Teledyne Technologies Q4 2021 Earnings Call Transcript

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Provided by Quartr
January 27, 2022

Key Takeaways

  • Teledyne delivered record 2021 results with all‐time highs in sales, adjusted operating margin and cash flow, and successfully closed the FLIR acquisition to become a global sensing and decision support technology company.
  • In Q4 2021, revenue jumped 70% year-over-year—driven by 8.4% organic growth and 61.6% from FLIR—with especially strong performance in commercial imaging and test & measurement.
  • Adjusted EPS (excluding acquisition charges) rose 23.9% to $4.56, free cash flow reached a quarterly record, $345 million of debt was repaid, and leverage fell from 3.8× to 2.9× net debt/EBITDA.
  • For 2022, Teledyne forecasts 4–5% organic sales growth (to nearly $5.5 billion total revenue including FLIR) and plans further price actions to offset inflation and mitigate supply chain constraints.
  • Segment achievements in Q4: Digital Imaging adjusted margin of 23.3%; Instrumentation posted a 7-year high book-to-bill of 1.35; Aerospace & Defense margin up 888 bps; Engineered Systems declined on exiting higher-margin engine business.
AI Generated. May Contain Errors.
Earnings Conference Call
Teledyne Technologies Q4 2021
00:00 / 00:00

There are 11 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Teledyne's 4th Quarter Earnings Call 2021. 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 given to you at that time. And as a reminder, this conference call is being recorded. I would now like to turn the call over to your first speaker, Mr.

Operator

Jason Van Leef. Please go ahead.

Speaker 1

Good morning, everyone. This is Jason Van Wees, Vice Chairman of Teledyne. And I'd like to welcome everyone to Teledyne's 4th quarter and full year 2021 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 Barabian, Senior Vice President and CFO, Sumain Senior Vice President, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibic And also joining today is Edwin Rox, Executive VP of Teledyne and President of our combined Teledyne Digital Imaging Businesses.

Speaker 1

After remarks by Robert and Sue, we will ask for your questions. But of course, before we get started, our attorneys have reminded me to tell you that all forward looking statements And yes, 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 1 month. Here is Robert.

Speaker 2

Thank you, Jason, and good morning and thank you for joining our earnings call. 2021 was a defining year for Teledyne with record sales and adjusted earnings, Operating margin and cash flow. Furthermore, with the successful acquisition and integration of Teledyne FLIR, Teledyne has further evolved into a global sensing and decision support technology company. We provide specialty sensors, cameras, instrumentation, algorithms and software across The electromagnetic spectrum and unmanned systems in the subsea, land and air domains. I've never been more pleased with our portfolio of businesses.

Speaker 2

In its simple description, We are a high technology commercial industrial business, balanced across multiple end markets with a resilient, predictable portion of long cycle government business. In the 4th quarter, Our operational execution remained very strong. We achieved revenue record revenue 70% greater than last year, driven by organic growth of 8.4% and the remaining 61.6 percent of sales increase contributed by Teledyne Clear. Sales growth was especially strong in our commercial imaging and electronic and test electronic test and measurement In addition, our Aerospace Defense Electronics segment saw continued growth in government and space markets along with ongoing recovery in commercial aerospace. Despite significant non cash purchase accounting charges, 4th quarter GAAP earnings per share of $3.39 decreased only 2.6% compared to last year.

Speaker 2

Excluding acquisition related charges, earnings were 4 point and $0.56 per share, an increase of 23.9% on a comparable basis from 2020. Compared to the midpoint of our 4th quarter Earnings output in October, which was $4.12 stronger Sales contributed about $0.12 per share, improved margins roughly $0.25 plus a small $0.07 per share increase related to discrete tax items, which by the way specifically excludes a larger tax benefit related to clear foreign tax matters appearing in the GAAP results. Cash flow was also all time quarterly record, Allowing repayment of $345,000,000 of debt and our leverage ratio Declined from 2.9 declined to 2.9 from 3.8, which was the number we had immediately after the Flare acquisition. Turning to 2022 outlook. The overall demand environment across all businesses remains favorable.

