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spk08: Ladies and gentlemen, thank you for standing by. Welcome to the Teledyne Third Quarter Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for questions and answers with instructions given at that time. If you should require assistance during the call, please press star, then zero, and an AT&T specialist will assist you offline. And as a reminder, your conference call today is being recorded. I'll now turn the conference call over to your first speaker, Jason Van Wees. Please go ahead.
spk00: Thank you. Hello and good morning, everyone. This is Jason Van Wees, Vice Chairman. I'd like to welcome everyone to Teledyne's third quarter 2024 earnings release conference call. We released our earnings earlier this morning. Joining us today are Teledyne's Executive Chairman, Robert Morabian, CEO, Edwin Rocks, President and COO, George Bob, and SAP CFO, Steve Blackwood, and Melanie Sivic, EBP General Counsel, Chief Compliance Officer, and Secretary. After remarks by Robert, Edwin, George, and Steve, we will ask you your questions. But 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 and our periodic SEC filings. And of course, actual results may differ materially. Here's Robert.
spk03: Thank you, Jason, and good morning, and thank you for joining our earnings call. Teledyne achieved all-time record sales in the third quarter, with revenues sequentially greater in each segment, allowing us to report overall year-over-year growth as we expected. We continue to see robust demand in our longer-cycle defense, space, and energy businesses. And at the same time, while year-over-year comparison remains challenging, sales for most of our short-cycle commercial businesses have either stabilized or have begun to recover sequentially. Year-to-date, we approximately repurchased about $354 million of our stock. We completed two acquisitions for $125 million and repaid $450 million of gross debts. But our quarter end leverage has remained in the 1.7 X given record free cash flow over the last nine months. Orders were greater than sales for the fourth consecutive quarter and we once again ended the period with record backlogs. Nevertheless, Given the timing of future shipments against this background and some sales we were able to accelerate into the third quarter, we continue to remain reasonably confident that quarterly sales will again increase sequentially in the fourth quarter, but only modestly compared with the third quarter. I will now turn the call over to Edwin, our CEO, who will further comment on the performance of our four business segments.
spk01: Thank you, Robert. This is Edwin, and I will first report on the digital imaging segment, which represents a bit over 50% 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. Third quarter 2024 sales declined less than 1% compared to last year. Sales to industrial machine vision markets declined year over year. However, this was partially offset by increased sales from FLIR, both its commercial infrared imaging and defense businesses, as well as for Teledyne space-based infrared imaging detectors. Furthermore, for the fifth consecutive quarter, healthy margins across the entire FLIR business portfolio helped us protect overall operating margin, even given the significant year-over-year reduction in sales of our typically highest contribution margin quarter clients. George will now report on the other three segments, which represent the balance of talent.
spk05: Thanks, Edwin. The instrumentation segment consists of our marine, environmental, and test and measurement businesses, which contribute a little under 25% of sales. For the total segment, overall third quarter sales increased 6.3% versus last year. Sales of marine instruments increased 24.1% in the quarter, primarily due to both strong offshore energy and subsea defense sales. Sales of environmental instruments decreased 3.5%, primarily due to greater sales of water quality instruments, offset by lower sales of select laboratory instruments and emission monitoring systems. Sales of electronic custom measurement systems which include oscilloscopes, digitizers, and protocol analyzers, decreased 8.6% year-over-year on a tough quarterly comparison versus 2023. Instrumentation operating margin increased in each product family in the third quarter, with overall operating margin increasing 155 basis points to 27.5%, and 152 basis points on a non-GAAP basis to 28.6%. In the aerospace and defense electronics segment, which represents roughly 15% of Teledyne sales, third quarter sales increased 9.2%, driven by growth of both commercial aerospace and defense electronics products. Overall segment operating profit increased year over year, with gap segment margin increasing 117 basis points to 28.1%, and 116 basis points on a non-gap basis to 28.2%. For the engineered systems segment, which contributes less than 10% to overall sales. Third quarter revenue increased 9.4%. Segment operating profit also grew with segment margin increasing 78 basis points due to higher sales and a greater mix of manufacturing programs. I will now pass the call back to Robert.
