Teledyne Technologies Incorporated

Q1 2022 Earnings Conference Call

4/27/2022

spk08: Ladies and gentlemen, we'd like to thank you for standing by and welcome to the Teledyne first quarter earnings call of 2022. At this time, all participants are on a listen-only mode, and later we'll conduct a question and answer session with instructions being given at that time. If you should require any assistance throughout today's call, please depress the star, followed by the zero, and one of us will be with you immediately. And as a reminder, today's call will be recorded. We would now like to turn the conference over to our facilitator, Mr. Jason Van Weef. Please go ahead, sir.
spk04: Thank you, Steve. This is Jason Van Weef, Vice Chairman of Teledyne, and I'd like to welcome everyone to Teledyne's first quarter 2022 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 Moravian, Senior Vice President and CFO, Sue Main, and Senior Vice President, General Counsel, Chief Compliance Officer, and Secretary, Melanie Sivik. Also joining today is Edwin Rocks, Executive VP of Teledi. After remarks by Robert and Sue, we will ask for your questions. Of course, though, before we get started, our attorneys have reminded me to tell you that all forward-looking statements made this morning are subject to various assumptions, risks, and caveats, as noted in the earnings release and our periodic SEC filings. And the 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's Robert.
spk11: Thank you, Jason. And good morning, everyone, to our 90th earnings call since our spinoff in November of 2019. at which point our stock price was approximately $9 a share. We began today, 2002 we began, with the greatest first quarter sales, earnings, and adjusted operating margin in our company's history. Our results and operational execution continue to reflect exceptionally well-balanced business portfolio across both in markets and geographies. Demand throughout our short cycle instrumentation and imaging businesses remain very robust, resulting in total organic sales growth of 7.8%, including approximately 100 basis points of currency translation headwind. We achieved record orders for our electronic test and measurement instrumentation and industrial imaging sensors and systems, even in a typically weak first quarter for these businesses. Sales from our longer cycle commercial aerospace and marine businesses increased considerably from last year, and backlog also grew. Both our GAAP and non-GAAP earnings were first quarter records. Gap earnings per share was exactly double compared with 2021, and non-gap earnings increased 34%. I want to emphasize that our non-gap earnings exclude only acquired intangible asset amortization, but in the first quarter, it also excluded a large tax benefit related to clear foreign tax matters, which only appear in the GAAP results. While free cash flow was lower than last year, it reflected the following items. First, bond interest payments of over $36 million made only in the first quarter and again will be made in the third quarter. Second, annual incentive compensation paid only in the first quarter, and third, a significant investment in inventory to de-risk revenue in future periods. These items will not be repeated in the second quarter. Nevertheless, our leverage ratio declined to 2.8x from 3.8x immediately after the FLIR transaction in May of 2021. Turning to our 2022 outlook, the overall demand environment across our businesses remain favorable. Even with supply chain constraints and currency translation headwind, we are increasing our expectation for the full year organic growth to approximately 6 percent from 4 to 5 percent communicated in January. Coupled with a full year sales contribution, slightly less than $2 billion from FLIR, this equates to total revenue of just over $5.5 billion for the year, roughly equal to the current consensus. I will now further comment on the performance of our four business segments. In our digital imaging segment, first quarter sales increased 185%, largely due to FLIR acquisition. But organic growth in our combined commercial and government imaging businesses was also very strong at 13.1%. Sales growth was strongest for industrial vision sensors and systems as well as our low-dose, high-resolution digital X-ray detectors. GAP segment operating margin was 15.4, but adjusted for intangible asset amortization, segment margin was 21.9 percent, or about 20 basis points greater than last year. In our instrumentation segment, Overall first quarter sales increased 7.8% versus last year. Sales of electronic test and measurement systems, which include oscilloscopes and protocol analyzers, were very strong and increased 19.1% year over year to record levels. Sales in the environmental instruments were flat compared to last year with greater sales from certain human health and drug discovery products offset by lower sales of industrial and laboratory gas