Speaker 2

Nevertheless, supply chain constraints continue to limit shipments. Given this, We think a reasonable outlook for total company organic sales growth at this time is between 4% 5%. Coupled with a full year sales contribution of Approximately $2,000,000,000 from FLIR. This equates to total revenue of just under 5.5 $1,000,000,000 Of course, if supply chain challenges these or As it's necessary, we were able to increase pricing to offset inflation more than At the present time, we will increase the revenue outlook throughout the year as we did in 2021, where we achieved full year organic revenue growth of 8.2% relative to our initial outlook in January of of 5% to 6%. I will now comment on the performance of our 4 business segments.

Speaker 2

In our Digital Imaging segment, 4th quarter sales increased 2 0 9%, largely due to the FLIR acquisition. But organic growth in our combined commercial And government imaging businesses was also very strong at 18.6%. Sales growth was strongest for industrial and scientific vision sensors and systems. In addition, We had record healthcare sales with revenue greater than any pre pandemic period. GAAP segment operating margin was 11.6%, but adjusted for purchase accounting and transaction costs, Segment margin was 23.3%.

Speaker 2

In our Instrumentation segment, 4th quarter sales increased 6.9% versus last year. Sales of electronic test and measurement systems, which include oscilloscopes and protocol analyzers were very strong and increased 13% year over year to record levels. Sales of environmental instruments increased 3.2% from last year with sales related to human health and safety markets such as drug discovery and gas and flame detection being the strongest in the quarter. Sales of marine instruments increased 6.5% in the quarter. In addition, quarterly orders were the strongest in the last 7 years with 4th quarter book to bill of 1.35.

Speaker 2

Overall, Instrumentation segment operating Profit increased 5.5% in the 4th quarter and 19% in 2021, With full year segment operating margin increasing 226 basis points for 218 basis points excluding intangible asset amortization. In the Aerospace and Defense Electronics segment, 4th quarter sales increased 12.5%, driven by 6.4% growth in defense, space and industrial sales, combined with 38.5 percent increased in sales of commercial aerospace products. GAAP segment operating profit increased 75% and margin 888 basis points greater than last year. Finally, in the Engineered Systems segment, 4th quarter revenue decreased 15.6% on operating profit and margin declined due to lower sales and also since we exited The higher margin cruise missile turbine engine business earlier this past year. Before turning the call over to Sue, I want to make a few concluding remarks.

Speaker 2

First, As noted in yesterday's 8 ks filing, an appeals court in Sweden Generally affirmed a lower court ruling made in March of 2020 regarding a clear tax matter dating back to 2012. The court determined an estimated Tax liability of $303,000,000 This outcome was anticipated by us and the associated liability was accrued as noted in our most recent 10 Q. We do not plan to appeal the decision and expect to pay the tax in the Q1 of 2022. Finally, regarding environmental, social and governance efforts or ESG, Teledyne's sustainability journey began more than 20 years ago with the belief that demand for environmental monitoring instruments would upgrow general industrial process implementation. Our first three acquisitions were Advanced Pollution Instrumentation, Monitor Labs And Tech Mart, 3 companies dedicated to analyzing trace contaminants in air and water.

Speaker 2

Today, our imaging sensors enable greenhouse gas and pollution monitoring from space. Our environmental instruments provide data on the concentration of chemicals and particulates in ambient air and our autonomous underwater floats and vehicles enable the monitoring of ocean temperature and salinity from the surface to deep subsea. While we have highlighted our strategy and product in our last three annual reports, Next month, we will publish an inaugural Corporate Social Responsibility or CSR report. Here, We will further highlight our sustainability efforts as well as disclose matrices regarding greenhouse gas emission and reduction targets, workplace safety and employee and management diversity. I'll now turn the call over to Sue.

Speaker 3

Thank you, Robert, and good morning, everyone. I will first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our Q1 and full year 2022 outlook. In the 4th quarter, cash flow from operating activities $295,600,000 compared with cash flow of $236,400,000 for the same period of 2020. Free cash flow, that is cash from operating activities less capital expenditures, was $261,600,000 in the 4th for the quarter of 2021 compared with $217,000,000 in 2020. For the full year 2021, free cash flow was $794,600,000 excluding FLIR transaction related Cash payments, net of tax.

