so long is being very good estimators of your own business. And when you think about all the M&A companies you've done, does that become inherently more challenging today versus a decade ago just because you have so many more businesses? And is there maybe, like, a tinkering of the process with how you communicate upwards from the businesses towards management to fine-tune the budgeting process in light of some of these, you know, being caught off guard here?
Speaker Change: And then just a follow up on the question earlier about teledyne different today.
Speaker Change: I think what.
Speaker Change: Well you guys have been known for for so long as being very good estimators have your own businesses.
Speaker Change: And with with high precision and when do you think about all the M&A company, you've done does that become just inherently more challenging today versus a decade ago, just because you have so many more businesses and is there maybe.
Speaker Change: Does there need to be tinkering of the process with how you communicate upwards from the businesses towards management.
Fine tune.
Speaker Change: The budgeting process in light of some of these.
Speaker Change: Caught off guard here.
Speaker Change: Well.
Speaker Change: Yeah.
Robert Mehrabian: I mean, you're right in one respect, and I'll kind of paraphrase what you said. Estimating the short cycle businesses actually has always been inherently challenging.
Speaker Change: I mean youre right in one respect.
Speaker Change: It's kind of paraphrase what you said.
Speaker Change: Estimating the short cycle businesses activities.
Speaker Change: Please be inherently challenging.
Robert Mehrabian: The flip side of this is the part that you mentioned; we have a lot of businesses, etc. That part is actually a help to us rather than a hindrance because it opens up the platform from which you can make acquisitions. And that is true and it will remain true, so we will accelerate that. The only thing we don't want to do is make stupid acquisitions with very high prices that are not going to be treated like the acquisitions we will do.
Speaker Change: The flip side is the part that you mentioned, we have a lot of businesses.
Speaker Change: Et cetera, that's part <unk> two dee.
Speaker Change: To us rather than a hindrance because it opens up the platform from which you can make acquisition.
Speaker Change: And that is true and he will remain too so we're going to accelerate that.
Speaker Change: The only thing we don't want to do is.
Speaker Change: Make stupid acquisitions with very high prices.
Speaker Change: That are not going to be accretive.
Speaker Change: The acquisitions, we've been able to do.
Robert Mehrabian: We had a larger platform to do that with, and like we just bought something in our marine business, Balfour's, in the UK. We have Atomic, which is a digital imaging business in the Netherlands that we are in the process of buying. The only difference between that business and our short cycle businesses is that they do a lot more custom imaging design, and they have a significant market for imaging in the defense domain.
Speaker Change: We had a larger platform.
Speaker Change: I do that with.
Speaker Change: And like we just bought something in our marine business.
Speaker Change: In the U K and we have added Mick.
Speaker Change: Which is.
Speaker Change: Digital imaging business in the Netherlands that we are going to we are starting the process of buying.
Speaker Change: The only difference between that business and our.
Speaker Change: Our short cycle businesses is that they do a lot more custom.
Speaker Change: Imaging design and they have a significant market.
Speaker Change: <unk> and the defense.
Robert Mehrabian: I think that this is an opportune time for us. Let's see what happens to the rest of the earnings and costs that come out. We didn't lower our numbers significantly. If we had, we'd be up now, right?
Speaker Change: No.
Speaker Change: I think I think that this is an opportune time for us, let's see what happens to the rest of the earnings Zhang Charles that come out.
Speaker Change: We did lower our numbers significantly if we lowered we'd be up now alright.
Robert Mehrabian: So all we're saying is we're gonna be flat with last year. Our margins are gonna be the same by the end of the year. Our revenue is gonna be about the same. We're Dutch without making any acquisitions. And we have enough muscle to buy our shares. And that's a good place to be with, even after those purchases. I think we'll end the year. Let's say we bought $200 million of our own stock.
Speaker Change: So how do we think is going to be flat with last year. Our margins are going to be the same by the end of the year. Our revenue is going to be about the same with that without making any acquisition.
We have we know from Vasco to buy our shares.
Speaker Change: And yes, that's a good place to be with a.
Speaker Change: Even after those purchases I think we'll end the year.
Speaker Change: I think we bought $200 million off our stock.