detection devices. Sales of marine instrumentation increased 9.7% organically due to improved energy markets, but also record sales of autonomous underwater vehicles for both defense and commercial oceanography applications. Overall instrumentation segment gap operating profit increased 20.5% in the first quarter with operating margin increasing 245 basis points or 229 basis points excluding intangible asset amortization. Moving to our aerospace and defense electronics segment, first quarter sales increased 9.9%, driven by modest growth in defense space and industrial share sales, combined with greater than 50% increase in sales of commercial aerospace products. Gap segment operating profits increased 51.6%, with margin 710 basis points greater than last year. Finally, in our engineered system segment, first quarter revenue decreased 8.9% and operating profit and margin declined due to lower sales, but especially since we exited the higher margin cruise missile turbine engine business following the first quarter of last year. Before turning the call over to Sue, I wanted to make a couple of concluding remarks. Effective just this week, FLIR successfully fulfilled the terms of its consent agreement with the U.S. Department of State. Compliance has been always and will always be a critical component of our culture at Teledyne. But Teledyne FLIR has now moved beyond the extra burden and cost of numerous investigations and third-party audits. Finally, regarding our global defense business, which represents approximately 25% of our total sales, over the last six months, defense sales, including that of Teledyne FLIR, declined slightly. year over year, and backlog also increased. However, this was more than offset by very strong commercial orders and sales across the company. But now, with firmer U.S. and NATO budgets, the outlook for our defense has changed, creating opportunities for greater defense sales but also limiting risk for Teledyne if general economic growth decelerates in the future period. While the improvement in this sense may benefit future years the most, we are nevertheless seeing an increase in near-term bookings and opportunities, some of which we expect to benefit the second half of 2022. This is especially true for the Teledyne FLIR business portfolio, where our commercially derived but military qualified products may only require a purchase order as opposed to a lengthy appropriations process. I will now turn the call over to Sue.
spk00: 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 2022 outlook. In the first quarter, adjusted cash flow from operating activities was $79.7 million, compared with cash flow of $124.9 million for the same period of 2021. The adjusted cash flow excludes a one-time payment of $296.4 million to the Swedish Tax Authority related to a disputed pre-application 2018 tax reassessment issued to a FLIR subsidiary in Sweden. Adjusted free cash flow, that is, cash from operating activities less capital expenditures, was $58.7 million in the first quarter of 2022 compared with $110.1 million in 2021. Capital expenditures were $21 million in the first quarter compared to $17.6 million for the same period of 2021. Depreciation and amortization expense was $86.9 million for the first quarter of 2022, compared to $29.3 million in 2021. We ended the quarter with approximately $3.85 billion of net debt, that is approximately $4.13 billion of debt, less cash of $284.3 million. Our stock compensation expense was $4.3 million in the first quarter of 2022 compared to $4.2 million for the same period of 2021. Turning to our outlook, management currently believes that GAAP earnings per share in the second quarter of 2022 will be in the range of $3.44 to $3.55 per share, with non-GAAP earnings in the range of $4.32 to $4.40. For the full year 2022, our GAAP earnings per share outlook is $15.34 to $15.66, and on a non-GAAP basis, $17.75 to $18, the latter being an increase at the midpoint to our prior outlook of $17.60 to $18 that we provided in January. The 2022 full-year estimated tax rate excluding discrete items is expected to be 23.1%. I'll now pass the call back to Robert.
spk11: Thank you, Sue. And operator, we'd like to take questions. If you're ready to proceed with the questions and answers, please go ahead.
spk08: Ladies and gentlemen, we'll now begin the question and answer session of today's conference. If you wish to ask a question, please depress the 1, followed by the 0 on your touchtone phone. You'll hear a tone indicating that you've placed yourself in queue, and all questions will be pulled in the order they are received. You may remove yourself at any time by once again depressing the 1, followed by the 0. And if you're using a speakerphone, please pick up your handset before depressing the keys. Once again, to enter the queue, please depress 1, then 0. Our first question will come from the line of Greg Conrad of Jefferies. Please go ahead.