Speaker 3

Capital expenditures were $34,000,000 in the 4th quarter compared to $19,400,000 for the same period of 2020. Depreciation and amortization expense was $86,200,000 for the Q4 of 2021 compared with $28,700,000 in 2020. In addition, non cash inventory step up expense for the Q4 of 20 21 was $47,800,000 We ended the quarter with approximately 3.6 $2,000,000,000 of net debt, that is approximately $4,100,000,000 of debt, less cash of 474 point compared to $5,900,000 for the same period of 2020. Resulting from the FLIR acquisition, restricted stock unit Funds for FLIR employees was $1,500,000 in the Q4 of 2021. Turning to our outlook.

Speaker 3

Management currently believes that GAAP earnings per share in the Q1 of 2022 will be in the range of $3.12 to $3.22 per share with non GAAP earnings in the range of $4.02 to $4.10 And for the full year 2022, our GAAP earnings per share outlook is $14.10 to $14.55 and on a non GAAP basis, dollars 17.60 to $18 The 2022 full year estimated Tax rate excluding discrete items is expected to be 22.8%. I'll now pass the call back to Robert.

Speaker 2

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

Operator

Our first question coming from Mike McGarry with Wolfe Research. Please go ahead, sir.

Speaker 4

Hey, good morning. Thank you. Robert, can you talk a little bit more about how you're thinking about doing deals again? What's the level of Leverage that you're comfortable with to start doing deals again? And how does the size of those deals sort of flex with where your level of leverage is at?

Speaker 2

Thanks, Mike. First, we are rapidly bringing our leverage down. The 2.9 leverage ratio that we currently enjoy is a number that we were really Thinking would happen by the end of 2022. So having moved that forward, I think by the end of 2022, we should be in what I would say in an investment grade range. We are at the present time, we are pursuing bolt on acquisitions.

Speaker 2

But in the long term, we would also look at larger acquisitions. What do I mean by large? Anything that goes beyond a couple of $1,000,000,000 takes a little time. So even at this time, we can look at those things we take because it takes 10 months to a year to close. Having said all of that, Our longer term leverage ratio is somewhere between 1.5 to 2.5.

Speaker 2

So if we get down to 2.5 or less by the end of 2022, we'll be in good shape to do other things.

Speaker 4

Great. Thank you. And then, as my follow-up, can you update us on free cash for 2022? And is there any update to the $1,000,000,000 number that you put out there for 2023? Thank you.

Speaker 2

Yes. Mike, if I were to Mike guess, I think our 2022 number is something like A little over $900,000,000 $23,000,000 will still be over $1,000,000,000 We might be able to improve on that as we go along. But right now with what I see or what we see in organic growth and also CapEx and other That's about the range.

Speaker 4

Got it. Thank you very much.

Speaker 2

Thank you, Mike.

Operator

Our next question comes from Greg Konrad with Jefferies. Mr. Konrad, please go ahead.

Speaker 5

Maybe just to start, I

Speaker 6

mean, embedded in your guidance, how are you thinking about margins, just given maybe some of the one timers in digital imaging 2021, if you could just give a little bit of granularity around segment margins.

Speaker 2

Yes. Greg, The digital imaging, we ended full year At a little over 24% if you exclude the non one time charges. It's a tough comp for us in 2022. And the reason I say that is in Q2, when we acquired Clear. They have always had a hockey stick sales profile during a quarter.

Speaker 2

So the beginning half of the quarter, they had a lot of costs, which they made out In the Q2 of the quarter as they sold product. And what we enjoyed this year was significant increase In the second half of the quarter, after we closed the transaction right in the middle of The quarter on May 14. So that helped us with the margin. Having said that, when you strip away All the one time charges except for intangibles, we still think we're going to be in 22%, close to 24%, 23.9%, 24%, which is a little less than 21%. But We're shipping everything out except intangibles.

Speaker 2

And those are pretty good margins. And it's probably The result of the fact that we're able to maintain our reduced cost structure that we enjoyed and implemented after the FLIR acquisition. Now, if we can increase, as I said earlier, If we can increase price to make up better make up for inflation, I think our and if we're our sales are as robust as they have been, I think our margins would definitely increase.

Speaker 6

And then maybe just to follow-up on that comment. I mean, you talked about Both supply chain and price as kind of if those improve as kind of upside drivers. Is there any way to Quantify maybe the impact of what you're seeing there? And then just in terms of pricing, where could that be most impact

Speaker 2

Yes. Let's start with price increase for us. In 2021, on the average, we increased price about 2% And we had volume increase of 6.2% and that resulted in the overall organic growth of 8 point 2%. On the flip side, we had some price increases from our suppliers. We were fortunate in that one because we instituted a very strong procurement program starting in 2019 before the pandemic.