Joseph Giordano: We're still in the year below 1.5 ZEG to EBDA, which is below our target of 1.5 to 2.5. So I think we're doing fine. I'm not worried. Thank you.
Speaker Change: We'll still end the year.
Speaker Change: One five debt to EBITDA ratio.
Speaker Change: Which is below our job.
Speaker Change: I can get one five to two points.
Speaker Change: I think we're doing fine I'm not worried.
Speaker Change: Thank you.
Speaker Change: Thank you.
Operator: Our next question comes from Andrew Buscaglia with BNP. Please go ahead.
Speaker Change: Our next question comes from Andrew Buscaglia with BNP. Please go ahead.
Speaker Change: Yeah.
Hey, good morning, guys.
Andrew Edouard Buscaglia: Good morning, Andrew.
Andrew Edouard Buscaglia: So I wanted to get a sense of how much this guidance is really de-risked. Maybe number one, are you assuming buybacks in the guidance? And then secondly, you know, why should we have confidence, given the low visibility, that there's not another step down here in some of these shorter cycle areas?
Andrew Edouard Buscaglia: So I wanted to get a sense of how.
Andrew Edouard Buscaglia: How much this guidance is really de risked.
Andrew Edouard Buscaglia: Maybe number one are you assuming buybacks in the guidance and then secondly.
Andrew Edouard Buscaglia: Why should we have confidence given the low visibility that there's not another step down here in some of these shorter cycle areas.
Robert Mehrabian: A very good question, Andrew. First, No, no, buyback is not built into the numbers, primarily because, Thank you for watching. That's fairly neutral for this year, depending on, of course, how much we buy. So I would put that aside.
Speaker Change: Yeah very good question Andrew.
Speaker Change: First.
Speaker Change:
Speaker Change: No no.
Speaker Change: No.
Speaker Change: Buy back.
Speaker Change: We're not seeing.
Speaker Change: Into the numbers.
Speaker Change: Primarily because.
Speaker Change: When we buyback is really going to affect next year's EPS not least years.
Speaker Change: So.
Speaker Change: That's fairly neutral towards this years, depending on our first home, which we bought.
Speaker Change: So I would put that aside.
Robert Mehrabian: The second part of the question: we've struggled mightily over the last 10 days and with our board in the last two days, trying to decide how conservative we should be or how aggressive we should be. We've ended up being somewhere in between the two. We think that... with the risk Some of the Don's Guide. On the other hand, we haven't finished it all. On the flipside, our defense businesses have a relatively good backlog.
Speaker Change: The second part of your question.
Speaker Change: Struggled with that.
Speaker Change: Mightily over the last 10 days and with our board in the last two days.
Speaker Change: Trying to decide.
Speaker Change: Hawk Conservative III should be or how aggressive we should see.
Speaker Change: We've ended up being somewhere in between the two.
Speaker Change: We think that.
Speaker Change: We have been raised.
Speaker Change: Some of the.
Speaker Change: Downside.
Speaker Change: On the other hand, we haven't.
Speaker Change: <unk>.
Speaker Change: Flip side.
Speaker Change: Defense businesses.
Relatively good backlog.
Robert Mehrabian: And the overall backlog in the company is 1.06. So the defense space businesses are going to come back in the second half. So they're going to balance that. In a situation like this, you can do one or two things. You can really lower the numbers and just play very safe, or you can do what is a reasonable judgment of what you see in the market and go forward. We've taken the ladder up.
Speaker Change: And so overall backlog and the company is one point those stick.
Speaker Change: So the defense and space businesses are going to come back in the second half so they're going to balance that.
Speaker Change: In a situation like this you can do one or two things you can really.
Speaker Change: Lowered their numbers.
Speaker Change: And just played very safe.
Speaker Change: Or you can do what is reasonable judgment on what you've seen the market.
Speaker Change: Well forward.
Speaker Change: We've taken the latter approach.
Speaker Change: Yes, okay.