spk07: Good morning. This might be a little bit greedy, and I appreciate the conservative nature of forecasting, but it sounded like you took up the organic growth outlook quite a bit with maybe a more minimal change in EPS that you announced this morning for the year. Can you maybe talk about the dynamics there and maybe given the comments on the supply chain, you know, maybe some of the offsets to what seems like maybe slightly better volume?
spk10: I don't know, Greg. What did you call it? Greedy? Yeah.
spk07: Greedy.
spk11: Frankly, you know, we're a conservative company. right now, sitting here, we're worried about inflation, which is, as you know, is difficult. Supply chain issues, while we're managing them, and have managed them successfully, are still uncertain. There's no certainty as when that will change. So, having said that, we expect inflation revenue to grow. It was about, I think in January, I said it was 4.6% organic growth. Now I'm indicating it was 6%, or maybe a little more. Nevertheless, having said that, we have to be conservative because there's too much uncertainty. There's the supply chain, there's the inflation, there's the war in Europe, there's the shutdowns in China, and this is not the time to be effervescent. This is the time to kind of focus on what we know we can deliver and go from there. So that's my answer to that. I don't know if that helps, Greg, or not.
spk07: That's helpful. And then, I mean, just kind of baselining the outlook with the quarter. You know, when I look at the margin, you know, some of the segments were well ahead of at least our expectations. maybe digital imaging fell a little bit short. Can you maybe just level set us on the outlook for the year for margins by segment and kind of what you're expecting today?
spk11: Sure. Let's start with digital imaging. For the full year, and I'm going to combine digital imaging together, FLIR and Legacy Teledyne. We think for the full year, it'll be about 23.3%. That's full year 2022. Slightly less than what it was in full year 2021. Now, in January, we were a little more effervescent about that we thought it would be closer to 23.9, but we think now 23.3 is a better number, primarily because we are experiencing some supply chain issues there, plus we're having to pay higher prices when we do find the components that we need. Moving to the instrumentation segment, in January, I mentioned that it would be about 23.8 percent, the margin. We're increasing that now by 50 basis points because of the tailwind that we have in test and measurement, oscilloscopes and protocols. We're increasing that margin now from 23.8 to 24.3. Moving to aerospace and defense, the margin we expect to increase substantially from what we projected in January. In January, we projected a margin of 21.9%, and we expected to grow almost 190 basis points to 24%. On the flip side, in our engineered system segment, which has revenue of about $400 million and is primarily government businesses, we expect margins to end lower than what we expected in January and be at 10.4%. So when you roll all of that up for the segments, right now we're expecting the margin for all the segments combined to be 22.7%, and then when you put in corporate expense, et cetera, The total company margin would be 24.5%. I hope that helps, Greg.
spk07: That's a tough one. I'm just going to sneak in one last one. I mean, you mentioned defense and kind of the increased opportunities, and I think at one point people were worried about, you know, defense maybe bringing down the overall growth rate of Teledyne. Is there any way to maybe quantify what you're seeing in terms of, maybe what you thought of as kind of the long-term defense growth rate prior and then post some of the budget tailwinds in NATO, kind of what you're thinking at going forward today.
spk11: Okay, let me start with Q1. Overall, we saw some decrease in defense across our portfolio from Q1 of last year. about 2.5%. And most of that experience came in Teledyne FLIR. Now, having said that, the longer term, we think our defense sales should decrease in the mid-single digits, which is, you know, if you take a negative 2.5 and go to let's say 5% or so, that 7.5% turnaround, that would be, though, at the end of 22, more likely 23 and 24. And the reason I say that is while we've kind of chewed away on our defense backlog, we're not seeing significant opportunities, both in Europe as well as across the board, in FMS sales, and I can give you examples of that, but we're seeing real demand for products that we have, especially in the FLIR businesses, Teledyne FLIR businesses. Some of them directly a result of the Ukraine conflict, and some of them are, of course, because of the increased budgets that are coming in the NATO alliance.
