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.

Sue? Thank you, Robert, for the kind words, and good morning, everyone. I will first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our fourth quarter and full year 2023 outlook. In the third quarter, cash flow from operating activities was $278.2 million. Free cash flow, that is cash from operating activities less capital expenditures was $255.2 million in the third quarter of 2023 compared with $252.2 million in 2022. Capital expenditures were $23 million in the third quarter of 2023 compared with $16.7 million in 2022. Depreciation and amortization expense was $76.9 million for the third quarter of 2023, compared with $80.8 million. We ended the quarter with approximately $2.74 billion of net debt, that is approximately $3.24 billion of debt, less cash of $508.6 million. Our stock-based compensation expense was $8 million in the third quarter of 2023, compared with $6.7 million in 2022. Turning to our outlook, management currently believes that GAAP earnings per share in the fourth quarter of 2023 will be in the range of $4.07 to $4.21 per share, with non-GAAP earnings in the range of $4.95 to $5.05. And for the full year, 2023, our gap earnings per share outlook is now $15.82 to $15.96. And on a non-gap basis, we are raising our outlook to $19.20 to $19.30. Both the fourth quarter and full year non-gap outlook excludes estimated pre-tax charges for further FLIR integration costs. The 2023 full-year estimated tax rate excluding discrete items is expected to be 22.1%. I will now pass the call back to Ali.

Thank you, Sue. Operator, we'd now like to take questions. If you're ready to proceed with the questions and answers, please go ahead.

Thank you, sir. Ladies and gentlemen, if you're using a speakerphone or a Bluetooth-connected device, please switch over to your handset if available so we can hear you clearly. To queue up, press 1-0 on your phone's keypad. You'll hear a tone indicating you've been placed in queue and can withdraw from queue by pressing 1-0 a second time. Once again, to queue up, please press 1, then 0. And we'll go to our first question. It's coming from Jim Ricciuti with Needham & Company. Please go ahead.

Good morning, Jim.

One moment. Your line didn't open properly, Jim. One second, please. Okay, there you go. It just got hung up. Go ahead. You may proceed.

Thank you. By the way, congratulations, Sue, and congratulations to everyone else on the new appointments. Robert, maybe a question for you. You talked about the booking strength at FLIR last quarter, and I'm wondering how did that business fare? to three from a booking standpoint, and what's the near-term outlook look like in the Teledyne FLIR business? And maybe as a follow-up, if you could provide a little bit more color on the overall level of bookings and various bookings at the segment level. Thank you.

Thank you, Jim. I would say on the FLIR specific, we're moving up to 0.93, 0.95 at the present time. with improvement in the defense segment. And defense is going to be over one, actually, for clear defense. We had an inflection in the defense businesses there in the second quarter, and we have some really good new awards that makes us feel good about that domain. Going to the rest of overall book-to-bill, Jim. I will exclude the engineer system because sometimes it would, when big, lumpy orders might increase book-to-bill to 1.4, 1.5, or drop it to 0.6, depending on the quarter. So if I exclude that, I think we will be over 0.9 at this time. But that is not a big concern at the present because where we have some softness in certain markets, we are gaining traction in markets like energy, defense, healthcare, and that's why our margins are improving and we're projecting better earnings as we go forward.

Got it. Can you give an update on the facilities realignment at FLIR, and when do you expect to see the meaningful improvement on margins as it relates to these moves, or maybe you're already starting to see some of those benefits?

Yeah, Jim, we're already seeing those benefits. First of all, most everything will be done in the March to April timeframe. The reductions in force A majority of them have happened, and the rest will happen in the Q4 timeframe. The facility closures, transfer of one facility to another, that will happen early next year. But having said that, coming back to the margins, FLIR margins have really improved this quarter, both because of the cost reduction, also because of the mix of businesses that we have, and digital imaging as a whole, which includes DALSA and E2B. At the end of last quarter, we were looking at perhaps a little margin decrement of 15 basis points. That has not turned it on. We expect for the year to be margins to be up 20 basis points. About 35 basis points, 40 basis points improvement over the quarter because of the focus on cost.

Got it. Thank you very much, and I'll go back into the queue.

Thank you, Jim.

Our next question comes from Ron Epstein with Bank of America. Mr. Epstein, go ahead, please.

Hi, good morning. This is Jordan. I'm for Ron.

Morning, Jordan.

So I just have a quick question. Could you guys walk us through any of the exposure you guys have to the Israel-Palestine conflict? And if you're seeing any increase in Heritage FLIR program interest or any big changes coming from outlays?