Andrew Edouard Buscaglia: Okay. You know, just, you know, I think some investors are also somewhat confused by, you know, the small portion of the cell. It seems like a small portion of digital imaging is driving sort of profound, at least profound, declines. Can you kind of walk through it within digital imaging? We know machine vision is weak, but that's probably only low-level digits as a percentage of that segment. Can you walk through the other items beyond just machine vision and tell us how much that is as a percentage of that segment sales just so we can get more clarity around what's affecting that, you know, the overall picture.
Speaker Change: Okay.
Speaker Change: Yes, I think.
Speaker Change: Investors are also somewhat confused by that.
Speaker Change: The small portion of that sale. It seems like a small portion of digital imaging is driving sort of a profound.
Speaker Change: These declines can you can you kind of walk through within digital imaging machine vision.
Speaker Change: Is weak, but that's probably on the low double digits as a percentage of that segment.
Speaker Change: Can you go can you walk through the other items beyond just machine vision.
Speaker Change: And tell us how much that is as a percentage of that segment Sal because somebody could.
Sal: You get some more clarity around what's affecting that yes, the overall decline.
Robert Mehrabian: Sure. But first, let's start with machine vision specifically.
Sal: Sure.
Sal: First let's start with machine vision specifically.
Robert Mehrabian: Approximately 600 million in 2023. We're projecting a decline of about 120 million of that. Ciao!
Sal: Approximately $600 million in 2023.
Sal: We are projecting a decline of about $120 million.
Yes.
Sal: So.
Robert Mehrabian: The reason it's affecting other things is that it's the highest margin business that we have in digital image. And overall... There are When you put the two parts together, which is also E2V, TSP&I, and FLIR, our total revenue there is going to be down about one and a half percent by year end. So it's not a big number, right? One and a half percent, but that's one and a half percent with something like over 3.1 billion.
Sal: The reason is affecting other things is that the highest margin businesses that we have in digital limit.
Sal: And over at all.
Sal: There are when you put the two products together, which is also <unk> <unk>.
Sal: And clear.
Sal: Total revenue there.
Sal: It's going to be down.
Sal: By year end about one in 5% so it's not a big number right.
Sal: But that's one 5%.
Sal: With something like over $2 1 million billion.
Robert Mehrabian: So it's meaningful only because the... Topline 3.1 is significant, and it's our highest margin this year. By year-end, we're projecting that basically the declines would be 1.5% overall. We clear up and don't say we're done because...
Sal: So it's meaningful not only because.
Sal: Topline pinpoint one is significant.
Sal: And it's our highest margin business by year end, we are projecting that basically.
Sal: The declines would be.
Sal: One 5% overall.
Sal: With clear up.
Speaker Change: So I will say to be done because of that.
Andrew Edouard Buscaglia: I don't know if that answers your question. The numbers, when you look at them, look large, but in retrospect... It's not huge; it's one and a half percent of the total.
Speaker Change: So I don't know if that answers your question.
Speaker Change: First the numbers when you look at him.
Speaker Change: Look large blip in retrospect.
It's not huge just one 5%.
Speaker Change: Okay.
Robert Mehrabian: Yeah, okay. Beyond and beyond machine vision are what other areas are short cycle that are out of favor?
Speaker Change: Yes, okay, and beyond and beyond machine vision or what other areas.
Speaker Change: Our short cycle that are out of favor.
Robert Mehrabian: Well, the only other one that I would say is out of favor. I wouldn't call it out of favor. I'd say it's declined. It's test and measure. This measurement is the filoscope and protocol solutions that we have.
Speaker Change: Well the only other one that I would say is out of favor.
Speaker Change: I wouldn't call it out our favorite I'd say decline.
Speaker Change: Test and measurement.
Speaker Change: Test and measurement is cielo scopes and protocol solutions that we have.
Robert Mehrabian: Last year, we had $240 million of revenue there. We expect right now that in January, we thought they'd remain flat. Now we're expecting them to go down about 10%. So that's $30 million in revenue. The good part of that is that its margins are remaining very healthy, and at the very high end of all of our margins, and we can take that decline in revenue without having a big hit anywhere else. [inaudible] is making up those sales. The last area, which is a little different, is the engineer system.
Speaker Change: Last year we.
Speaker Change: We had $240 million of revenue there.
