Teledyne Technologies Incorporated

Ladies and gentlemen, thank you for standing by. Welcome to Teledyne's third quarter 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, press star zero on your phone's keypad. And as a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Mr. Jason Van Wees. Please go ahead.

Thanks, John, and good morning, everyone. to our third 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 Morabian, and Senior Vice President and CFO, Sue Main. Also joining today are Steve Blackwood, who will assume the role of SVP and CFO on December 1st, Melody Sivic, currently Senior Vice President, General Counsel, Chief Compliance Officer and Secretary, who will be promoted to Executive Vice President on January 1st, and Edwin Rocks and George Bob, currently Executive VPs of Teledyne, who will assume the roles of CEO and President and COO, respectively, on January 1st. After remarks by Robert and Sue, we will ask for your questions. Of course, 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 in their periodic SEC filing. may differ materially. In order to avoid potential selected 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.

Thank you, Jason, and good morning, and thank you for joining our earnings call. These are exciting times for Teledyne. We have new leadership coming in, but we also have continuity and resilience in our programs, in our operations, and our ability to meet what we say we would do in our earnings. In the third quarter, as an example, we achieved record operating margin and earnings per share. Gap operating margin of 18.8%. was a third-quarter record. On a non-GAAP basis, the operating margin was 22.8%, which was an all-time record for any quarter. Likewise, GAAP earnings per share of $14.15 was a third-quarter record, and non-GAAP earnings per share of $5.05 was an all-time record for Teladon. Compared to last year, GAAP and non-GAAP operating margins increased 119 and 86 basis points respectively, and both GAAP and non-GAAP earnings per share increased approximately 11%. Our overall third quarter performance was led by growth in our marine medical, aerospace, and certain defense businesses, coupled with vigilant cost control. There was, however, some deterioration in certain end markets, such as industrial automation and laboratory instrumentation. Nevertheless, given our focus on operational excellence, operating margins increased, both sequentially and year over year, in digital imaging and instrumentation segments, helping generate record earnings. Given continued debt repayment through September, which totalled about $680 million year-to-date, our consolidate leverage ratio declined to just under two times. We're pleased to have added Zeno Networks to our test and measurement businesses, which also continued to perform very well in a challenging environment. In terms of our outlook, we now see total sales for 2023 growth of about 4%. or a little less than the second half versus our July outlook, with the fourth quarter sales being roughly $1.45 billion. Approximately half of this change in incremental is due to incremental currency translation headwind from July to now, and the balance being further deterioration in industrial and laboratory instrumentation markets mentioned earlier. However, given the strong margin and earnings achieved in the third quarter, we're raising our non-gap earning outlook to $19.25 at the midpoint from a prior outlook of $19.10. I will now further comment on the performance of our fourth segment. Third quarter sales in our digital imaging segment were flat compared to last year. Sales of X-ray products, infrared imaging detectors, and surveillance system increased year over year, but were offset by lower sales of unmanned ground systems and microelectromechanical systems, or MENs. Sales of commercial marine hardware and software were flat but declined organically. Finally, cameras and sensors for industrial automation declined compared to last year. Like Teledyne as a whole, the digital imaging business portfolio is exceptionally well-balanced across market segments and geographies. With the help of bolt-on acquisitions and growth in our medical and defense markets, we were able to offset declines in industrial automation and the small portion of our overall portfolio that is associated with consumer discretionary spending. Despite the flat revenue, margins performance improved considerably to record levels, with the clear businesses collectively slightly higher than segment average margins. Turning to our instrumentation businesses, this segment consists of marine instruments, test and measurement, and environmental instruments. Overall third quarter sales in instrumentation segment increased 7.4% versus last year. Sales of marine instruments increased 20.5% in the quarter primarily due to ongoing recovery in offshore energy markets, and also greater sales of acoustic imaging systems. Sales of electronic test and measurement systems, which includes oscilloscopes, digitizers, and protocol analyzers, collectively increased 2.5%. We continue to see some softness in sales of analyzers for electronic storage and data center application, but this was more than offset by sales of devices for wireless and video protocols, as well as continued strong sales of oscilloscopes. Demand for high-speed networking customers remained very healthy. and we see the Xeno acquisition enhancing our offerings in this market. Sales of environmental instruments decreased slightly compared to last year, with sales of air quality and gas and flame safety analyzers offsetting some decline in drug discovery and laboratory instruments. Instrumentation segment operating profit increased over 20% in the third quarter with gap operating margins increasing 277 basis points to 26% and 253 basis points on a non-gap basis to 27%. These were all-time records for this segment. Third quarter sales in our aerospace and defense electronics segment increased 8.1%, driven by growth both in defense electronics and commercial aerospace products. Gap and non-gap operating profit increased 11.5%, with margins 81 basis points greater than last year. Finally, in the engineering system segment, third quarter revenue increased 4.1%, but operating profit declined slightly given an unfavorable product miss, but also a tough comparison with the prior year period. In conclusion, we are pleased to continue to do what we know best, gross sales and margin in businesses with favorable markets, while cutting costs and protecting margins in those businesses where market trends are more challenging. At the same time, especially now that our leverage continues to decline, we should acquire and integrate complementary businesses. Before turning the call to Sue, I want to thank her for her more than 34 years of service to Teledyne, and I wish her a very well-earned retirement. I will greatly miss her. And finally, I want to congratulate our other executives on their well-deserved promotions announced yesterday, and I and the entire board are delighted that the same talented group of executives will continue to serve Teledyne's leadership.