Teledyne Technologies Incorporated

Welcome to Teledyne's fourth quarter earnings release conference call. Here's our first speaker, Mr. Jason Van Weese.

Good morning, everyone. This is Jason Van Weese, Vice Chairman. I'd like to welcome everyone to Teledyne's fourth quarter and full year 2024 earnings release conference call. We released our earnings release this morning before the market opened. Joining me today are Teledyne's Executive Chairman, Robert Morabian, CEO, Edwin Rocks, President and CEO of Bob, Senior Vice President and CFO Steve Blackwood, and Melanie Sivek, EVP, General Counsel, Chief Compliance Officer, and Secretary. After remarks by Robert, Edwin, George, and Steve, we will ask 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 ethics and values. 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, will be available for approximately one month. Here is Robert.

Thank you, Jason, and good morning, everyone, and thank you for adjourning our earnings call. In the first fourth quarter, we achieved many all-time records. Record sales increased 5.4%, and accelerated from the third quarter. Fourth quarter and full year non-GAAP earnings per share were records, as were fourth quarter and full year non-GAAP operating margins. Finally, our record annual free cash flow, given that we ended the year with a very low leverage despite $1.1 billion of capital deployment in fiscal 2024. We successfully closed the MiroPak acquisition at the beginning of fiscal 2025, and we continue to expect the completion of the Xelatos Carbot transaction in the first quarter. We entered 2025 optimistic about our business portfolio in both commercial and defense markets. Our short cycle commercial businesses improved throughout 2024 and comparison eased in 2025. We also believe our defense businesses, which favor purchase orders versus protected appropriations, Unmanned versus manned platforms and standard products versus highly customized solutions are well positioned in the current environment. Nevertheless, especially given the very strong U.S. dollar, we believe it's prudent to be a bit cautious in our 2025 outlook. Including the acquisition of Micropak, But excluding the Xelatos carve-out, since this acquisition has not yet closed, we believe 2025 sales may grow approximately 4%, with non-GAAP earnings double that amount at approximately 8% at the center of our outlook range. I will now turn the call over to Edwin, who will further comment. on the performance of our digital imaging segment.

Thank you, Robert. This is Edwin, and I will first report on the digital imaging segment, which represents approximately 54% of TelLine's portfolio. Fourth quarter, 2024 sales were a record and increased 2.5% compared with last year. The performance of digital imaging lastly reflected record sales at TelLine FLIR, with healthy growth across FLIR's commercial, and defense infrared imaging systems, unmanned and counter unmanned air systems, as well as maritime hardware and software. While sales to industrial machine vision markets declined year over year, quarterly sales were at the highest level in 2024. Our legacy space-based imaging business continued to grow. While some healthcare businesses, such as cancer radiotherapy, were resilient, Sales of x-ray detectors for more consumer discretionary dental markets declined year-over-year. Non-GAAP operating margins improved sequentially and year-over-year, primarily due to the contribution from FLIR, which more than offset the year-over-year decline in higher contribution margin machine vision sales. George will now report on the other three segments, which represent the balance of Teledyne. 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 fourth quarter sales increased 10.1% versus last year, with growth in each major product line. Sales of marine instruments increased 21.1% in the quarter due to both strong offshore energy and subsea defense sales. Sales of environmental instruments increased 1.7%. primarily due to greater sales of laboratory instrumentation as well as air safety instruments. Sales of electronic test and measurement systems, which include oscilloscopes, protocol analyzers, and Ethernet traffic generators, sequentially improved for the third consecutive quarter and increased 2.3% year-over-year. Instrumentation operating margin in the fourth quarter increased 27 basis points, 27.3%, and 96 basis points on a non-GAAP basis, to a record of 29.1%. In the aerospace and defense electronics segment, which represents roughly 14% of Teledyne sales, fourth quarter sales increased 6.8%, driven by growth of defense electronics products. Overall segment operating profit increased year over year, with gap and non-gap segment margin increasing over 150 basis points. For the engineered systems segment, which contributes approximately 8% to overall sales, Fourth quarter revenue increased 11%. However, segment operating profit decreased due to higher cost to complete estimates on certain programs. I will now pass the call back to Robert.