Speaker 2

And because of that, we also ended up with some good Contracts, longer term contracts with some of our suppliers. Having said all of that, I think about $2,000,000,000 that we buy from our Various suppliers between the in the new Teledyne. I think we are going to have some price increases from them that are going to be in the 2% to 3%, maybe a little more. But we are offsetting that right now in 2022 With our own price increases of 1.5% to 2%, but maybe we can do a little better than that. And right now, we're predicting Projecting our volume to go up 2.5% to 3% on top of the price increase, which Of course, with the current outlook that I gave you, between 4% 5%.

Speaker 2

Having said that, if we can increase prices more And as we go down the year like we did in 2021 and things turn out to be working for us, our organic growth should be better, just Like it was in 2021.

Speaker 6

Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Jim Ricchiuti with Needham and Company. Please go ahead, sir.

Speaker 7

Thank you. Robert, I'm wondering if we think about your annual revenue outlook, Any sense as to how much of a revenue impact you're seeing, you're anticipating as we think about Some of the supply chain challenges that are out there?

Speaker 2

I can only do the short term, Jim. In Q1, the way we're looking at it, it's probably Effect of somewhere about $80,000,000 right now, what we see. Of course, we are working very hard on that one. We have buyers across our company focused on that. But more importantly, we're also using buyers across the globe, Specifically more in the Far East that identify parts for us.

Speaker 2

So if we have, Let's say, 500 parts shortages across the company, they can usually find something about something around 60% to 70% And then of course, we have to qualify and use them. And we also have our semiconductors Board manufacturers, they are also looking for parts for us at the same time. So we have this cooperative activity going on that I think has helped us So far, certainly in 2021. Right now, we're looking at $80,000,000 decrement. But as we did in Q4, We'll overcome some of that as we go forward.

Speaker 2

And we've kind of baked that into our projections. So I don't think supply chain is going to kill us as it does in some of the other companies. Got it. And you gave I

Speaker 7

may have missed it, but you gave some color on the book to bill in Marine Instrumentation.

Speaker 2

Could you provide some booking book to information on

Speaker 7

some of the other business segments. And just related to your comments about operating margins in digital imaging, if we think about some of the business areas that you've structured. It would seem like there would be some nice margin expansion opportunity in some of those areas.

Speaker 2

Right. Well, let me start with the first part of your question, which is book to bill. In the instruments area, Book to bill is about 1.08. So it's pretty healthy. In Q4, it was higher.

Speaker 2

It was like 1.16, but the average it out over the 4th quarter is 1.08. The strongest category there being enjoyed by marine. Nevertheless, all of our ag Programs, all of our businesses in the instrument business have in the instrument segment have ratios over 1. In digital imaging, we have about 1.05. Healthier in Our historical digital imaging, which includes, of course, DALSA E2V and other things, That is really doing well.

Speaker 2

It's about 1.3. FLIR is less than 1. And the reason for that is primarily in their defense businesses, which are both lumpy and also They are projecting at this time the kind of programs that we anticipate. That's why, by the way, we restructured The management of that business under Jifeng Li, who was as you know, the Deputy for Research and Engineering, acting Deputy for Research and Engineering in Department of Defense. And we think that's going to come along fine.

Speaker 2

In AD and E, Aerospace and Defense segment, It was over 1. It was 1.04. And in Engineered Systems, which is big programs, fairly lumpy was close to 1. So overall, I'd say, if you look at the total company, at the end of 2021, averaged over 2021, are talking about 1.05, which I think at this time for us that's a pretty healthy number. And then let me go to the second part of your question, which had to do with margins.

Speaker 2

We had significant margin improvement in All of our businesses, except fairly flat in Engineered Systems in 2021. Let me start with that because The trick is to maintain those margins as we move into 2022 and as we grow. 1st, in instruments, Our margins increased from 20 to 21, 218 basis points, and we expect to increase that another 30 basis point to 23.8%. As I mentioned in digital imaging, overall, We have some tough comps. Our margins may decline just a little bit, maybe 30, 40 basis points.