spk10: Thank you. Thank you, Greg.
spk08: Our next question will come from the line of Jim Ricciuti of Needham & Company. Please go ahead.
spk09: Hi. Thank you. Good morning. Robert, just in light of the comments you just made, I'm wondering, is Tel Aviv thinking differently about longer-term inorganic opportunities in defense. Over the years, you guys have focused mainly on building up the commercial portfolio, and you've done that quite well. But I'm just wondering, as you think about the business, has anything changed in the way you're thinking about M&A going forward?
spk11: Okay. Jim, good morning to you. First, let me back up and say, The way we look at defense, which is not about with FLIR included, Teledyne FLIRs, it's about 25% of our portfolio. The way we like to think about that part of our portfolio is kind of like a shock absorber. When commercial businesses go up and down, especially if they go down and you have serious inflation and other things happening, become very negative, it acts like a shock absorber. But having said that, you also have to look at what's happening across the world. And the way we see it is that the conflicts have caused significant change in demand for products, especially our products from our perspective. We think we should be ready, which we are, to enjoy the fruits of that. Having said that, I am not really that convinced that we should change the balance of portfolio towards defense. And I say that with an M&A. And I say that because I don't really think it's very prudent for a company like Teledyne change strategy because of something that has happened or is happening. And I think our primary growth engine has always been our commercial businesses, and we have more opportunities there. So I think in M&A we'll probably focus on commercial businesses. Having said that, we bought FLIR, and FLIR had a substantial defense business. I went and observed it, but defense is good. It's got a predictable backlog, but it's not really – it doesn't have the kind of margins you can enjoy in the commercial domain.
spk09: Got it. Thank you for that. And also, I appreciate the color on the segments in terms of the way you're viewing the operating margins for the year – I wonder if you could turn for a moment to, to gross margins, which were, were quite strong in, in Q1. And I'm wondering if you could elaborate on what some of the biggest factors were in that and maybe how we should be thinking about gross margins going forward. I know there's some puts and takes, obviously some of the, the cost pressures, but mix also, but is there any, any color you could provide on, on the strength there?
spk11: Yeah. Um, Jim, you're obviously very familiar with Teledyne. If you look at our Q1 gross margins of last year, it was about 38.9% for the legacy Teledyne. We didn't have FLIR at the time. FLIR, on the other hand, Teledyne FLIR, enjoys higher gross margins, than us, about 55% or did historically, or 50%, I'm sorry. So when you combine those two together, the combined company gross margin in the first quarter moved from 38.9% to 43%. Having said that, we also enjoyed higher margins in our test and measurement businesses because they grew significantly, 19.2%. That's in our instruments group. And our aerospace and defense margins moved up huge because of the about 50% increase in our commercial aerospace business. So we enjoyed two tailwinds. buying a business, which is now a significant part of our portfolio, that had higher gross margins, that are legacy businesses, and then turnaround that we experienced in our commercial aerospace business, and then really good record orders and revenue in our test and measurement businesses.
spk09: In commercial air, presumably, you see that recovery continuing, it looks like, at least from what we're hearing elsewhere. Is that fair to say?
spk11: Yes, I would say so. We do have some concern going forward, only because the comps are going to be a little tougher in Q3, Q4. Last year, we were in a trough, as you remember. Well, we're encouraged. We do a lot of both OEM products for commercial aircraft, but we also do a lot of aftermarket products. So we're encouraged, let me put it this way.
spk09: Okay, thanks. I'll jump back in the queue.
spk11: Thanks, Jim.
spk08: Our next question will come from the line of Joe Giordano of Cohen. Please go ahead.