Thank you, George. I'll conclude with a few comments on capital allocation. In 2024, we continued our tradition of prudent and flexible capital deployment. That is, we opportunistically repurchase stock when we felt our shares were very undervalued, while at the same time, we were willing to for large acquisitions when we thought price expectations were unreasonable. But then, as our own valuation partially recovered and M&A markets became more rational, we pivoted by stopping repurchases and we're pleased to announce the Micropac and Excelatos acquisitions. Given over $1.1 billion of free cash flow in 2024, our balance sheet capacity is the highest in years, and our M&A pipeline remains healthy. Nevertheless, we will continue to exercise discipline and flexibility as we have always done. I will now turn the call over to Steve Blackwood.

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 first quarter and full year 2025 outlook. To begin, our fourth quarter non-GAAP earnings per share reflect the removal of $16.6 million of FLIR acquisition-related tax benefits Remaining tax benefits of $13.6 million were approximately half offset by a higher tax rate. In the fourth quarter, cash flow from operating activities was $332.4 million, compared with $164.4 million in 2023. Cash flow, that is, cash flow from operating activities less capital expenditures, was $303.4 million in the fourth quarter of 2024, compared to $124.2 million in 2023. Cash flow increased in the fourth quarter primarily due to lower income tax payments, but also due to improved working capital performance. Capital expenditures were $29 million in the fourth quarter of 2024, compared with $40.2 million in 2023. Depreciation and amortization expense with $77.1 million in the fourth quarter of 2024, compared with $77.4 million in 2023. For the full year 2024, free cash flow was $1.11 billion. We ended the year with just under $2 billion of net debt. That is approximately $2.65 billion of debt, less cash of approximately $650 million. Now turning to our outlook, which includes the acquisition of Micropac, but excludes the Xelatos Carvel, which is not yet closed. Management currently believes the GAAP earnings per share in the fourth quarter of 2025 will be in the range of $3.90 to $4.04 per share, with non-GAAP earnings per share in the range of $4.80 to $4.90. And for the full year 2025, we believe the GAAP earnings per share will be in the range of $17.70 to $18.20 with non-GAAP earnings per share in the range of $20.10 to $21.50. I will now pass the call back to Robert.

Thank you, Steve. We would now like to take your questions. Paul, if you're ready to proceed with the questions and answers, please go ahead.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please, while we poll for questions.

Thank you. Our first question is from Noah Popanak with Goldman Sachs. Please proceed with your question.

Hey, good morning, everyone.

Good morning, Noah.

Robert, you referenced 4% growth top line in the 2025 guidance. Is that 3% organic and a point from MICRPAC, or is that 4% organic?

No, what I mentioned is, as you said, a little over 4%, 3.2% organic and about 1% through acquisitions. Acquisitions include micropack NOAA, but they also include parts of Valport, which we acquired for our marine businesses, and a part of Atomic that we acquired earlier in the year for the digital imaging project. those add up to about 1.1%, so 1% total is 4.2, yes.

Okay. And if Excelitas closes on schedule, can you talk about what that adds in revenue EBITDA earnings to the year?

Yeah, I think it depends on when it closes, as you can appreciate. But I'm going to say about $15 million a month, NOAA.

Okay. Okay, great. And then maybe if you could just talk about the three or slightly over 3% organic assumption. I mean, we've had this discussion for a few quarters now of your short cycle versus your long cycle. I guess, you know, in the release, it sounded, it looked like you referenced, you know, kind of long cycle, still strong. It looked like you were saying short cycle, better, hard to tell how much better. All the leading indicators there still look a little, you know, kind of better, but a moving target. So what are you seeing in those businesses in machine vision and instrumentation, and how did you go about deciding what kind of recovery to assume in the guidance in those businesses?

Okay. So let me start with, if I may, I'll do it by segment, which is – should make it clear, on an organic growth basis, as you and I agreed, our target's about 3.2%. If you go to instruments, which includes marine, environmental, and test and measurement, we expect all three of those subsegments to grow with a combined organic growth of 3.8%. In digital imaging, we believe the total digital imaging organically will grow just under 3%, maybe 2.8%. Aerospace and defense, right now we're targeting it at 4%, but once you include that micropack acquisition, which is closed, that will then jump up to 8%. Engineered systems, we assume it will grow about 2.3% organically. So that kind of is the summary of the segments and the growth. So in other words, Noah, we expect everything to grow organically in the lower single to mid-single digits.

Okay. I appreciate all that detail. Thank you. For sure, Noah. Thank you.

Our next question is from Conrad with Jefferies. Please proceed with your question.