I think we have some background noise. I think basically... We expect in the long term to have some orders in our defense businesses from that. We are a supplier, obviously, and we think that the conflict, unfortunately, the conflict is what it is, but I think I'm not at liberty to disclose, but we have contributed to some of the defense mechanisms that are used by Israel. The other part is that the first thing that will happen is that there will be a refreshment of the stockpiles in the defense businesses, both because of the conflict in Israel, but also as well as the conflict in Europe. And these present themselves as obviously long-term opportunities, both the FLIR defense programs, but also our aerospace and defense segment that has a lot of components and subsystems that go into various products.

Great, thank you.

Thank you, George.

Next we go to Joe Giordano with TD Cohen. Go ahead, please.

Hi, good morning, guys. Morning, Joe. I'm just curious on the management changes that you articulated for January 1st. Is there any real change in the org structure internally just in terms of how the businesses are going to roll up? You have a COO now. It's just Just curious if there's any kind of like structural changes in how the business is going to report.

Yeah, I think that's a good question, Joe. Two things. First, we have one subsegment, which is in the instruments businesses. Remember, instruments consists of marine, environmental, test and measurement. The marine already reports to George Bob. the test and measurement and environmental report to me. Those would begin reporting to George in January. Edwin has been running our biggest segment, which is our digital imaging segment. He'll continue running that for a while, but as time goes on over the next 12 to 18 months, they will begin harmonizing, George learning more about the digital imaging businesses, and Edwin learning more about the businesses that George is running at the present time. The resilience to all of this is that I'm not going anywhere. We'll continue to work together, the three of us. Also, of course, with others like Jason and Steve Blackwood, and Melanie, to make sure that all the assignments changes happen slowly, orderly, and don't upset any of our market leading products that we're focused on. So I see this as a continuum, but one in which both Edwin and George take more responsibility, and I move to more to worrying about how to allocate capital with Jason, do more M&A, and also improve our margins, which is something we have to do continuously.

I appreciate that quote there. If I go over to DI margins, I mean, obviously that's been a focus area for investors and for you guys. It was pretty substantially higher than maybe what people anticipated this quarter. Curious if there was any kind of one-off type benefits going on this quarter that maybe we have to consider reversing out. And then, you know, into next year, you know, we have time before we get there, but I think you guys have been at conferences recently talking about maybe 23% is a good target for next year as an early, you know, early target. You're kind of going to be there now. If you think this year's up 20 bips, you're kind of going to be almost at 23 for this year. So is that, does that target now just become that much more conservative? How should we think about that?

That's a good one. Actually, you're right. The margins have improved. Right now we're projecting for the full year, 23, to be at 22.7%. So it's very close to the 23% that you mentioned. Moving further up, of course, that's what we're going to strive for. We have to take a little more cost out. in DALSA E2V as we've done in FLIR, and we're doing that right now. And the other part that I think would affect it is that some of the markets that are declined, like semiconductor, automation sensors in our vision systems, those are going to come back. And then finally, we have some new markets for our digital imaging. For example, inspection of lithium ion batteries. You remember now, most of that manufacturing is beginning to switch back to North America, and we do have some really good systems for quality control. And you can guess in a lithium ion battery, a flaw can be catastrophic. So these new cameras, new markets, will offset some of the declines we have now, but I also think that the semi-market will come back. So if all of that takes place, as I've just outlined, obviously our margins should improve.

If I could just sneak in one last one. If I think about your oscilloscope business, I know that's growing very quickly now on delivery of backlog, but if you think about where orders have been all year, and let's say we don't, like absent an inflection near term in orders, Is that a business that likely declines, just given where your backlog is and what you're delivering this year, if I think into 24?

No, I think we feel very good about our TRM business. First, remember, as you said, part of it is oscilloscope. Part of it is digitizers. And a very fast-growing part has been our protocol analyzers, where we just made the acquisitions in our acquisitions. The book to bill in that business is between 94.95 at this time, .94, .95. By the way, in protocols, we don't really see declines. What we see is a little push out because new standards are continuously evolving and our protocols are at the forefront of those standards. So people will be adapting those. But while those have softened a little bit, the oscilloscope, because we're also offering new products, are doing fine. I know that market may not look as exciting now as it has done before, but it is for us. It's very exciting. Thanks, guys. Thank you.

And next we will go now to Greg Conrad with Jefferies. Go ahead, sir.

Good morning. Morning, Greg. Maybe just to level set the guidance for the year in terms of revenue, you mentioned industrial automation and laboratory instrumentation softening, but can you just remind us where FX is the biggest headwind given you said that was half of the impact, just kind of thinking about the segments for the rest of the year.