Speaker 2

But I think as we improve our revenue and pricing that should take care of that. In Aerospace and Defense, Our margins between 2021 2020 increased 745 percent and we expect to improve that another 80 basis points in 2022. Engineered Systems is the toughest comp we have because we did exited the turbine engine business And we think we're going to have some margin shrinkage there, maybe 40, 50 basis points, but it's of course 48% of the company. So overall, I think total company margins right now with the organic growth that I projected between 4% 5 I think our total margins for the company will improve about 20 basis points to 21.5%. But as I said before, if we can enjoy a little more price increases and if our revenue goes up, Just like it did in 2021, then our margins would go up accordingly.

Speaker 5

Got it.

Speaker 8

Thank you.

Operator

Thanks, that's helpful. Our next question comes from Christine Lagarde with Morgan Stanley, please go

Speaker 9

ahead. Thanks. Good morning, guys. Robert, on the parts Shortage issue that you mentioned in the supply chain, are trends starting to improve and you're seeing more availability? Or are you seeing the issues become more widespread and potentially see more parts affected?

Speaker 2

I would say, Kristin, overall, things are improving. There are pockets where Things have not improved. Basically, the lead times are increased a little bit. And the trick is, of course, to make sure that you built Certain products that you're waiting for a single part or 2 part, build those products and put them on the shelf and be ready to move as soon as you secure That's especially becomes important in something like our cameras. We have thousands of cameras That can go out as soon as the part arrives.

Speaker 2

And because of the efforts, Christine, that I mentioned before With buyers across the world, especially in the Far East, looking for specifically people dedicated for looking for parts for us, We're able to offset those. I think overall, the across our portfolio, Part shortages are not that important in certain areas like aerospace and defense and certain parts of Digital Imaging, for example, some of the people that supply us Semiconductor products for our digital imaging, that is the people that make the Various products that we design, they're also our customers. So there is a little bit of We enjoy a little bit of leverage there in that what goes around comes around. So we enjoy that leverage. So I would say it's a serious matter, but it's not as serious as other companies are suffering from.

Speaker 9

Thanks. That's really helpful color. And maybe, as a follow-up question on one of the pricing increases you mentioned. It sounds like you've got efforts in place to pass on this 2% to 3% pricing increases from your suppliers and potentially get a little bit more. Can you talk about the competitive environment, what your competitors are doing and also any feedback from your customers about Their price inelasticity, and ultimately, I mean, 2% to 3% seems pretty low versus inflation that we're seeing in the overall industry that's more Mid single digit.

Speaker 9

I mean, is this a very easy thing for you to be able to accomplish, which is passing that off and getting a margin on top of that?

Speaker 2

Christine, I'm never going to admit it's easy because if it were easy then we would We'd enjoy a different world. What has happening to us is that We can't get price increases where our products have superior performance. So If someone is going to buy a camera, that's got very specific requirements for that application and we provided that we can enjoy price increases. In our protocol analyzers and oscilloscopes where we have very unique positions. We're way ahead of the curve on other people.

Speaker 2

We can enjoy significant price increases. On the other hand, if you're making a product in the ambient particulate or ambient Air monitoring and you're in China and they're emphasizing by Chinese. And they are not really that interested in paying a high price for a product that's really superior. Then you don't have as much price advantage and you have to compete with what the market dictates. Fortunately for us, Christine, as you travel across our portfolio of products Across the company, because our end markets are so diverse, you get really Because of our balanced portfolio, you get some places where you can enjoy serious price increases and some places that you have to stay competitive.

Speaker 2

So what you do is you just Focus on cutting costs, focus on improving manufacturing operations.

Speaker 9

Great. Thank you very much for the color.

Speaker 2

For sure.

Operator

Our next question comes from Elizabeth Greenfield with BOA. Please go ahead.

Speaker 10

Hi, good morning, everyone. Good morning. I was hoping you could speak to your operating margins over more of the medium term, so not just this year, but How we should think about them progressing, through call it the next 5 plus years or 5 years?

Speaker 2

Well, I can tell you, we measure ourselves against Very best in class. We've closed our margin gap Significantly, over the last 5 years, we have improved margins About 400 basis points. Now going forward another 5 years, Where I sit here now, I'd say if we can improve 40 to 50 basis points a year, it'd be great. We've closed the gap very fast. On the other hand, if things go our way, which seems to have gone our way in the past, We could do better than that.