spk05: Hey, good morning, guys. Good morning, Joe. So just wanted to start with the growth rate in the FLIR defense portfolio for the quarter. I know that was down. So FLIR overall was down for the year on year. Just how was that? How did that one cue play out relative to what you were thinking internally three months ago? And has your overall like mid single digit growth of the FLIR portfolio this year changed? And maybe you can, if you want to loop that in with, like, your updated views on organic growth by segment, that's probably helpful, too.
spk11: Sure. As you well know, Joe, FLIR, as you mentioned, the defense businesses in FLIR, they declined year over year. If you went to the historical defense business, they declined about 10.9% year over year. But, you know, That's also consistent with our own engineered systems segment that declined about 9% year over year. Some of the primes that we were listening to this week, their businesses declined about 8%. Having said that, we think in Q2, the clear defense, And our overall defense should be relatively flat and then pick up in the third and fourth quarters, I'm going to say, plus 5%. And the reason I say that is because the overall market that we're seeing and the opportunities that we're seeing in the defense businesses are positive. both in Europe as well as in this country. So when you look at it that way, yes, we did have a decline in Q1, but we had a decline in our existing defense business, especially engineered systems, which also is recovered as the year goes forward. In the year overall, now you've got to look at the other side of FLIR, which is their commercial businesses. The commercial businesses did reasonably well in the first quarter. They went up about 2.3% compared to last year. And last year they had a little bit, not much, but they had a little bit of sales in elevated skin temperature products. So in total, I think we expect for the year the revenue year over year to go up for the overall FLIR business, Teledyne FLIR, I should say, to about, from what was last year, 1.895 billion, if you rolled it all in historical as well as after the acquisition, to about 1.970, which would be the highest over the last three years. that be a combination of defense and commercial? I hope that answers the question, Joe.
spk05: That's helpful. Thank you. I was just curious, like, your point on this is not the time to be effervescent and in full year outlooks because of what's going on in supply chain and what's going on with inflation. I think that's totally fair. If you look at your portfolio, like what's the most concerning part? Like which do you think is the least protected of all your businesses if, you know, something was to happen negative globally?
spk11: I don't want to venture the guess, Joe, because I don't know. But let me say this. We have intentionally balanced our portfolio for just these kinds of times. When times get uncertain, various parts of our portfolio absorb the shock from the markets and from the economies. That's why, if you look at our history, when bad things happen, right afterwards, some other companies may not deal with it as well. Right afterwards, we buy someone that has not done as well. So I would say that I feel comfortable with our portfolio. We're guiding the street on what we think we can deliver. And we don't want to be too, as the word, effervescent. On the other hand, if bad things continue happening, as they are now, might be a good opportunity for us coming out of this with a significant M&A. We don't see a warning sign at this time, Joe.
spk05: Okay. And if I get just one last quick one, the test and measurement growth is really strong again. How sustainable is that at that level? Do we start moderating on the rates and kind of stay on a gross dollar basis at similar levels? How do you think about that business?
spk11: Well, again, going with our team, I'm going to say net Gap earnings, gap growth, net growth for the year should be about 4.5%, 5%, even though we had such a good first quarter. We're seeing better orders, by the way, even the last three weeks. But that's an area that we sell significant amount of products in China. And nobody knows what's going to happen with the lockdowns there. And it's a short cycle business, and the comps are going to be tougher as we move forward because we did pretty well the last three quarters of last year. So I would say we've increased our outlook from January a little bit, from let's say 4% to 4.5%. We'll stay with that for now to see how things evolve as time goes on.
spk05: Thanks, guys.
spk08: Our next question. Our next question comes from the line of Andrew Buscaglia of Barenburg. Please go ahead.
spk06: Hey, good morning, guys.
spk11: Morning, Andrew.