Speaker Change: We expect right now that in January we thought they would remain flat now we're expecting it to go down about 10% so that $30 million in revenue.
Speaker Change:
Speaker Change: The good part of that is that it's margins are remaining very healthy.
Speaker Change: At the very high end of all of our margins.
Speaker Change: We can take that decline.
Speaker Change: In revenue.
Speaker Change: Not having a big hit.
Speaker Change: Anywhere else.
Speaker Change: Marine.
Speaker Change: Is making up those sales decline.
Speaker Change: The last area.
Speaker Change: Is there a little differently engineered system.
Robert Mehrabian: In 2023, we will have $440 million in revenue. Right now, we're projecting about a 10% decline or about 35 to 40 million jobs lost. If there's a good part to it, it's only 7% of our portfolio, and it's our lowest margin business at 10% or less. So, that's why, well... The surprise here is that, yes, we do have declines, but we're saying we're going to keep our revenue the same as last year, and our operating margins are going to be the same as last year in an environment that's a little more constricted for our digital imaging short cycle business.
Speaker Change: In 2020, we had $440 million in revenue.
Speaker Change: Right now, we're projecting about a 10% decline or about $35 million to $40 million decline.
Speaker Change: If there is a good parts to it.
Speaker Change: Is that that's the only 7% of our portfolio.
Speaker Change: And it's our lowest margin.
Speaker Change: At 10% or less.
Speaker Change: So that's why well.
Speaker Change: You know that can.
Speaker Change: The surprise here is that yes.
Yes, we do have declined what we're saying we're going to keep our revenue the same as last year and our operating margins are going to be the same as last year in the new environment.
Speaker Change: A little more constrictive for our digital imaging shore side.
Speaker Change: Yes, okay.
Andrew Edouard Buscaglia: Yeah, okay. Thanks, Robert. Thank you.
Speaker Change: Thanks Robert.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: As a reminder, if you have questions we would like to queue up. Please press one zero next we will go to Kristina Lee Wang with Morgan Stanley. Please go ahead.
Operator: As a reminder, if you have questions or would like to queue up, please press 1-0. Next, we will go to Kristine Liwag with Morgan Stanley. Please go ahead.
Speaker Change: Hi, Good morning, guys. This is Gabby answer Christine Thanks for taking my question. So I was just wondering if you can provide some a little bit of color. If you have been seeing improvements in the supply chain and your expectations for the supply chain going forward and how that's going to impact the business throughout the year.
Kristine Liwag: Thank you very much. Great question. The supply chain improved significantly in 2023 versus 2022. It has improved further. (inaudible) This could give you exact numbers.
Speaker Change: Thank you very much great question.
Speaker Change: The supply chain.
Speaker Change: Improved in 2023 significantly versus 2022.
It has improved further.
Speaker Change: This year.
Speaker Change: This could give you an exact number.
Robert Mehrabian: We, when we buy from brokers, we pay a high price. Uh-oh. Last year in the first quarter, we bought about $10 million for electronic suppliers broke. This year, in the first quarter, we only bought a little over two million, so I think that's a significant improvement. Having said that, there are a couple of suppliers that make very sophisticated boards or semiconductor devices that are still lagging, and it's more of a delay problem rather than a price problem. So I think the supply chain is okay. We're all experiencing some delays in some sophisticated parts. Other than that, I think that's behind us. Great. Thank you so much, for sure.
Speaker Change: We when we buy from brokers.
Speaker Change: Oh.
Speaker Change: Higher higher percentages of.
Speaker Change: Uh huh.
Speaker Change: Price.
Speaker Change: Last year in the first quarter.
Speaker Change: We bought about $10 million for electronics.
Speaker Change: Buyers broker.
Speaker Change: This year first quarter, we only bought a little over to media. So I think the SPD <unk>.
Speaker Change: Improvement.
Speaker Change: Having said that there are a couple of suppliers that make very sophisticated.
Speaker Change: Sure.
Speaker Change: <unk> semiconductor devices.
Speaker Change: Are still lagging.
Speaker Change: It's more of a delay problem rather than a pricing problem. So I think the supply chain is okay. We don't XP some delays of.