spk03: Thank you, George. I'll conclude with a few comments on strategy and capital allocation. Over the last several quarters, some of our markets have experienced weakness, but we lowered costs to protect margins in these businesses while growing and increasing margin in those businesses where the environment was more favorable. During this period, we also opportunistically purchased our own stock. While our current $1.25 billion stock repurchase authorization remains active, we're also fortunate that our near-term acquisition pipeline is healthy. While there are always new challenges, I'm optimistic that we have begun to exit some of our more difficult quarterly comparisons. and we will continue to grow both organically and through acquisitions. I'll now turn the call over to our CFO, Steve.
spk04: Thank you, Robert, and good morning. 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 2024 outlook. In the third quarter, cash flow from operating activities was $249.8 million, compared with $278.2 million in 2023. Free cash flow, that is cash flow from operating activities, less capital expenditures, was $228.7 million in the third quarter of 2024, compared to $255.2 million in 2023. Cash flow decreased in the third quarter due to higher income tax payments. Capital expenditures were $21.1 million in the third quarter of 2024, compared with $23 million in 2023. Depreciation and amortization expense was $76.9 million for both the third quarters of 2024 and 2023. For the first nine months of 2024, cash flow from operating activities and free cash flow were $859.5 million and $804.8 million, respectively. We ended the quarter with approximately $2.24 billion of net debt. That is approximately $2.80 billion of debt, less cash of $561 billion. Now turning to our outlook. Management currently believes that GAAP earnings per share in the fourth quarter of 2024 will be in the range of $4.27 to $4.41 per share, with non-GAAP earnings per share in the range of $5.13 to $5.23. And for the full year of 2024, we are raising our GAAP earnings per share outlook to $17.28 to $17.42, and we are narrowing our non-GAAP outlook to $19.35 to $19.45. the top end of our prior outlook range. I will now pass the call back to Robert.
spk03: Thank you. We would now like to take your questions. Operator, if you're ready to proceed with the question and answers, please go ahead. Did I lose our operator?
spk08: No, I'm sorry. Ladies and gentlemen, if you would like to ask a question, please press 1 then 0 on your telephone keypad. You'll hear an indication you've been placed into queue, and you may remove yourself from the queue by repeating the 1, then 0 command. If you are using a speakerphone, we ask that you please pick up your handset and to make sure that your phone is unmuted before pressing any buttons. Again, for questions, press 1, then 0 at this time. Our first question will come from the line of Jim Ricciuti with Needham. Go ahead.
spk07: Hi. Thank you. Good morning. Robert, I think you alluded to... some acceleration in sales, perhaps coming pull-ins from Q4. Was that mainly in the defense area, or were there some other markets where you saw that?
spk03: No, I think it was primarily where we have the largest backlog, which would be the defense businesses. A little bit from energy, but primarily defense. Right, Jim?
spk07: Got it. And just with respect to, it sounds like you had a good quarter from an order standpoint. Can you give us any more color in terms of book to bill as it relates to the segments and maybe how you're thinking about overall revenue growth versus what you maybe were thinking about a few months back?
spk03: Let me start with the book to bill. Let me start with the overall first. Book to build at the end of Q3 was about 1.08. Almost all of the businesses had healthy book to build, except for one of our environmental businesses. Let me now go over those. In instruments, book to build was about one. with marine, of course, being much higher, and TNM coming along, too, at over one, and environmental below one. In digital imaging, we're experiencing good book-to-bill numbers in what we call historical teledyne. Book-to-bill was 1.08. And FLIR had excellent book to build of 1.17. Aerospace and Defense, 1.04. And Engineer Systems, 1.02. Now, regarding the revenue, we've decided that with all the uncertainty in the world today, starting with elections and then, of course, the various conflicts in the Middle East and Europe, we've decided that it's prudent to maintain the number, the revenue number that we had at the end of Q2 that we projected, which is about 5.620 million, or 5.6 billion. And we might do better, but right now, Jim, With all the uncertainty, it's prudent not to be too effervescent.