Yeah, the effects that I mentioned is versus what we were looking at in July and things have tightened and it's costing us about a percent and it's mostly focused in our digital imaging and instrumentation businesses. Having said that, overall, If you look at year over year, we do get a little tailwind, but it tightens significantly from our July meeting to today. We'll deal with it like we deal with any market softening here and there. I mean, basically focus on getting products off where there's a good market, cut costs where we don't have the market, improve our margins, and if we can, do what we just did, beat and raise.

And then, you know, the operating discipline definitely comes through. You know, given those two markets that you did say were deteriorating, how does price play into this? Just thinking about maybe what you're able to capture, does that kind of change the pricing equation at all, you know, thinking about into year end?

Yeah, I think what we have been able to do is increase prices successfully in businesses that are doing well, like on our aerospace and defense businesses or certain parts of our environmental. And for example, marine, where we have a really strong market at the present time, we've increased prices. That offsets prices that we have not been able to increase in the environmental area. So it changes. across our portfolio up and down. But generally, we are successful in raising prices across the board. We have been this year versus, let's say, last year. And we think that the stability that's happening for our businesses will allow us to increase prices, but more modestly going forward. than we have aspirations for. But if things turn around, we'll do it.

Thank you. I'll leave it at that. Thanks.

Thank you.

And next we'll go to Andrew Biscaglia with BNP. Go ahead, please.

Hey, guys. Thanks for taking my question.

Good morning, Andrew.

Hey, Robert. So maybe... Robert, you mentioned your book to build just over 0.9, which is not too inspiring heading into 2024. But you talked about some optimism in some areas like digital imaging, some of those markets coming back. I'm wondering, can you comment on your expectations heading into the new year? Last quarter, you talked about backlog, possibly, or defense backlog converting into Q4. And now you're sounding more optimistic around new awards as well, materializing. So I'm just wondering, can that book-to-bill change on us heading into the new year, or how are you feeling going into January, February?

Yeah, I think to cut to the chase, we still have over 3 billion of backlog, which is very healthy. We have some short cycle businesses that they'll always have been short cycle, especially in the environmental areas, as an example. 0.9, 0.93 does not bother me, only because we have a loss of a slew of new products that are coming to market. For example, just take Going back to FLIR defense, we just introduced a new nano drone called the Black Hornet IV, which can go twice as high as the one we have, which is Black Hornet III. It was only 10,000 feet. This can go up to 20,000 feet, last longer, be a lot more do a lot of other things. We also have new programs in concert UAS. And the other thing that is exciting for us that we're just starting to get some traction on is understanding where we can bring our intelligence systems, if you want to call it artificial intelligence, to bear. We have now about $250 to $300 million of products that are benefiting from not just being sensors, but being systems, cameras, that provide intelligent information. So it doesn't bother me, the slight detriment in backlog. It's primarily because certain parts of the market, like semiconductor, It's done. But all semiconductor inclusive across Teledyne is less than 10%. So it doesn't bother me. I think the more important thing is can we just keep bringing new product and make the acquisitions that we are not able to do because our leverage is down and do what we've always done, acquire, integrate, and increase our earnings per share.

Yeah. Okay. Well, that dovetails into my next question around M&A. With your leverage now back below 2-ish, what are you seeing in the pipeline for next year? And then maybe if you don't see M&A materialize, what are your thoughts on share repurchase, just given where your valuation is?

I'll answer the M&A question. I mean, share repurchase is a is something that we haven't done. We've only purchased shares, oh, I'm gonna say 10, 12 years ago, about $400 million. When you look at our market cap versus that, very small fraction. I think our M&A opportunities are there. We're looking at smaller acquisitions at the present time. With one or two, what I'll call mid-size, several hundred million dollar acquisitions in the potential pipeline. The one thing we have to be careful about is there's some really outrageous prices that people are paying for some of the acquisitions we've looked at. Multiples of sales going 15 times, and that's just not us. Well, we are looking at smaller acquisitions, both here and in Europe, and they'll come along just like we've done before, what we call the string of pearls, and we will make those acquisitions. If we don't make any acquisitions, on the flip side, by the end of next year, our leverage ratio would be one, which was actually less than that before the FLIR acquisition, And, you know, cash also will help our earnings, but our primary focus is going to be acquisitions.

Okay. Thanks, Robert.

Sure.

Next we go to Rob Jameson with UBS. Go ahead.

Hey, thanks for taking my questions. Just a couple. Can we run through the segment, each segment, and what you're embedding for organic and margin expectations just for the rest of the year? And then also, just to hit on your net leverage comment there, is it safe to kind of assume that you guys are going to be able to produce above, like, maybe a billion in free cash flow in 24?