Speaker Change: Some sophisticated.
Speaker Change: Other than that I think thats behind.
Speaker Change: Great. Thank you so much.
Speaker Change: Sure.
Operator: Our next question is going to come from Noah Poponak of Goldman Sachs. Please go ahead.
Speaker Change: And our next question is going to come from Noah <unk>.
Noah: Oldman Sachs. Please go ahead.
Noah Poponak: Robert, to have the second quarter revenue be about flat from the first, and the year-over-year rate of decline we need to accelerate. Is that right? Is that what you're anticipating?
Noah: Hey, good morning, everyone.
Noah: Good morning Noah.
Noah: Robert.
Noah: The second quarter revenue to be about flat from the first.
Noah: The year over year rate of decline to accelerate.
Is that is that right is that what you are anticipating.
Robert Mehrabian: Right now, we're anticipating that it will be flat, only because the answer is yes, only because we don't think our, where we have really good backlog, it's got to kick in until the third quarter. The decline, about 4.5% from last year, year-over-year, in second course, yes. Okay.
Speaker Change: Right now great.
Speaker Change: <unk> that he will be flat.
Speaker Change: Only because.
Speaker Change: Yes, only because we don't think are.
Speaker Change: Where we have really good backlog, it's going to kick in until the third quarter the decline.
Speaker Change: About four 5% from last year.
Speaker Change: Year over year in second quarter, yes, okay.
Noah Poponak: Yeah, and then I guess that would imply... You know, kind of mid single-digit organic revenue growth year over year in the back half. I was going to ask you just alluded to it, but I was going to ask how much of that is, kind of purely visibility from longer cycle things in the backlog versus What's the assumption embedded in that on the short cycle side?
Speaker Change: Yeah, and then I guess that would imply.
Speaker Change: Kind of mid single digit organic revenue growth and year over year in the back half.
Speaker Change: He was going to ask you just alluded to it but I was going to ask.
Speaker Change: How much of that is.
Speaker Change: Kind of purely visibility from longer cycle things in the backlog versus.
Speaker Change: Whats the assumption embedded in that on the short cycle side.
Robert Mehrabian: I think primarily it's what we have in the long cycle; the majority of that recovery is in what we have in our backlog, of maybe 3.5% to 4% improvement in revenue in the second half. There is a little bit of a... positivity in some of our short cycle businesses, only because of our larger customers or platforms on which we serve, like semiconductors. The data shows that it's better than it was last year and is improving, so we have a little of that in mind. So, I think that's it, but we're not counting on industrial automation and other things to improve significantly because, frankly, we have no visibility.
Speaker Change: I think primarily it.
Speaker Change: What we have in there.
Speaker Change: The long cycle the majority of that recovery didn't work we have in our backlog.
Maybe three and a half to four 4% improvement in revenue in the second half.
Speaker Change: There is.
Speaker Change: A bit of.
Uh huh.
Speaker Change: Positivity and some of our short cycle businesses.
Speaker Change: Only because.
Speaker Change: Our larger customers or platforms on which we serve like semi conductor.
Speaker Change: The data shows that it's better than it was last year and improving itself.
Speaker Change: So we have a little of that in mind.
Speaker Change:
Speaker Change: So I think that we.
Speaker Change: But we're not counting on industrial automation or other things to improve significantly because frankly, we have no visibility.
Speaker Change: Okay.
Noah Poponak: What are the pieces of the engineered systems margin in the quarter? Is there, I assume there's some kind of cumulative catch-up adjustment, mark-to-market?
Speaker Change: What are the pieces of the engineered systems margin in the quarter or is there I assume there is some kind of cumulative catch up adjustment mark to market.
Robert Mehrabian: right down in that.
Speaker Change: Right.
Speaker Change: Yes.
Robert Mehrabian: Yeah, what happens in that business is that, as you well know, we're obligated to have to do six or six accounts. And so you estimate. Thank you for your time. Thank you, and Completion Timing.
Speaker Change: Yeah, well it happens in that business is that.
Speaker Change: As you well know we're obligated.
Speaker Change: To do so.
Speaker Change: Currency.
Speaker Change: I would say you estimate.