Good morning. Good morning, Conrad. Yeah, I don't know what they called me up front, but maybe just starting with the digital imaging outlook, I mean, a lot to unpack in the quarter, and you have both short cycle and FLIR. Can you maybe just put a finer point on kind of last year into next year, how you're thinking about vision, what you're seeing out of FLIR defense, and maybe stuff like healthcare that was a little bit weaker in 2024, how you're kind of thinking about that recovery.

Yeah. Let me do 24 and then 25, and I'll break it up between FLIR and what we call our historical digital imaging before FLIR. So In 24 over 23, we had a little growth in FLIR overall. Primarily, it was held back by a small business that we have which deals with mid-market two-dimensional area scan, which is kind of a machine vision business. That declined about $40 million. So if you take that out, the rest of FLIR actually increased about $70 million year over year. And it increased in almost all areas. It increased in our cores, which we sell, microvolumeters, as well as indium antimonide cores. It increased in tomography, both infrared instruments and cameras, and our Raymarine businesses kind of held steady. They were down a little bit, but not much. So overall, FLIR increased. Defense in FLIR did really well, and it increased about 9% in all of its various subsegments did well. So FLIR Now going to 25, we're assuming about a 2.8% to 3% overall increase, because we are still a little cautious about the commercial businesses. But forgive me, FLIR by itself will increase about 3.9%. But we're still a little cautious about the camera businesses. But we think the defense businesses that are very, very healthy because we have really good backlog. If you go to what we call our traditional digital imaging before FLIR, we think the growth is going to be modest. Overall growth would be about 3.1%, but some of that comes from the Atomac acquisition that we did in mid-year. So if you subtract that out, is closer to 1.2%. So when you add those two up, its overall growth, both through acquisitions and organic for the total digital imaging, would be about 3.6%. Part of the reason we're being a little cautious, especially in the commercial digital imaging, especially the legacy part, is because while we had a little bit of tailwind this quarter from foreign exchange, we think we're going to have headwind right now with the dollar being strong, about 1.3% going into 2025. And if that doesn't change, of course, that's going to affect us. So we're kind of programming it into our projections as we go forward. I hope that answered your question, Greg.

Yeah, that's good. And then maybe a follow-up. I mean, implied EPS, you know, it seems like you have good margin expansion into 2025. I think in the past you've maybe talked about mix of some of that short cycle markets, which it doesn't seem like you're embedding, you know, any big increases in 2025. Can you maybe just level set the margin outlook and maybe the drivers just given it doesn't seem like mix would be that much of a tailwind given, you know, volume expectations.

Yeah, let me go to the overall company. We finished the year at 22%. We expect that to grow by 80 basis points. Now, if you look at the segments, it'll be more like 70 basis points. So it'll go from what is now 23.4% for the full year 2024 to 24.1% in 2025. So there's growth there. If you go to the larger business, which is obviously segment, the digital imaging, we finished the year from a segment non-GAAP operating margin at 22.2% for the year. We think we'll get about 80 basis points, which is significant. Next year, maybe a little less, but between 70 and 80 basis points. Some of the other segments, we've had very strong margin growth since 2022. For example, in instruments, our margins between 22 and 24 grew 310 basis points. So we're being a little more cautious. Maybe it'll grow in 2025, 45 basis points. And the other thing is that when you go to aerospace and defense, where we've had really excellent growth also of 150 basis points in the last two years, we're a little cautious going into 2025, primarily because the micropack acquisition is not going to initially have the kinds of margins that we enjoy there, which were 28.6%. in 2024. So we're dialing in maybe 14, 15 basis points increase because of the micropack effect. Of course, once that thing is tucked in properly, you'll start enjoying margin expansion like all of our acquisitions do. I hope that answered your question, Greg.

That's perfect. Thank you.

For sure.

Thank you. Our next question is from Andrew Buscaglia with BNP. Please proceed with your question.

Hey, good morning, guys.

Good morning, Andrew.

I was just trying to understand with 2025, so you're talking about 3.2% organic. You know, just to be clear, that would include some FX in that organic number. And then do you assume some and how much short cycle recovery do you assume as the year goes on? Can you talk a little bit about the cadence of your estimate?

Yeah, first, yes, we do account headwind from FX. As I mentioned, at the present time, it's 1.3%. So we dialed that in because we don't know what's going to happen, obviously, because this year it was not bad. This year, actually, FX was basically 20 basis points tailwind. So we have a big headwind. So that's that. The second part of your question was short cycle. We think that most of our short cycle businesses should be growing, but modestly because of FX partially. like test and measurement and environmental in the low single digits. And as I mentioned before, while we think FLIR will grow about 3.9% for the year, a lot of that comes from defense. The non-defense part will grow a little less. And then, of course, as I mentioned, our historical... digital imaging would grow modestly.