spk06: So I was hoping you could maybe add a little bit more commentary specifically. You obviously sound more positive on defense and government business, specifically with FLIR, too. And FLIR had always kind of talked about, you know, these big longer-term programs of record they were after. and very positive on their unmanned systems business, which was small, but definitely an area they saw as a big source of growth. When you make those comments, are you referencing things like that, or is there any other color you can give specifically into what kind of the nature of these awards are, or potential opportunities, you said?
spk11: Yeah. Let me first comment on the... long-term legacy systems and programs of record. Some of that has happened, will happen. Some of it I'm not so sure because I don't look through the same lens as the previous management did. Having said that, there are significant opportunities in soldier-borne sensor systems. And when you mentioned unmanned systems, there's a range of them, as you well know. If you move to the air, there is, of course, the Black Hornet, Black Hornet 3, which is five inches in size, very silent, can go about a mile, come back, BGPS active, performing GPS-denied environment. We're seeing real interest in that, and that's doing very well. On the flip side, on the ground systems, our packbots are doing really well. Actually, some of them, we saw some videos, are being used in Ukraine by the Ukrainian forces that we trained before the war. In the... Gimbals that we have, they're used and they're doing very well. Some of them actually were on the new Ukraine's new helicopters in Kyiv. Our IR sensors go into various drone manufacturers and we're seeing a lot of demand across all of our unmanned systems for not just drones, but also for the sensors that go on top of those. We also have, in the longer term, as you said, programs. We also have an interesting opportunity, which has to do with a larger drone. That's a little bit like what is known as the switchblade. That drone would be, if we can achieve a program of record, coming to the words you said, if we can achieve program of record for that drone, that would be a real winner. It's in the final stages of prototyping. We should be able to get some revenue by the end of the year. It has really strong capability, it's a vertical takeoff and landing drone. It has opportunities to carry munitions. It's recoverable, that is if you wave off an assignment. You can wave it off within the last two seconds and bring it back. It's got a 30 minute flight time, And you can go out 20 kilometers. So when I think about something like that, that's akin to an opportunity that we can enjoy when we get that certified and flying. Having said all of that, I think it's important to recognize that getting into programs off record is not that easy. And what we like to focus on is get what you can now, sell what you can now, and then plan for the future over the long term, but don't hedge all of your eggs in that basket. I don't know whether that helps.
spk06: No, very helpful. No, it sounds encouraging. And maybe you could comment, too, you know, the other news this quarter is that the consent agreement is going away. Could you just remind us the impact of that? It sounds like, I forget if that is included in your kind of annual synergy estimate and where we stand with synergies from FLIR at this point.
spk11: Yeah. The total cost of that for FLIR and then Teledyne was of the order of $87 million. It started in 2018, and we successfully ended it this quarter. We had some expenses in Q1. We also had to pay $3.5 million to the government that we were obligated to pay. We've built that into the synergies for going forward already. But part of the reason that we're able to have the synergies that we enjoyed with Teledyne FLIR is that when we bought them, we said, look, we expected to have accretion in the first year. And we thought that at the time, the accretion would be somewhere between $40 million to $80 million this year. So where I sit right now, I would guess $80 million would be the low end, and it would be closer to $100 million in synergies. And that kind of absorbs some of the opportunities that we see now that the consent decree is behind us.
spk06: Okay, got it.
spk11: Okay.
spk08: All right, thank you.
spk11: Thank you. Thank you, Andrew.
spk08: Our next question will come from the line of Christine Lewag of Morgan Stanley. Please go ahead.
spk01: Hey, good morning, everyone.
spk11: Good morning, Christine.
spk01: Looking at the supply chain constraints, last quarter you had mentioned that alternative sourcing has thus far proven successful in about 60% to 70% of cases. Are these trends holding steady, improving or worsening? And also, what other initiatives can you implement to manage the risk?