Speaker Change: Your cost.
Speaker Change: And completion timing.
Robert Mehrabian: When we went back and looked pretty hard, we saw that some of the costs were higher than we had anticipated, so we adjusted those. I think that took a shot. Please see the complete disclaimer at https://sites.google.com or at https://sites.google.com/policies/privacy/, So that's what took the hit, but I think we know exactly what happened. We'll fix it, we are fixing it, and we should get beyond that as we move forward.
Speaker Change: Well, we went back and looked pretty hard.
Speaker Change: We saw that some of the costs were higher.
Speaker Change: And we had anticipated.
Speaker Change: If we adjust it.
Thanks.
Speaker Change: That took us.
Speaker Change: Check out of our sales, but when you do Costco products, which takes a step down let's say.
Speaker Change: $100 million you have to take the profit on the same amount.
Speaker Change: That's why they're here.
Speaker Change: I think we.
Speaker Change: We know exactly what happened.
Speaker Change: We will fix it we are fixing it and we should get beyond that as we move forward.
Noah Poponak: Do you know the size of the deal in front of you guys there on how much of a markdown you took in the quarter?
Speaker Change: Do you know the size off in front of you guys. There on how much of a markdown you've talked in the quarter.
Speaker Change: Well, we took a.
Robert Mehrabian: Well, we took In Q1, we took about a $7 million EBIT kit, which was basically 10 to 11 cents. So if that hadn't happened, we would have made our earnings despite the downturn in a short cycle limit. [inaudible]
Speaker Change: In Q1, we took about a $7 million EBIT.
Speaker Change: Which was.
Speaker Change: Basically 10 to 11.
Speaker Change: So if that happens.
Speaker Change: Happened, we would have made our R&D.
Okay.
Speaker Change: Despite the downturn in those short cycle imaging work.
Speaker Change: We'll take a shot at it.
Speaker Change: That's helpful. That's helpful last one I guess.
Noah Poponak: Given how much you've now de-levered Balanchine, NetDatDiva, Post, FLIR, Integration.
Speaker Change: Yes.
Speaker Change: Given how much you've now de Levered.
Speaker Change: Balance sheet net debt to EBITDA post clear integration.
Robert Mehrabian: You're still going to have, you know, pretty healthy free cash flow despite the... Thank you for all the tweaks you're making here today. If you're coming out with a share repurchase, I guess the number you're talking about is kind of small relative to your forward annual free cash flow generation and how much balance sheet firepower you have if you were to take leverage a little higher. A little bit of like a, you know, if you're going to lay up, just lay up type of thing.
Speaker Change: Youre still going to have.
Speaker Change: Pretty healthy free cash flow despite the.
Speaker Change: Tweaks youre, making here today.
Speaker Change: If youre coming out with a share repurchase.
Speaker Change: I guess the number youre talking about is kind of small relative to.
Speaker Change: Your forward annual free cash flow generation, how much balance sheet firepower you have if you were to.
Speaker Change: Take leverage a little higher.
Speaker Change: Little bit of like a if you're going to lay up lay up type of thing I guess I'm surprised that you maybe part of it as you formulated all of this before the move in the stock today.
Robert Mehrabian: I guess I'm surprised that you might be part of it as you formulated all this before the move in the stock today. Is there a scenario where you reevaluate? Something more aggressive in 2024? Do you need to keep room for the M&A pipeline?
Speaker Change: Is there a scenario where you reevaluate.
Speaker Change: Something more aggressive in 2024 do you need to keep room for the M&A pipeline.
Noah Poponak: How would you respond?
Speaker Change: How would you respond to that.
Robert Mehrabian: Well, two ways. First... We'll put out a case about our authorization. And if you look at that, we have authorization to go from what we said was 200 to 250 to 300 million dollars. We can go up to 1.25 billion in buyback. As you know, Noah, that depends on the stock price and how the market reacts. But at the lower stock price that I was looking at this morning, that would be a significant number of shares. We can do that if we choose. We still have enough powders to make acquisitions.
Speaker Change: Well two ways first.
Speaker Change:
We'll put out there.
Speaker Change: Okay.