Okay. And on that Excelita, or Excel, or however you say it, acquisition, what do you, should we assume some accretion to non-GAAP earnings in 25 months that's closed?

Yeah, I think, well, it depends on when it's closed, but I think if I look at the full year, As I answered Noah's question, we think we'll bring in about 15 million a month in revenue, and we think for a full year, if we were to have it for a full year, it should give us about 15 to 20 cents of accretion. Again, it's just talking in an acquisition, not doing a whole bunch of things in... in margin expansion, which we always do in subsequent years.

Got it. Okay, thanks, Robert.

Thank you.

Thank you. Our next question is from Damian Karras with UBS. Please proceed with your question.

Hey, good morning, everyone. Morning, Damian.

Morning. I appreciate all of the color you've provided. I was wondering if you could maybe just give us a little bit better sense for the order trends that you've been seeing. You know, are there any areas that have maybe picked up more meaningfully than you had expected, you know, three months ago, or vice versa?

Yeah, Damien, let me start with book to build, and I'll go to the most recent quarter. We just finished Q4. Overall, book-to-bill for the company is about 1.04. So it's positive. But it varies between the various different businesses. In instruments, for example, book-to-bill is 1.12, which is pretty high for us. Marine business is leading that by 1.23. And then environmental is positive, 1.09. We're a little cautious on TNM. We think it's just a little below 1, maybe 0.95, 0.99 for the whole year. Digital imaging, FLIR is positive at 1.03. Our historical imaging is slightly below 1 at 0.97. AD&E is 0.96, but we have to take into consideration the orders. They are a little lumpy, as they are in our engineered system, which is at 1.16. So overall, we think we have positive trends in our book to build. Now, if you go to some of our commercial, where we have the headwind, and we've had it last year, is in very specific areas of digital imaging, as Edwin mentioned, primarily in machine vision and machine sensors. Machine vision is recovering, though it's recovering slowly, but it is recovering. We've had order increases throughout the year. Machine sensors, where we make the detectors for other folks, that always lags behind six to nine months. So we think that recovery will be closer to the second half of 2025. I hope that answers the question.

Yes, that's very helpful. Thank you. And my second question, so obviously quite a bit has changed since last quarter with an election and a new administration that's come in. Could you maybe give us updated thinking about potential policy implications? There's the question of tariffs in China and Mexico, and the U.S. government is certainly an important customer of yours, and there's this new Department of Government Efficiency. So could you maybe share your thoughts on how you're thinking about all of that and what it might mean for Teledyne?

Please remember that I am not any more knowledgeable than anybody else, but I can relate it to our businesses. Let's talk about tariffs first. If you look back a couple of years, 2022, where we had all these shortages, right, coming out of COVID, we had experienced peak supply chain challenges, that cost us about $100 million in 2022. What did we do? We increased prices, not only in some of our businesses that we could, but also we improved margins. So we made up for it between those two and then our own efficiencies. The way the tariffs are laid out, at least initially, the Canada, Mexico, China, we think the impact of those will be less than what we experienced in 2022, maybe half as much. So we think we can deal with that. The other thing is the sophistication of the tariffs. We have to yet dive into it. Because we make products in different countries. We make products in Canada that then we finish off in the US. Sometimes we export. Sometimes it's for domestic consumption. So the value add changes. But having said all of that, we think we can deal with that. In terms of the Dodge efficiency, I think it kind of would favor us partially because compared to others. Partially because most of our defense businesses, as an example, it's purchase order businesses with products that we have rather than protracted appropriations. We also are in unmanned platforms. If you take our unmanned air vehicles, ground vehicles, and underwater vehicles, which we have all three. It's almost $400-plus million. Our platforms are unmanned. A lot of our sensors go on those versus manned platforms. And a lot of our products are also standard products rather than very highly customized solutions. So I think we will do okay.

That makes sense. Appreciate all the color. For sure. Thank you.

Our next question is from Jordan Leone with Bank of America. Please proceed with your question.

Hey, good morning. Good morning, Jordan. On the defense outlook, the 4% organic growth, how much of that is conservative? Just when we look at outlays being up 26% from FY23 to 24, I would expect the momentum to continue. So are there programs that are ending or it's just a mixed bag?

