Teledyne Technologies Incorporated (NYSE:TDY) Q1 2023 Earnings Call Transcript

Teledyne Technologies Incorporated (NYSE:TDY) Q1 2023 Earnings Call Transcript April 26, 2023

Teledyne Technologies Incorporated beats earnings expectations. Reported EPS is $4.53, expectations were $4.43.

Operator: Ladies and gentlemen, thank you for standing by. And welcome to the Teledyne First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. As a reminder, this conference is being recorded. I’d now like to turn the call over to our host, Mr. Jason VanWees. Please go ahead, sir.

Jason VanWees: Thanks, Brad, and good morning, everyone. This is Jason VanWees, Vice Chairman. And I’d like to welcome everyone to Teledyne’s first quarter 2023 earnings release conference call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne’s Chairman, President and CEO, Robert Mehrabian; SVP and CFO, Sue Main; SVP, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibik; and also Edwin Roks, Executive VP of Teledyne. After remarks by Robert and Sue, we will ask for your questions. Of course though, before we get started, please be aware that all forward-looking statements made this morning are subject to various assumptions, risks, and caveats as noted in the earnings release and our periodic SEC filings and 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.

Robert Mehrabian: Thank you, Jason. Good morning, everyone, and thank you for joining our earnings call. We began 2023 with record first quarter sales, operating margin, non-GAAP earnings and free cash flow. Overall, sales increased 4.7%, with revenue and operating profit growing in every segment. Excluding foreign currency headwinds, which negatively impacted first quarter sales growth by approximately 1.4%, growth in local currency would have been 6.1%. Excluding acquisitions, core growth in local currency would have been approximately 4.2%. GAAP operating margin of 17.5% and non-GAAP operating margin of 21.1% were also first quarter record. First quarter GAAP earnings per share were $3.73 and non-GAAP earnings of $4.53 were also first quarter record.

Given record first quarter cash flow, our consolidated leverage ratio declined to 2.3 even after completing the ChartWorld acquisition at the beginning of the quarter. We also repaid $300 million of debt which matured on April 3rd on the first day of the second quarter. Turning to our 2023 full year outlook, we are reaffirming our prior sales and non-GAAP earnings per share outlook. As supply chain challenges improved modestly, we were able to exceed our original first quarter sales and earnings outlook by pulling forward some revenue from the second quarter. Consequently, by maintaining the full year guidance, we have also modestly derisked the quarterly sequential revenue and earnings slopes. While our short-cycle businesses are more economically sensitive, they were resilient in the first quarter.

We are now a little more cautious. On the other hand, we are more positive in our longer-cycle medical, aerospace, defense and marine businesses. On revenue, specifically we will continue to see total 2023 growth of approximately 5% or sales of approximately $5.73 billion with the second quarter being roughly $1.4 billion. Regarding margins, our earnings outlook now implies approximately 40 basis points of margin improvement for the full year 2023. Currently, we think the Instrumentation segment will be above average contributor to this, while margins in the other segments may increase more modestly. I will now further comment on the performance of our four business segments. Our Digital Imaging segment was founded on our first acquisition in 2006 of Teledyne Scientific, our research laboratories, and Imaging, which provides high-end infrared sensors for space and astronomy.

Since then, this segment has grown organically and through acquisitions such as DALSA, e2v, Scientific Cameras, FLIR and most recently ETM and ChartWorld to contribute almost 56% of Teledyne’s revenue today. First quarter sales in this segment increased 4.7% on a constant currency basis with foreign currency translation contributing negative 1.8%. Sales increased year-over-year for industrial and scientific vision systems, as well as for our low-dose high-resolution digital X-ray detectors. But were offset by lower sales of unmanned ground systems for defense applications. Our product families increased or decreased more modestly with higher sales of surveillance, unmanned air systems and especially — specialty semiconductor devices, offset by some lower sales of certain commercial infrared imaging and marine’s products.

GAAP segment operating margin increased 40 basis-points to 15.8% and adjusted for a reduced intangible asset amortization, non-GAAP margin decreased 13 basis points and it was lower at 21.75%. Turning to our Instrumentation segment, it is comprised of marine, test and measurement and environmental instruments, and contributes about 24% to Teledyne’s revenue. Overall, first quarter sales increased 8% versus last years with sales growing in all fields noted above. Sales of marine instruments increased a healthy 14.6% in the quarter, primarily due to strong marine defense sales, especially autonomous underwater vehicles, as well as ongoing recovery in offshore energy markets. Sales of electronic test and measurement systems, which includes oscilloscopes, digitizes and protocol analyzers collectively increased 5.3% year-over-year despite a tough comparison with the first quarter of last year.

