Teledyne Technologies Incorporated (NYSE:TDY) Q1 2024 Earnings Call Transcript

Teledyne Technologies Incorporated (NYSE:TDY) Q1 2024 Earnings Call Transcript April 24, 2024

Teledyne Technologies Incorporated misses on earnings expectations. Reported EPS is $4.55 EPS, expectations were $4.64. TDY isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Teledyne Q1 2024 Earnings Call. [Operator Instructions] At this time, I’d like to turn the conference over to your host, Jason VanWees. Please go ahead, sir.

Jason VanWees: Hi. Thank you, and good morning, everyone. This is Jason VanWees, Vice Chairman. 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 Bobb; SVP and CFO, Steve Blackwood; and Melanie Cibik, EVP, General Counsel, Chief Compliance Officer and Secretary. After remarks by Robert, Edwin, George and Steve, we will ask for your questions. However, before we get started, the attorneys have reminded me to tell you that all forward-looking statements made this morning are subject to various assumptions, risks and caveats as noted in the earnings release and their periodic SEC filings.

And of course, actual results differ materially. In order to avoid potential selective disclosures, this call is simultaneously being webcast and a replay both by a webcast and dial-in will be available for approximately one month. Here’s Robert.

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 margin, record adjusted earnings per share, and record free cash flow. While overall orders remained strong, sales were impacted by deterioration in some of our short-cycle imaging and instrumentation markets. We have previously assumed 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, and we now forecast full-year sales in those product families to decline meaningfully in 2024. 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 in ’24 versus ’23. Within the Digital Imaging segment, year-over-year sales declined due to significantly lower sales of machine vision sensors and cameras related to industrial automation. However, this was partially offset by organic growth and significant margin improvement at Teledyne FLIR, given our unmanned system businesses, growth and the resiliency of our core Infrared Imaging businesses. Similarly, in Instrumentation, we were relatively flat, where significant reduction in sales of Test and Measurement Instrumentation were almost entirely offset by marine electronics and unmanned underwater system.

And despite the overall flat sales segment, margin increased considerably. In our smallest segment Engineered Systems, which is largely a U.S. government prime contractors, sales were impacted by the very late approval of the U.S. 2024 budget. We also revised estimated progress and cost to complete the uncertain contracts, resulting in some revenue and profit reversal. 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 appropriate time for us to add stock repurchases to our capital deployment plan. I will now turn the call over to Edwin and George who will further comment on the performance of our four business segments.

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. 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 plus 30%. Other year-over-year changes were less significant, but included continued growth in our space-based imaging business, resilient sales in healthcare and FLIR’s core infrared and maritime businesses, and declining sales of semiconductor-related micro electrical mechanical systems, or MEMS. As Robert mentioned, the FLIR businesses grew organically and for the third consecutive quarter were positive contributors to overall segment margin. Finally, segment orders were healthy with a first quarter book-to-bill of 1.06 times. George will now report on the other three segments which represent the remaining 45% of Teledyne.

George Bobb: 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 systems, and gas and flame safety analyzers more than offset by lower sales of drug discovery and laboratory instruments. Sales of Electronic Test and Measurement Systems, which includes oscilloscopes, digitizers, and protocol analyzers, decreased 18.2% year-over-year on the toughest quarterly comparison of 2024 versus 2023.

Overall Instrumentation segment operating profit increased in the first quarter, 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 Teledyne sales, first quarter sales increased 7.2%, driven by growth of Commercial Aerospace and Defense microwave product. GAAP and non-GAAP segment operating profit increased year-over-year with segment margin increasing approximately 80 basis points. 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 Robert.

Robert Mehrabian: Thanks, George. In conclusion, orders have been strong for two consecutive quarters, 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. So while our current outlook for full-year sales is flat with 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 were partially offsetting declines in our longer cycle Defense and Energy businesses. Hopefully this time, the recovery in the short cycle businesses would be shorter. In any event, during the 2014 to 2016, we executed approximately $400 million of opportunistic share repurchases, 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.

Stephen 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 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 billion in 2023. Cash flow increased in the first quarter due to stronger working capital performance. 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.