spk11: Thank you, Kristen. That's a very good question. Let me start with the effect. the net effect. We think in the first quarter of this year, the one just behind us, the effect of shortages affected us by about $74 million. We think going forward, that's not going to be changing all that much. Having said that, We also were able to buy components, find components, or redesign our products that let us sell over $100 million of products that we couldn't have if we had not enjoyed that. We have a very robust activity dealing with shortages in our procurement process. led by Paul De La Rosa, and 30 of our business units. So they do three things. First, they identify who has the shortages and what are the common suppliers for those shortages. And we then deal directly as a company with that supplier and prioritize what we can buy from them. We may have shortages in various businesses, but one may not affect our revenue as much as the other. So that helps us focus on the high-priority ones. Second, we source from third parties. Especially, we have our own people in the parties, plus we have some of our suppliers, primary suppliers for our semiconductor products. requirements that are looking for parts. So if we're missing like 700 parts today, we may have already found maybe 450 parts that we can enjoy. But we have to, of course, bring them in and qualify them. We're not just going to take them and put them into our product. We have to qualify them like we do everything else. And then we also, lastly, look at redesign. That is, can we redesign not just the specific part, but can we redesign the product, let's say the camera that we're selling, to avoid the part that has significant shortage, especially if we see forward, looking forward. So long answer to your question is the following. Yes, we're going to have some revenue shortfall because of that, but it's not going to be killing us. It's going to be in the same level that we had. And part of it is alleviated because we've also put in some inventory. That's one of the reasons that we talked about our cash. We've increased our inventory in sending on our shelves our products and also materials that we have either bought long-term or products that once we get the part, we can get it out the door. There's a whole combination of these things that's kind of so far has helped us avoid significant effects on the company as a whole. I hope, Christine, that answers your question.
spk01: Yeah, Robert, that was really helpful. And then if I could do a follow-on. Is the supply chain issue that you're seeing... for Legacy Teledyne the same as what you're seeing for FLIR, or is there a difference between the two?
spk11: Not much difference, Christine. I think that if digital imaging, as an example, which is now 60% of our business, it's the same because we make very similar products. Different end markets. similar product, complexity, et cetera. So I would say it's the same. There's some exceptions here and there. By and large, though, they're the same.
spk01: Great. Thank you very much, Robert.
spk09: Of course, Tristan.
spk08: Our next question comes from the line of Noah Poppenack of Goldman Sachs. Please go ahead. Hi. Good morning, everyone.
spk10: Good morning, Noah.
spk03: Robert, can you quantify how much inventory you added in that buffer stock process?
spk11: I'm going to say about $55 million. I hate to admit it, but it hurts me.
spk03: Well, it seems sensible with what's happening at the moment. And it sounds like you're saying you don't expect that to alleviate anytime soon. So you'll just hold the inventory balance at that level as opposed to burning that down through the year?
spk11: We're going to burn it down, Noah. It's either that or my clothes, but we're going to burn it down.
spk03: I mean, if you're not expecting supply chain to improve, won't you need to hold buffer stocks?
spk11: Yeah, we'll hold some. Of course we will, Noah. But here's the thing. I think the combination of the things that I just mentioned, is making us feel a little more comfortable. The other thing is some of our businesses have been a little too conservative. We had a plan to reduce our inventory this year by a similar amount. So now it's gone up that much. So if we can bring it back, we still have ample inventory. We just have to move it around so that the... measurement is such that it doesn't really hurt our cash flow. We have, for example, the problem we have, for example, with wafers. That's something that's long-term, and we've got to buy it. We buy 30,000 wafers in digital imaging, and we've got to buy it and we've got to keep it, because that's one that you cannot buy in the market, whether it's East Asia or whether it's here, you can't buy that. So that one we do. But there are other things that we can get rid of this year.
spk03: Okay. Are you still expecting total company bottom line full year free cash to net income conversion over 100%?
spk11: Very close. Very close.
spk03: Okay.
spk11: I think that's what I told the board yesterday.
spk03: Okay. On the cost input inflation piece, what is the rate of increase that you're seeing at the moment?