Speaker Change: About our authorization.
Speaker Change: And if you look at that.
Speaker Change: We have auto origination.
Speaker Change: Go from what we said was 200 to 250 to.
Speaker Change: $300 million.
Speaker Change: He can go up to 125 billion in buybacks.
Speaker Change: Buyback.
Speaker Change: As you know that depends on the stock price and how the markets react.
Speaker Change: Uh huh.
Speaker Change: The lower stock price.
Speaker Change: I'm just looking at this morning I was looking at this morning.
Speaker Change: That would be a significant number of shares we can do that if we choose.
Speaker Change: We still have.
Speaker Change: Powders.
Speaker Change: To make acquisition.
Robert Mehrabian: [inaudible] That part of our portfolio doesn't bother me. If you look at the final data point you may want to know is that we have only $150 million of debt, fixed debt, that we have to pay in the second half of 2024 in October. $150.
Frankly.
Speaker Change: That's part of our portfolio doesn't bother me if you look at our final.
Speaker Change: Data points, you may want to know is.
Speaker Change: We have only $150 million of debt.
Speaker Change: Fixed debt that we have to pay in the second half of 2024 in October 100, and GT, we just paid for <unk>.
Robert Mehrabian: We just paid $ 450. The next payment doesn't have to come due until 2026. And then if you look forward, the next three or four payments, our average borrowing cost, and those are all fixed, our average borrowing cost is more like 2.35%. So that's about as ideal as you want to have. And as we generate cash, we can buy shares, and we can make acquisitions, and we haven't even touched our line of credit. So from that perspective, I feel pretty confident.
Speaker Change: The next payment.
Speaker Change: Doesn't come due until 2026.
Speaker Change: And then if you look forward the next three or four payments our average borrowing cost and those are all fixed.
Speaker Change: Our average borrowing cost is more like two 5%.
Speaker Change: So that's about as the ideal net debt as you want to have.
Speaker Change: And as we generate cash.
Speaker Change: We can buy the shares.
Speaker Change: And we can make acquisitions and we haven't even touched our line of credit.
Speaker Change: So.
Speaker Change: From that perspective, I feel pretty comfortable.
Okay.
Operator: At this time, there are no additional questions.
Speaker Change: Helpful. Thank you.
Speaker Change: Thank you.
And at this time there are no additional questions in queue.
Robert Mehrabian: Thank you very much. We would like now to conclude the conference, operator. I will now ask Jason to do so. Thank you, John.
Speaker Change: Thank you very much would do we would like now.
Speaker Change: To conclude the conference operator, I will now ask Jason to do so.
Jason VanWees: Thank you, John, and thanks, everyone, for joining the earnings call this morning. Again, all the earnings releases are on our website. The replay is available, and for those who are not on the call, please feel free to contact me if you'd like to talk further. So, thank you, everyone. Bye.
Jason: Thank you John and thanks, everyone for joining the earnings call. This morning.
Jason: And all of the earnings release or on our website, a replay is available and for those.
Jason: Please feel free to.
Jason: Talk further.
Operator: As we mentioned, this conference has been recorded for replay, which will be available for one month starting at 10 a.m. Pacific Time today and ending May 24th, 2024 at midnight. To access and listen to the replay at any time, you can call 866-207-1041 and use access code 832-7266. For international callers, you can use the number 402. Again, for domestic, that is 866-207-1041, and for international, 402-970-0847, and the access code to use is 832-7266. That does conclude your conference call for today. We thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.
Jason: Thank you everyone.
Speaker Change: As he mentioned in this conference has been recorded for replay, which will be available for one month Sterling Turner.
Speaker Change: Pacific time today.
Speaker Change: And ending May 24, 2024 at midnight to access them listen to the replay at anytime you can call 806, 20710, or one and using access code eight three to seven six.
Speaker Change: National Collars, you can use the number four zero too.
Speaker Change: 9700847.
Speaker Change: Again for domestic <unk> 8662071041, and international 4029700847, and the access code to users eight three to 72 606 that does conclude your conference call for today.
Speaker Change: We do thank you for your participation and for using AT&T conferencing, you may now disconnect.