Well, I don't know if I fit the 4% number. As I mentioned in FLIR, we think it'll be higher than that, our growth. It was... Approximately, our FLIR defense businesses in Q4 grew almost 9%. We expect it next year to grow another 6%. So that's not as conservative. Now, the problem is that really we don't know what's going to happen to the various programs yet. But as I mentioned, If you take the fields that we're in, which are the unmanned systems primarily, and then, of course, electronic warfare, and then, of course, observations using EOIR, those favor us by and large, regardless of which programs go forward. So I'm pretty bullish about the defense part of our businesses.

Got it. Okay. Thank you so much. Thank you.

Our next question is from James Rashudi with Needham & Company. Please proceed with your question.

Hi. Thanks. Good morning. Hey, Robert, are you at all surprised by the slow recovery in that legacy digital imaging business?

Yeah. Yes.

To be very honest, I am. Part of it is really people are very cautious in building up inventory, especially our distributors. Partially, it's the China effect, both in terms of their imports, even though we don't export as a total company, that much to China. We're doing digital imaging, and partially because they are building their own systems and their own sensors. But by and large, Jim, these are short cycle businesses. They can turn on two, three, four weeks. So we don't have a lot of visibility. I can only talk about what happened. It's very hard to predict where things are going. But overall, if you look at the book-to-bill, even though when your billing is low, book-to-bill looks healthy, we've been enjoying book-to-bill, positive book-to-bill in our camera businesses for the last three quarters. So having said all of that, Yeah, I was surprised on why it's not recovering as fast as we should. I think it's partly because other people are conservative in building inventory, as are our distributors. The last question I'll add to is some of our customers are trying to lower their prices that they pay us. And frankly, we won't take those orders because the business is what the business is. And we're not going to lose margin just to get revenue.

Got it. That's helpful. And it appears that within that commercial business, and I think you indicated this, it appears to be some conservatism. embedded in the, uh, the full year outlook. If you were to look at areas that have the potential to maybe do a little better, would you say it would be some of the instrumentation business or, you know, potentially in the digital imaging business, maybe things starting to come back as we get through some of this, you know, this de-stocking that people have been talking about for a while now?

Yeah. Um, I think I would start with instrumentation. Some of the conservative is instrumentation and primarily in test and measurement. We're assuming the growth there is going to be 2.5% or so, but it could be a lot more because it's been doing better and better as the years gone on in 2024. Digital imaging, frankly, we have a slew of new products going out, which I think will be much more competitive. So yeah, we are being conservative. Having said that, at this time, it's prudent to be conservative. But we've always been, as you know us, we've always been conservative in everything that we do or say. You have to take that into consideration.

Understood. Thanks a lot. For sure. Thank you. Our next question is from Joe Giordano with TD Cowan. Please proceed with your question. I'll look on for the year.

Hi, Joe. I think you got cut off the first sentence. I didn't get it.

Hey, I'm just asking about a free cash flow outlook for the year.

Yeah, just to reiterate, I like bidding this one because we did so well. We got free cash flow of 1.11 as Steve mentioned. We think it'll be over $1 billion. If we hit one billion again, I'll be happy. We had some lower taxes, but we also enjoyed some improvement in our working capital and inventory. We had some advance payments on some programs. Those may not happen. But having said all of that, I think a billion is a good number.

And then I know this question has been asked on other calls, and you've been consistent with your answers, but it's a question we get from investors fairly often who want to look at Teledyne. But, you know, given the free cash flow generation you have and that you've shown the ability to be a bit more flexible with buybacks lately, is the dividend of it all interesting to you guys to bring in a new class of investors who can't currently invest in the shares?

That's a tough one. You know, just a little dividend I don't think will do us a lot of good, although I know companies that do that. Right now, I think we're better off if we can use our money to buy companies, especially since our acquisition pipeline seems to be richer than it has been. Having said that, when our stock was what we thought undervalued, We bought back stock, which is another way of returning cash to the investors.

Yep. Thank you. For what it's worth, from what we're hearing, people will be fine with a small dividend if there's a view that it could get somewhat larger over time. But that's just the feedback we're getting.

So thanks, guys. Thank you for that input. Thank you.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Jason Van Weest for any closing comments.

Again, thanks, everyone, for joining us this morning. If you have follow-up questions, please feel free to call me at the number on the earnings release. And again, a replay of this is available via webcast and via dial-in. Thank you, operator. To conclude the call, we'd appreciate it. Thanks, Paul. Bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.