Some softness in sales of analyzers and electronic storage and high speed networking applications was more than offset by devices for wireless and video protocols, as well as very strong sales of oscilloscopes and related accessories. Sales of environmental instruments increased 3.4% compared with last year, with greater sales of air quality, process gas and safety analyzers, partially offset by drug discovery and laboratory instruments. The other two segments of Teledyne are Aerospace and Defense Electronics and Engineered Systems that together contributes 20% of Teledyne’s revenue. In the Aerospace and Defense Electronics segment, first quarter sales increased 4.2%, driven by growth of both defense and commercial aerospace products. GAAP and non-GAAP segment operating profit increased approximately 9.6%, with margins 132 basis points greater than last year.

In the Engineered Systems segment, first quarter revenue increased 9.1% and operating profit increased 6.4%, resulting in a modest 25 basis points decline in margin from last year. Finally, first, because of our unwavering focus on improving on all aspects of Teledyne’s operations, and second, prudent capital allocation, and third, the broad geographic and end markets that we serve from short-cycle to long-cycle commercial to defense, I am optimistic that Teledyne will successfully navigate through today’s uncertain economic times as we have consistently done so in the past. Our record also shows that we have successfully dealt with multiple economic turmoils and during the ensuing recoveries have been able to acquire complementary enterprises for compounded growth.

I will now turn the call over to Sue.

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Sue Main: Thank you, Robert, and good morning, everyone. I will first discuss some additional financials for the quarter not covered by Robert and then I will discuss our second quarter and full year 2023 outlook. In the first quarter, cash flow from operating activities was $203 million and primarily reflected higher accounts receivable collections compared with the first quarter of 2022. Free cash flow that is cash from operating activities less capital expenditures was $178.6 million in the first quarter of 2023, compared with adjusted free cash flow of $58.7 million in 2022. The 2022 adjusted value excluded by $296.4 million payment to the Swedish Tax Authority related to a FLIR pre-acquisition tax reassessment. Capital expenditures were $24.4 million in the first quarter of 2023, compared with $21 million in 2022.

Depreciation and amortization expense was $82.1 million for the first quarter of 2023, compared with $86.9 million. We ended the quarter with approximately $3.16 billion of net debt that is approximately $3.82 billion of debt less cash of $665.2 million. Stock-based compensation expense was $7.9 million in the first quarter of 2023, compared with $9 million in 2022. Turning to our outlook, management currently believes that GAAP earnings per share in the second quarter of 2023 will be in the range of $3.76 per share to $3.88 per share with non-GAAP earnings in the range of $4.56 to $4.66. And for the full year 2023, our GAAP earnings per share outlook is $15.80 to $16.05. And on a non-GAAP basis, we are maintaining our prior outlook of $19 to $19.20.

The 2023 full year estimated tax rate excluding discrete items is expected to be 23%. I will now pass the call back to Robert.

Robert Mehrabian: Thank you, Sue. We would now like to take your questions. Brad, if you are ready to proceed with the question-and-answers, please go ahead.

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Q&A Session

Operator: Thank you. We can first go to Jim Ricchiuti with Needham & Company. Please go ahead.

Jim Ricchiuti: Hi. Thank you. Good morning. Robert, I am wondering if you could talk a little bit about the shorter-cycle areas of the Instrumentation business. I think you gave some color about the Digital Imaging short-cycle business, but if you look at Instrumentation, any changes that you are seeing in that shorter-cycle business?

Robert Mehrabian: Not much. There is a little bit of — in one of our businesses, like, which is our test and measurement, we make a protocol solutions — provide protocol solutions to the electronics industry. There we have some new product protocols coming out. So people are little waiting for the new ones and maybe not buying the old loans. Other than that, where the book-to-bill is almost 1, oscilloscopes are doing well and in the T&Ms we feel alright. On the environmental, the only thing that there is a little softness that we are experiencing in the pharmaceutical market, where we supply a whole range of products. There — but we are making that up by some of our air quality and other products that are doing well in this environment. So, overall, I think, we are doing okay.

Jim Ricchiuti: Got it. Since you were good enough to give us a book-to-bill, which I think was for the entire Instrumentation business. I am wondering if you could provide some book-to-bill color on Digital Imaging and the Aerospace and Defense and maybe the company as a whole? Thank you.

Robert Mehrabian: Yeah. Jim on the Instrumentation, if you put marine in, which we didn’t talk about. Marine has got a book-to-bill of 1.12. So, it’s very healthy. So because of that, it pulls Instrumentation as a whole above 1 to 1.04. Going to Digital Imaging, book-to-bill is less than 1, not substantially, but less than 1, primarily I think, because of some of the ground-based defense systems that we have which is about a little over 0.9. But having said that, we have some really large orders coming and we have also post-quarter had a large order for our Black Hornet, small air UAVs. When we had right after the quarter, as an example, we had $94 million award for those, and by the way, those are also in high demand in the Ukraine conflict.