spk07: That makes sense. Just one quick follow-up, then I'll turn it over. Just with respect to the test and measurement business, are you seeing now, it looked like you had some nice sequential growth. Do you feel that the weakness in the scopes business is behind you, or is this still the protocol analogic? strength contributing to this overall better results.
spk03: In the third quarter, it was primarily the protocols. I think we're a little hesitant about projecting the oscilloscope businesses, but usually what happens at year end, which would be our Q4, people do do capital expenditures and we pick up business in that domain. So we're hopeful that this year would be a repeat of last year with Q4 being higher than Q3.
spk07: Thanks very much.
spk03: Thank you, Jim.
spk08: We will next go to the line of Greg Conrad with Jefferies. Go ahead. Good morning.
spk03: Good morning, Greg.
spk02: Is there any way, or can you parse digital imaging for the quarter and maybe what you're seeing across the different businesses? I mean, going into the quarter, we did see a couple of negative pre-announcements from some of your peers on the vision side. Any color on what you're seeing across the different vision and markets, either from an order or just trend perspective?
spk03: Yeah, let me slice it on the larger scale. picture first, if I may. If you look at our two segments within that digital imaging, you have our historical digital imaging, which is DALSA E2V, as well as our scientific imaging here, and then you have FLIR. So if I look at the big picture for Q3, On what we call our traditional historical digital imaging, revenue was declined. Organic growth was negative, almost 9.8%, 9.9%. On the other hand, FLIR did exceptionally well. In the defense businesses in FLIR, which is 40% of FLIR, the growth was 8.2%. with all the subdivisions within there growing very healthy. In the FLIR commercial businesses, we were essentially flat, but we have to keep in mind that in the commercial FLIR businesses, we also do have a camera vision system, which is basically an area camera, two-dimensional area camera, which had much lower sales, just like the rest of our vision camera systems in DALSA A2V. So if we took that negative out, FLIR industrial also grew. And overall FLIR grew 3.2% with that negative coming. We had, now we also going to DALSA A2V, What we're looking at there is basically a range of businesses, some positive and some negative. Let me give you the positives first and the negatives which we've talked about before. Interestingly enough, our microelectromechanical systems, or MEMS, is experiencing really good growth. Maybe that's the canary in the mine because they're making a lot of products that are of relevance to the semiconductor industry. Also, as you may recall, we have an aerospace and defense business within our historical digital imaging. That did very well, grew almost 13%. Where we had decreases were primarily in scientific and industrial vision systems, and somewhat in healthcare. I think the healthcare is going to recover, and I think in the industrial and scientific vision systems, we believe that at least in the camera domain, we've bottomed out and we have a slow V recovery. There's a portion of that that deals with sensors, where we make sensors for ourselves and other people, That's going to lag a little more. It may have bottomed out, but we don't see a recovery at this point. So overall, I would say DALSA, E2V, Teledyne imaging were lagged a little bit with mixed progress in the different businesses. FLIR carried the day for the overall digital imaging.
spk02: And then... I mean, maybe it's a little bit early to talk about 2025. But it seems at least on the long cycle, whether that's defense or, you know, on marine, you've experienced positive book to bill on ramping sales. You know, if you look out over the next year, can you maybe talk about how much visibility you have on the long cycle businesses versus, you know, how you're thinking about, you know, the recovery and short cycle over the next year?
spk03: But the long cycle businesses, Greg, assuming there's no catastrophes, because anything like that can affect our long cycle businesses. They're healthy. We think they're going to grow year over year. We have some really good program wins, both in our FLIR defense as well as in our teledyne imaging here in space and other programs. So we think those are going to grow. On the short cycle businesses, we're just going through the first cut of our plans for next year. I think I have to say it's a little too early to predict how that's going to work. I'll wait another couple of months and see if... what happens to the elections here, but more importantly, what kind of capital expenditures people exercise as they get near the end of the quarter Q4.
