Teledyne Technologies Incorporated

Ladies and gentlemen, thank you for standing by. Welcome to the Teledyne Technologies Third Quarter Earnings Conference Call. At this time, all parties are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, you can press star and then zero. And as a reminder, this call is being recorded. I'd now like to turn the call over to our host, Mr. Jason Van Wees. Please go ahead.

Good morning, everyone. This is Jason Van Wees, Vice Chairman of Teledyne. and I'd like to welcome everyone to Teledyne's third 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 Morabian, Senior Vice President and CFO, Sue Main, SVP General Counsel, Chief Compliance Officer and Secretary, Melanie Sibic, and also Edwin Rocks, Executive VP of Teledyne. After remarks by Robert and Sue, we will ask for your questions. Of course, though, 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 caveats, as noted in the earnings release and our periodic SEC filings. 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. It will be available for approximately one month. Here's Robert.

Thank you, Jason. Good morning, and thank you for joining our earnings call. I'm very pleased with our performance this quarter, as well as Teledyne's long history of navigating challenging markets. Despite the strong dollar, supply chain constraints, and inflation, we achieved record third quarter sales, earnings, operating margin, and free cash flow. Excluding foreign currency headwind, which negatively impacted third-quarter sales growth by approximately 3% or $39 million, core growth in local currency would have been 6.9%. In addition, year-over-year reported sales increased in all segments despite the FX headwind. Non-GAAP earnings of $4.54 was a third-quarter record and just shy of our all-time record. And our earnings quality was also very high, given our largest effective tax rate in several years. Overall, orders and demand remain strong, which is a testament to the strength of our balanced business portfolio. Total company book-to-bill was 1.06, and while orders remained reasonably healthy in our short-cycle commercial businesses, they were particularly strong in our longer-cycle government, marine, and aviation businesses, and quarter-end external backlog of approximately $3.2 billion was also a record. Record third quarter free cash flow of $252 million improved for the second consecutive quarter and was 116% of adjusted net income. Our acquisition pipeline is growing. And we're pleased to announce, we were pleased to announce, the pending acquisition of ETM earlier this morning. Turning to our 2022 full-year outlook, with our strong operating performance in the third quarter, we're able to increase our full-year earnings outlook while de-risking the prior heavily weighed Q4 forecast. On revenue, given our current exchange rate and the U.S. government's continuing resolution, as well as the evolving semiconductor and technology export controls, we're a bit cautious at this time and now project four-year sales of roughly $5.45 billion. In the third quarter, we also took the opportunity to refocus Teledyne FLIR by eliminating some smaller money-losing products to help improve our margins. And as a result, we had some cost towards our revenue. Finally, while supply chain constraints continue to limit shipments, we have seen a modest, very modest, improvement in recent weeks, at least with regard to availability of certain printed circuit boards as well as electronic components. I will now further comment on the performance of our four segments. Starting with our digital imaging segment, third quarter sales increased 2.3% despite currency translation headwind of nearly 4%. Sales growth was strongest for industrial and scientific vision sensors and systems, as well as for our low-dose, high-resolution digital X-ray detectors. Sales of commercial infrared imaging cameras and components also increased. Gap segment operating margin was 17.2%, But adjusted for intangible asset amortization, segment margin was 22.9%, 170 basis point improvement from the second quarter of this year. In our instrumentation segment, overall third quarter sales increased 6.7% versus last year. Sales of electronic test and measurement systems which include oscilloscopes, digitizers, and protocol analyzers, remained strong and increased 9.7% year-over-year, with growth in all major geographies and product categories. Sales of protocol analyzers across numerous industry standards, such as peripheral component Interconnect Express, or PCI Express, Universal Serial Bus, or USB, and High Definition Multimedia Interface, HDMI, remain strong, as well as sales of oscilloscopes and our unique cross-sync product, which combine oscilloscopes and protocol analyzers together. Sales of environmental instruments increased 6.3%, compared with last year, with greater sales of both drug discovery and laboratory instruments, as well as air monitoring and process gas analyzers. Sales of marine instrumentation increased 5.1 percent in the quarter, primarily due to near-record sales of autonomous underwater vehicles for both defense and commercial oceanography applications. Overall, instrumentation segment profit increased 12.9% in the third quarter, with gap operating margin increasing 126 basis points to 23.2%, and 83 basis points on a non-gap basis, excluding intangible asset amortization, the margins increased to 24.5%. In the aerospace and defense electronics segment, third-quarter sales increased 4.8%, primarily driven by a 20.7% increase in sales of commercial aerospace products. Gap segment operating profit increased 23.4%, with margin 349 basis points greater than last year. And finally, in our engineer system segment, third quarter revenue increased 7.2%, and operating profit also increased slightly. Before turning the call over to Sue, I wanted to make a couple of concluding remarks. Over the last 18 months, we have endured the same challenges as most companies, that is, record inflation, supply chain constraints, and now strong US dollars. At the same time, we completed the integration of Teledyne FLIR, our largest acquisition, and then we rapidly leveraged. While the operating environment remains challenging, We're glad to be back to doing what we do best, investing in our businesses to drive organic growth, being vigilant on costs and simplifying our operations to increase margins, and finally, acquiring and integrating complementary businesses.