spk11: Yeah, that's a good question. There's two parts to that. One of them is materials, and the other one is wages. On the material side, with everything that's going on in the world, our costs are increasing at this time about 3.5% of our gross profit cost, cost of our goods. And frankly, we look at that from both the business side, also look at it from the corporate side. Wage inflation is a little less, maybe 3.25%. When you roll that up all together, we're seeing about cost increases of 3%, let's say. Got it. The flip side is we also are increasing prices ourselves where we can, not in every program. And we're pretty much offsetting that with price increases. So net-net so far being very positive. careful and prudent in what we do, we've managed to negate those two. We'll have to work very hard to keep doing that.
spk03: Are you raising price at a rate equal to or slightly greater than the cost inflation, or are you actually maintaining the price-cost gap that you previously had?
spk11: I think I would say we're maintaining it.
spk03: So you already had pricing and you're accelerating the pricing to maintain the price cost gap.
spk02: That's it.
spk03: Okay. And then last thing I wanted to ask is you've discussed a new opportunity set evolving on the national security front. As the combined business now, what percentage of your or government related to national security revenues are domestic versus international?
spk11: Let me think for example. I think about overall we're 25%. I would say about just under 20%. 19% is U.S. and DOD. And I'd say about 5% to 6% is foreign at this time.
spk03: Got it. Okay. Thank you. I appreciate it.
spk11: Thank you, Noah.
spk08: Our next question is a follow-up from the line of Jim Rusciutti of Needham & Company. Please go ahead.
spk09: Yeah, I may have missed it, but Robert, I was wondering if you provided any information on book-to-bill either for the company or for the segments, if there was much variability in the book-to-bills that you saw on the different segments.
spk11: Yeah, that's a good question, Jim. Let me start with the total company, if I may. Book-to-bill is pretty healthy. It's 1.09. We have really good backlog, by the way, or the highest backlog that I remember. We have about $2.95 billion of backlog. And with backlog, we define very carefully kind of money that we already... No, it's going to come in. So our book-to-bill of 1.09 is pretty healthy, but it's variable across the company. Let's start with digital imaging. Digital imaging is a little less than the whole company. It's about 1.04, but still healthy. In instruments, it's close to the company total. It's worth 1.08, with marine being a little higher. than environmental, marine being at 1.13, and test and measurement being at 1.07, environmental at 1.04. So the total instrumentation is the same as the company, at 1.08. Aerospace and defense electronics, as I mentioned, because of the commercial aerospace comeback, we have a 1.13. book to bill. And in engineered systems where our revenue went down for the reasons I mentioned, partly because we got out of the turbine engine business after the first quarter of last year, plus we've been eating into our backlog, we have some really nice additions. Our book to bill is 1.38, but I'm always cautious on that one because that's a long-term program lumpy program wins. So overall, 1.09, that's pretty good for us in this environment.
spk09: Got it. That's helpful. Thanks, Jim. Thank you.
spk08: There are no further questions in queue at this time.
spk11: Thank you very much, Operator. I'll now ask Jason to conclude our conference call, please.
spk04: Thanks, Robert. And again, thanks, everyone, for joining us this morning. And if you do have follow-up questions, please feel free to call me at the number on the earnings release. And, of course, our earnings releases are available on our website, teledyne.com. Steve, if you could conclude today's conference call and provide the replay information, we would much appreciate it. Goodbye, everyone.
spk08: Certainly, Mr. Van Weest. Ladies and gentlemen, that does conclude our conference call for today, which will be available for replay today at 2 p.m. Eastern time until May 27th, midnight of that day. You may access the replay by dialing 866-207-1041 and entering an access code of 580-5962. If you're dialing from an international location, please use 402-970-9000. and the access code of 580-5962. Once again, on behalf of today's panel, we'd like to thank you for joining today's Teledyne teleconference call, and thank you for using our service. Have a wonderful day. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-