We ended the quarter with approximately $2.33 billion of net debt, that is, approximately $3.25 billion of debt less 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. And for the full-year of 2024, our GAAP 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 discrete items, is expected to be 22.5%. I will now pass the call back to Robert.

Robert Mehrabian:

Operator:

Operator: [Operator Instructions] At this time, our first question is going to come from Jim Ricchiuti with Needham and Company. Please go ahead.

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Q&A Session

Jim 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?

Robert Mehrabian: In terms of the gross margin, we’re looking at relatively flat gross margins of somewhere around 43%.

Jim Ricchiuti: Okay.

Robert Mehrabian: Yes.

Jim Ricchiuti: All right, Robert with the shift in capital allocation, I’m wondering, what is this? What does this really 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?

Robert Mehrabian: All right, Jim. Kind of, but let me just start with some numbers that are significant. Our debt-to-EBITDA 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 FLIR in acquisition. If we don’t do anything else, by the end of the year, our debt to EBITDA ratio will be closer to 1.3, where it is at 1.7 today. So 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 shares because of stock option exercises and restricted stock awards. We’d like to get that off the table first. But at the same time, we have a lot of capacity for acquisition.

We can spend up to $1.5 billion, $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 it with all the various regulatory hurdles that you have to go through, 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 ’16. We bought our shares back, 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 it to be right after that, because we had the financial wherewithal. I don’t know if that answers your question.

Jim Ricchiuti: It helps. I mean, in the past, at least, more recently, you’ve talked about valuations still being a bit on the rich 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?

Robert Mehrabian: Not yet. On the other hand, I have to tell you, Jim, they haven’t all come out with their earnings. And in this market, kind of a bifurcated market, I expect that some of those will come down and there will be just like it did before. Interestingly enough, history does repeat itself. It doesn’t repeat itself on the time scale that we always expect, but repeats itself.

Jim Ricchiuti: Got it. Thanks very much.

Robert Mehrabian: Thank you, Jim.

Operator: Our next question is going to come from Greg Konrad with Jefferies. Please go ahead.

Greg Konrad: Good morning.

Robert Mehrabian: Good morning, Greg.

Greg Konrad: It is a bit of an unusual question, but one I’ve been getting from investors. And in light of the uncharacteristic guidance cut, which there hasn’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 what’s really changed just given some of these uncharacteristic items, or is this just you think about it as part of the normal cycle?

Robert Mehrabian: Well, two things. First, in the 25 years or so, Greg, we’ve only had this occasion in four earnings, almost 100 earnings calls and release us. We’ve experienced this four times, 4%. So it’s not something that happens very frequently. 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 — we’re hitting the ball out of the park. And Defense, of course, is doing well. With recent passage, etc., we intend — 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 businesses.

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. What is different today from the past is that, Teledyne can absorb those kinds of shock much more easily than it could before. In 2015 to ’16, when oil went from over $100 down to $30, that was a shocker to Teledyne, because our revenue was only $2.5 billion, $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 different and can absorb shocks like that. And we did this quarter, everything else being equal. But when I look at it, I said, look, we had two hits that we took in one quarter. One of them was this significant decline in Industrial Automation and Semiconductor.

But 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 Engineered System business, which was unexpected, 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, yes, we took a hit, and we’re taking our revenue down by $220 million out of 5.9 to 5.7. In the old days, at those days, we’ve taken a $220 million hit that would have been just devastating. We recovered those times, those kinds of shocks, I think we’ll recover this time just as well, if not better because we have the muscle to and the ability and the credit by companies and when necessary buy back our stocks.

Greg Konrad: And then I appreciate that. And maybe just kind of a follow-up to that. I mean, just thinking back about to what Teledyne did out of the oil and gas downturn and there was the sequester before that and impacted defense. I mean, if I remember back, you took pretty aggressive actions and we saw what margins and growth did out of those two downturns. I mean, is there similar actions that you’re undertaking on the short cycle side? Does that offer opportunity maybe to examine the margins where you have an even better kind of trajectory coming out of market recovery?