Let me answer the last question first. We're right in the middle of our planning cycle for our operating plan and made presentations to our board yesterday and the answer is yes. Let me now go back to the organic question that you asked for this year. Fundamentally, we're gonna have organically, we're gonna be relatively flat in our overall digital imaging business, maybe a little percent down, but that's partly because we're also cleaning up some stuff that are not profitable. On the other hand, we will have organic growth of almost 6% in our instrumentation businesses, which, as I said, is environmental, test and measurement, and marine. We're going to have, similarly, over 6% in our aerospace and defense organic growth and about 8% in our engineer systems. So those are very healthy growths for this environment that we're all experiencing.

Thank you. That's helpful. And then I guess just one specific to, like, custom measurement. You said you had a new protocol product that was coming to market in September. Just wondering what the uptake is and how, you know, customers have reacted to that. And, you know, is that – could that be an incremental benefit to that sliver of instrumentation in fourth quarter?

Yeah. The new protocol is the PCI Express Gen 7 protocol. The life cycle of that is usually a couple of years. I think we'll see some benefit from that next year, probably, later next year. But the flip side is the protocol business that we just bought, Xenon, is fulfilling a gap that we had in our protocol businesses, which was the high-speed network protocols, and they fill that gap very well. So we love our protocol businesses and hope that we can buy more of them as time goes on.

Great. Thank you very much.

Thank you.

Next we go to Christine Leweg with Morgan Stanley. Please go ahead.

Hey, good morning, everyone, and congratulations on the leadership changes. Robert, I hope that this change means you get some extra free time.

I hope so, too. I have my new leaders shaking their heads across the table from me, but I hope I will. Yes, thank you, Christine.

Well, great, and it's been wonderful to follow your career and what you've done for Teledyne. So maybe with the leadership changes, and sometimes there's also change in strategic focus. I mean, Teledyne is a much broader and bigger company than it was over 20 years ago. You mentioned earlier that M&A is still a priority over share buybacks. I guess as we look out the next 5, 10, or even 20 years, and maybe that question is a little too broad of a scope for this call – But how do we think about the strategic direction for Teledyne? Like, where to from here?

Well, first let me answer the first question. The way we operate in the current Teledyne is a lot of the M&A ideas come from our businesses. Now, we are proactive. At any one time, we have a large funnel of ideas businesses that we're looking at. But that will not change because it comes from digital imaging, it comes from instrumentation, and marine, and A&D. And these are areas that the two leaders that are taking over are responsible for. So I don't think in the short term things will change. Also, in the short term at least, I'm still going to be here And of course, Jason helps make a lot of the capital allocation decisions. But having said that, we will probably focus more on commercial businesses as we go forward. And we will get some defense businesses, but we don't want our defense businesses to grow beyond where they are today. We have a healthy balance of 25% defense, 75% commercial, almost half or 47% of our commercial businesses are overseas. We're also expanding some defense businesses in the NATO countries and the Middle East. But having said that, I think my colleagues and I agree that we do not want to change our portfolio from what it is today. to something that is not sustainable. If you're singularly focused on one market, when that market suffers, then it takes the whole company down. Our balanced portfolio is our resilience and our ability to tolerate changes. And as you can see, While we have some weakness in certain areas, we have strength in other areas. We have growth in instruments, in A and D, engineer systems. And so I don't think that'll change. Now I'm talking about three years. If you go beyond that, then I can't predict because, you know, the world is changing so much right now. I mean, it's such a, a difficult environment in some cases. It'll depend on what happens, and our strategies will evolve.

Great. Thank you for the caller, and congratulations again.

Thank you.

A quick reminder for additional questions, press 1-0. We have one more in queue at this time. We're going now to Noah Popinak. Please go ahead.

Hey, good morning, everybody.

Good morning, Noah.

Congratulations to everybody on the new seats or responsibilities. Robert, I just want to go back to the DI margin. You just printed a number that you previously said you would get to in two years. It sounds like you're saying the majority of the explanation for that is that you performed an incremental cost out And so if that's the driver, wouldn't that kind of sustain in the margin from here? And therefore, why would that margin pull back from the level that you just reported?