spk02: And then maybe just sneaking in one last one. I mean, if you think about defense across FLIR and engineered and A&D electronics, what was defense up in the quarter?
spk03: Defense... U.S. government defense was up organically maybe 2.5% plus, but we do have programs overseas that are doing really well. For example, Ukraine. We supply a whole range of products to them. Also, some to Middle East. And those programs have been very healthy, and we seem to be winning new programs, especially with offers that we have in counter UAV systems, as well as our miniature, our own UAVs, the small black hornets, which are doing really well. So we're overall very positive in that domain.
spk02: Thank you.
spk03: For sure.
spk08: We'll move on to the line of Andrew Biscaglia with BNP. Go ahead.
spk11: Hey, good morning, everyone.
spk03: Morning, Andrew.
spk11: I wanted to touch on, you know, Marine has been so strong all year, and you seem to have good visibility in that. You know, I'm just wondering what the sustainability of that growth is through next year. How much visibility do you have that you could you can maintain such a strong segment and then maybe not see... People are a little bit worried about challenging comps, but how do you see that playing out?
spk03: Yeah, that's a good question. Marine has had kind of variation in their book to build with Q1 being very strong at 1.27 and then Q3 being around 1.04. Here's the story on marine. We acquired about 23 small businesses to form our marine group. Those range from interconnects for commercial oil exploration and oil production to defense. We have underwater vehicles. a whole range of them from floats to gliders to what we call the Gavia vehicles that are being used both in this country and in Europe. And then we have military programs that deal with hull penetrators for the Virginia-class submarine as an example. So the mix is very interesting. It's offshore energy. maybe 30%, maybe more, if you put in exploration, it's close to 40%. But then we have science, construction, which are about 27%, and then we have defense, which is as much as 28%. So it's kind of mirrors, in some ways, Teledyne as a whole. Our expectations are that that will remain strong It is possible, though, that with the current projections, oil prices may decline significantly, not as much as they did in 2014 to 2016, but may decline. And if that happens, some of our production interconnects will go down, but the other businesses that we have there should remain healthy. So I'm positive about marine for next year.
spk11: Okay. No, that's helpful. Um, and you know, you, you know, you guys made the comment in your press release about, um, you know, we've been buying back stock, but maybe MNA looks like it's perking up here. Um, can you comment a little bit more on that? And then specifically on any, what are the sides of these deals here you might be seeing?
spk03: Yeah. Andrew, uh, that's, that's a very good question. And the reason it's timely, It's for the first time, I would say, since we acquired FLIR. We've done a couple of acquisitions every year. Like this year, we bought a small business for our marine. We bought Atomic, which is an imaging business for our overall imaging, DALSA E2V. But there hasn't been that much activity or opportunity for us to do acquisition. Suddenly, in the last month or so, the funnel seems to have opened up, and we are seeing more opportunities, especially outside digital imaging, for example, in our aerospace and defense, as well our instruments. So we're kind of positively inclined to look at what we can do, how much power we have to make acquisitions, and frankly, we bought our stock when it was close to 52 weeks low, and we've continued buying it through Q3, but now I think it's more likely that we will focus more highly on acquisitions since we have the wherewithal to spend up to I don't know, two to three billion if we want to. I don't know if we'll do that much, but we certainly are in the market to buy some smaller companies, which would be, let's say, in the $50 million range, and maybe some things that are closer to half a billion or more. It won't be anything as large as FLIR at this time, but there are many opportunities.
spk05: Okay, very helpful. Thank you.
spk03: For sure.
spk08: We'll move on to the line of George Yarno from TD Cowan. Go ahead.
spk10: Hey, guys. Good morning. Morning. Can you just talk to us through, like, what's contemplated in the guide for next quarter and how you're thinking going forward about what's going on at Boeing?