So, overall, I am encouraged with what’s happening in Digital Imaging. There has been a little lag in the defense part, but that’s coming up as the backlog is filling in and it’s — we have better orders this quarter, first quarter than we did last year. And then on the AD&E side, I think, book-to-bill is 1.05. Engineered Systems is close to 1, but that’s lumpy. So, I think, we are going to be fine there. Overall for the company, I’d say when you add all those numbers up, it’s slightly less than 1, maybe 0.96, 0.97, but that’s not a great concern at this time. We are just being cautious as we always are, because of the uncertain times that everybody is facing. Other than that, I feel pretty good about our portfolio and its resilience.

Jim Ricchiuti: Got it. And just final question if I may, just in light of that — the some of the uncertainty that’s out there. I think you have talked about M&A. Should we still think mainly about M&A this year is more tuck-in related and then potentially as we come out of this, there might be some opportunities for larger deals in 2024. Is that better way to think about M&A, again without being specific which I know you can’t be?

Robert Mehrabian: No. I understand, Jim. I think that’s a good analysis. There might — we are obviously chasing some, what we call, string of pearls M&As. We — it’s possible that we might end up with something more mid-size near the end of the year, but definitely with our balance sheet. We have right now — we have drawn down on our line of credit, which is about 1.15 billion. We have only drawn down $25 million and it’s sitting there. We have paid all of our debt that’s coming due. We don’t have any debt payments until 2024. And we have a lot of capacity for to do larger deals, as opportunity comes, and of course, we are looking at things. But you are right, larger deals take time and it would probably be more like early 2024 or sometime in 2024.

Jim Ricchiuti: Got it. Thanks very much.

Robert Mehrabian: Thanks, Jim.

Operator: And next we can go to Greg Konrad with Jefferies. Please go ahead.

Greg Konrad: Good morning.

Robert Mehrabian: Good morning, Greg.

Greg Konrad: Maybe just to revisit Digital Imaging, is there any way to kind of decompose the organic growth, just given your short-cycle commentary, when you think about health care, machine vision, space and maybe the legacy FLIR business, just kind of what trends you are seeing and you mentioned being more cautious on short-cycle, like, how are you thinking about Digital Imaging for the year?

Robert Mehrabian: Well, first, let’s start with Q1. Organic — and let’s also do what you suggested, which is stay with the first, what we would call our historical Digital Imaging, which is DALSA, e2v and associated companies. There we had a healthy organic growth in Q1 of 6.2%, healthcare grew 9.2% and MEMS grew 8.8%. So, overall, we are very happy with that and some of those like smaller cycle vision systems had a healthy growth rate there. On the FLIR side of the equation, which would be the newer digital imaging, we had both positives or negatives. Overall, we had a contraction of about 4.8%. But that was primarily driven by our unmanned systems and primarily in the unmanned drone vehicle systems. As I said, after the quarter, we have had some very healthy awards in our UAVs, which are unmanned air vehicles.

Surveillance declined and was plus 5%. Tomography was down a little bit — a little under 4%, but uncooled and cooled cores, which are infrared cores, they were up 3%. And industrial vision system was up almost 19% — over 19%. So it was a mixed bag. The drag down for that business was primarily in the defense and primarily on ground — on unmanned ground systems. Now we had a little softness in tomography and maritime, which is our marine — Raymarine businesses. But, overall, I think, we were okay. We just have to fill out the backlog for our unmanned vehicles, ground vehicles and we will be fine.

Greg Konrad: And this might just be miss-modeling on my part, but I mean margin seemed a little late in Digital Imaging in the quarter. Can you maybe talk about price-mix going forward and how you are expecting margins to trend for the year, given your commentary? I think, you still expect them to be up, just a lesser degree than the total 40 for the company?

Robert Mehrabian: Well, right now what I’d say is, I expect the margins to be up about 30 basis points for the year, let’s start with the year and this is the overall Digital Imaging margin. So that would be pushed out on one side. I think, in Q2, we will improve sequentially on our margins and we should be fine and we are also going to take some price actions to make sure that we get there. On the overall for the company, we think the margins now would increase 40 basis points for the year and if we can have better price increases going forward, we should improve on that. So when I look at it, I’d say, look in our instruments businesses, we are going to have margin improvement for the year of almost 80 basis points, Digital Imaging about 30 basis points, Aerospace and Defense is so healthy that I will be happy to just keep our 27.1% operating margin.

Engineered Systems will probably increase in 50 basis points, and overall, the segment’s 40 basis points and the company about 40 basis points. That — I hope that helps you.

Greg Konrad: That was perfect. I will leave it to you. Thank you.