I mentioned the margin for the year of 22.7 in DI. which is 35 bases higher than it was what I quoted in Q2, at the end of Q2. What has happened is that the cost thought is important because it's not just people, it's the consolidation of people. our facilities as well. We have not done that. We were all focused on, at first, fixing our export control issues, fixing our tax liabilities. We're still working on tax liabilities somewhat. But what's happening is that the defense businesses at Digital Imaging, specifically FLIR, are getting better. Machine vision, while it's getting worse at the present time, sooner or later it's going to have to come back. And so I was a little cautious about, you know, for next year when I was asked about the margins, and I stayed with the 22.7, maybe 23%. But over the long term, there's no reason that these margins in these businesses could not be like margins in our aerospace and defense, which We're predicting this year to be 27.6% for our instruments. We are 26.1%. There's no reason that margins cannot improve and get there.

Okay. That's helpful context. I understood part of the challenge to be that... there's been volatility in defense outlays compared to what's been authorized at the end market level. And so with regard to your defense business inside of digital imaging, you were gearing up for higher defense revenue that then just kind of surprisingly didn't come through. And so did that come through in the third quarter? Or what was the growth rate, I guess, in the defense piece of digital imaging in the quarter?

We have several large programs that came through in the third quarter. And large for us is, you know, things that are below, above $10 million, $20 million, for example. We got some content unmanned vehicle systems that we partnered with Hansberg. That was a nice win in Q3. We've also penetrated some of our nano drones are now moving into India. We had a nice award from there. Also, our surveillance program, we had to straighten out some of the issues with our gimbals and vibration and products that we inherited. When we straighten those out, and we have now a Navy award that's about 35 million. So surveillance grew in Q3, and I think with the mini drones and our newer product, we think we'll do fine. Our unmanned programs, we expect to grow in Q4. Overall, what we've been able to do is really take some unprofitable stuff out consolidate facilities that shouldn't have been separate to begin with, focus on the things that we can deliver, unmanned systems, using our own sensors. Other people have unmanned systems in various conflicts that use our sensors. So we're happy to set up our sensors, but we also can incorporate them in our system. So we kind of think that the defense business there in DI has had an inflection point and is really turning positive now.

Okay, that's helpful. And then just one last one in DI. What do you now expect the rate of decline to be for the year in the machine vision piece? And do you have enough order book or visibility to have a sense for what that revenue does in 24? Or is it too short cycle?

I think overall, we're going to see an increase in revenue in DASA E2P part of DI. as much as 6%, with some of it coming from acquisitions. In the other part of DI, which would be FLIR, we expect that we may have a slight decline, let's say, to 1839, 1.834, let's say, from 1.8 from what was then 1.86 last year, which is very minor. And some of that comes from Raymarine, you know, where we consumer products that are more discretionary at this time. But overall, I don't see a huge decline in digital imaging because also A2V is grown. And we are weathering the downturn in some of our other commercial products very well. And then we, of course, have some really good upsides in things like healthcare, where markets, even in, let's say, in Q3, we had almost 12% increase in revenue in that area. It's balanced.

Sorry, those comments are on total digital imaging revenue? You're saying?

Total digital imaging revenue, yes.

Okay. I appreciate that. Just so it's clear, I was asking on just machine vision within digital imaging?

Or just machine vision?

Yeah.

Okay. There's different parts of it. There's a machine vision at DALSA ET. and there's some machine vision in FLIR. I haven't added those two together. If I were to add those two together, I'd say the full year might be down 2%. But again, it could be a little higher, but it doesn't bother me that much, only because, as I mentioned before, we have new products, like in battery inspection, And we're more emphasizing our ability to put some information and intelligence in our devices, cameras, and move up market. So this market's going to turn. It's not going to stay where it is. Semiconductor is not going to stay down forever. And I think we're well positioned for growth once those turn a little bit.

Yeah, that's interesting. It's much different than the peer set, so seems well-positioned. Okay. All right. Well, thanks again. Thanks for the time. I appreciate it.

Thank you very much, Noel.

And we have no additional questions in queue this time.

Thank you, operator. I'll now ask Jason to conclude our conference call.

Thanks, Robert, and again, thanks, everyone, for joining us today. If you have any follow-up questions, please feel free to call me. Numbers on the earnings release or, of course, send me an email. And all the press releases are available on our website, as is the replay. John, if you could give the island information for the replay at the end of this call, that would be great.

Certainly. Ladies and gentlemen, this call has been recorded and will be available for replay from today at 10 a.m. Pacific time. Through midnight on November 25th, 2023, to access the replay, dial 866-207-1041 and enter access code 643-9556. International participants, dial 402-9400847. And once again, those numbers are 866-207-1041 for domestic and for international participants, It's 402-940-0847. And the access code, again, is 643-9556. And that will conclude your conference call for today. Thank you for your participation. And if you're using AT&T Event Conferencing, you may now disconnect.