spk03: Let me start with Boeing because that's a subject that we kind of study and follow. We, in our aerospace business, which serves Boeing as well as other Airbus and a whole bunch of airline customers. We think the strike could have a risk for us. I'm hoping that it settles, but the risk for us is in the 737 MAX, where we have the data acquisition systems, that could hit us that's assuming the strike goes through the year, through a quarter, that could hit us as much as on the upside, maybe $5 million in revenue from Q3 to Q4. But if the strike is settled, depending on timing, it could be less than that, maybe $2 or $3. So it's a little bit of a headwind for us. The other part of your question was, forgive me, I kind of lost the trend of... Boeing was the first question.
spk10: I can move. You also mentioned in instrumentation, I think you indicated that there was a piece of that business on the environmental side that was weak with orders below revenues. Can you give us a little bit more color on what that is and what type of applications or end markets that's facing?
spk03: Yeah, in the environmental side, we have two sets of businesses. One set deals with drug discovery and water quality, et cetera. And that business has been okay. Where we've seen a little weakness is in our air quality monitoring, stack monitoring, basically looking at quality of product. There we've had a little weakening, and we depend a little bit on Middle East where they buy our systems, large systems. I think it might be a little weak, a few million dollars, but I'm not that concerned about it. Nothing bad is going to happen. We think Q4 should be a little better than Q3. So it doesn't concern me right now. And instruments, as George said, includes marine, test and measurement, as well as environmental.
spk10: And just last for me, the margins in DI were good. I think it's probably better than some expected indicators. Give us maybe some color onto what drove that, and how are you thinking about margins to wrap up the year across the portfolio here?
spk03: I think what you have is FLIR's margins really improved very much, and we're very healthy. And digital imaging as a whole remains relatively flat. in margins. I would say maybe went down 30 basis points if you look at the whole year, 24 versus 23. The same year, of course, as I mentioned, was FLIR. On the flip side, Edwin and his people were able to take costs out in our camera especially in our camera, and some healthcare businesses to compensate for low revenue. And that helped protect some of the margins in those businesses. Some of our very high margin businesses are in the camera business. So there's been a combination. FLIR, very strong digital imaging, the rest of digital imaging taking the cost out. And I'm hoping that as the recovery comes, we will not put that cost back in because we've had really good experience with defense and, of course, with marine in the past where we took the cost out, didn't put the cost back in very quickly, and the margins there have turned out to be very healthy. So overall, I'm positive about digital imaging.
spk10: Is there a way for you to just kind of scale like how big a drag? I know those cameras and sensor businesses have very high margins. So how much of a drag would you say currently those businesses are on what you're reporting for margin?
spk03: I would say overall those businesses account for maybe $300 million, the ones that we're seeing the drag on. And I would say It changes, but I'd say maybe $50 million in drag in those businesses overall. It doesn't sound like a lot, but those are our highest margin businesses. And so when the revenue goes down, then that margin overall declines because of that. But as we've said before, we think the cameras have bottomed out. Book 2 bill is better than one. Of course, remember, bill is low compared to last year. And censors will come eventually, but not right away.
spk08: Thank you.
spk03: For sure.
spk08: We'll go next to the line of Jordan Linnaeus with Bank of America. Go ahead.
spk06: Hey, good morning. Could you give some color around how you're thinking about three years' opportunity for new programs like Replicator 2?
spk03: Let me take this. We have a whole bunch of programs for FLIR that are doing really well. Let's start with the small UAVs. The small UAVs, we have the best system in the world. These are UAVs that are about six to seven inches in size. If they were flying in the room with you, you probably wouldn't hear it or notice it, but your picture can go automatically. You'd get a good video of it up to 25 kilometers away. So that's really good. But on the other side, we also have a content UAV system that's being used in Europe. And another example is we have... loitering UAVs that we're introducing, which can carry munitions. The difference between these and other people's munition-enabled UAVs is that we can call these back if they reach the target and it's not an opportune time, so we can recover the system. So overall, I think the whole UAV business for us is very strong. We also have a whole bunch of other programs, like we just announced a program win in a suite of sensors that go on for chemical, biological, nuclear. We announced that we just won a program for $168 million. So FLIR, especially FLIR Defense, We're very positive. We have an excellent leader there in Jeep and Lee, and we're very positive about that business.
spk06: Got it. So for Replicator 2, specifically counter UAS systems?
spk03: We have a system in Europe right now with Kongsberg, which is being deployed, and it's successful. That's all I can say about that at this time.
spk06: Got it. Thank you so much.
spk03: For sure.
spk08: And as a reminder, ladies and gentlemen, if you do have questions, please take this opportunity now to press 1 then 0 on your telephone keypad. We'll go next to Guy Hardwick with Freedom Capital Markets. Go ahead.
spk09: Hi. Good morning.
spk03: Good morning, Guy. Hi.
spk09: Hi. A lot of my questions to be answered, but just sort of big picture, digital imaging margins peaked at 24% a few years back. If short cycle does recover at some point next year, what is the potential, you think, in terms of given kind of what you've said about incremental margins and the higher margin mix of short cycle?
spk03: Yeah. Right now, if I look at... Q3, if I look at Q3, our margins in overall digital imaging are about 22.6%. Last year, this time, they were more like 24.2%. So I would hazard the guess that as a minimum, should be as good as last year. And if the short cycle businesses do come back strongly, there's an opportunity for us to go above 25%, which would be very healthy for us. But I would maintain that with uncertainty, especially in our longer recovery of our centers.
spk08: I didn't realize you weren't done. Sorry. I'll re-bless you.
spk03: we'd go probably more to 24 plus percent, 24.2, 24.5. But if the sensors recover, then the margin would go higher.
spk09: Okay. And thank you. Just as a follow-up, obviously you indicated in the statement that you see short cycle has stabilized and maybe improving. I assume that's because of booking trends. Can you maybe just give us a bit more color on booking trends in short cycle?
spk03: Yeah, in the last two to three months, our book to bill is above one, let's say 1.1. But I have to always keep in mind that when we talk book to bill, we're talking about bill that's lower than it used to be. So I don't want to overstate that. It's not like book-to-bill at the height of the system. But what that tells us is that we have reached the bottom and we're recovering. The flip side on sensors themselves, the book-to-bill has not recovered yet. So people are a little more hesitant to spend money on sensors because then they have the longer haul of developing cameras whereas it's easier for them to acquire cameras. The flip side, I have to say, again, going back to FLIR, because FLIR has been so successful, is that they have both long cycle and short cycle infrared cameras. In the long cycle, they're fixed cameras. In the short cycle, they're handheld cameras. And we're very pleased that FLIR Industrial has done really well in that domain, and we expect that they'll continue to do so. With new products, with artificial intelligence-enabled cameras that bring decisions, make decisions easier for the customers, we're positive that as we are with the FLIR defense businesses.
spk09: And Robert, is that the point, what used to be called point gray, is that what you're referring to?
spk03: No, point gray is the one that's more matched to the cameras that we have in DOSA E2V. Actually, while we kind of put it in FLIR, it's more aligned with DOSA E2V from an organization standpoint. It reports to the leader. What I was talking about was the infrared offerings. They're substantial.
spk09: Not visible, right. Okay. Thank you, Robert.
spk03: Thank you.
spk08: We have no further questions in queue at this time.
spk03: Thank you. Operator, thank you very much. I'll now ask Jason to conclude our conference call, please.
spk00: Thanks, everyone. Thanks, Robert. If you have any follow-up questions, of course, my number is on the earnings release. Please feel free to call me. And then, Alan, if you'd please give the replay information at the end of the call, that would be ideal. Thanks, everyone. Goodbye.
spk08: Thank you, ladies and gentlemen. This conference is available for replay, and that will be beginning today, October 23, 2024, at 10 o'clock Pacific Daylight Time through November 23, 2024, at midnight. To access the AT&T Playback Service during that time, you can dial toll-free 866-207-1041 and the access code is 128-4672. International participants may dial area code 402-970-0847 using the same access code. Those numbers again are 866-207-1041 and area code 402-970-0847. The access code once again is 128-4672. That will conclude your conference call for today. Thank you for your participation and for using AT&T Event Teleconferencing. You may now disconnect.
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