Speaker 2

But sitting here right now, I'd say 40 to 50 basis points looking forward.

Speaker 10

Thank you very much.

Speaker 2

For sure.

Operator

Our next question comes from Andrew Buscaglia with Borenberg, please go ahead.

Speaker 6

Good morning, guys. I was hoping you could dig a little bit more into digital imaging in the quarter. It Definitely exceeded my expectations. And you made an interesting comment that healthcare sales had a record level of sales. Can you So I imagine that's the main driver, but can you just talk about what you saw within that segment?

Speaker 2

Yes. There are two parts to it, Andrew. Of course, there's our legacy Digital Imaging and there's our new acquisition, So if you would bear with me, I'd like to separate the 2 for a minute. And then of course, going forward, we're going to talk Rajeev, there were 1. But let me start with our historical digital imaging.

Speaker 2

Without acquisitions, between 2020 2021, we enjoyed 15.6 percent increase in revenue from about $986,000,000 to 1.140 And then if you look at our machine vision within that and cameras, scientific cameras And sensors that really did well. It was in the Q4, it was 29%. And in the Q4, it was about 36%, forgive me. Overall, during the year was 29%. Healthcare, which as you know, we make X rays as well as X-ray source components for Cancer treatment, we had our best quarter we've had in the last ever this year And it increased 19.5% in Q4 and 15.8% for the year.

Speaker 2

And then we also had growth in our Aerospace and Defense in that segment. 4th quarter about 4.8%, over the year about 4.1%. And then MEMS, as you know, our microelectromechanical systems, fab, We enjoyed about 17.9% for 4th quarter 12.3%. Q4 was a great quarter. We had a little decline in our geospatial, but that's a very small part of That portfolio, it's only $60,000,000 So $2,000,000 or $3,000,000 would look like A lot of money, but it essentially didn't grow year over year.

Speaker 2

Now looking again, I'm going to stay with this segment for a while. Looking forward to 2022, at this time, we're projecting about 5.35 percent growth for next year, something to go to about $1,200,000,000 And that varies across the various products, a much more moderated increases than we had in 2021. But again, let me caution that it's the beginning of the year and I can't see we can't See too far forward to project things much higher than 5%, 5.3% in this Let's go to FLIR for a second. Overall, before we acquired FLIR, In 2020, revenues of about 1,924,000,000 And of course, that was the year that they really enjoyed the elevated skin temperature products, which contributed about $1,000,000 to that revenue. If you go through 2021 and you add up Free acquisition and post acquisition revenue for the whole year for FLIR, it was 1.895.

Speaker 2

So It went down about $29,000,000 which means that we made up Most of that $100,000,000 decrement that we saw in the elevated skin temperature and which was also reflected primarily in their industrial segment businesses, which went down about $46,000,000 Next year, we're projecting those businesses to improve by about 5.9% And overall, the total business will increase to almost to $2,000,000,000 or increase from where we are today, 5.5% $2,000,000,000 And then if you track the defense businesses and Raymarine, etcetera, Raymarine had a great year. That's part of, of course, the industrial segment, almost 15.9%. We're thinking moderate, about 3% next year. Defense businesses enjoyed some pickup from $768,000,000 to $785,000,000 in 20 20 to 2021. But we're projecting another 6.4% Going into 2022.

Speaker 2

So and almost increases in all areas. So in sum total, We think that our overall digital imaging businesses, which would be both of those combined, Will be about $3,200,000,000 in revenue, which would be an increase of about 5%, maybe a little more over this year. This is all organic.

Speaker 6

Okay. Yes, very helpful. Yes, so maybe just switching gears. I was surprised to see we're seeing a couple of quarters now where A and D Electronics have really picked up. And I believe you said aerospace is up over 30%.

Speaker 6

How much of this is just easy comps or is that the real side of things of activity picking up in that area do you think?

Speaker 2

Well, first, let me go into the aerospace part. Of course, that's the tilted towards commercial Aerospace, that's a small portion of our overall portfolio. It's about $120,000,000 100 and $5,000,000 but we took a real beating from 2020 to 2021 From 2019 to 2020, and that business just hit the bottom. It went down about $100,000,000 We took cost out as we always do. We took the cost out and some of the comps therefore were Easy as we come into the New Year.

Speaker 2

That business has grown significantly and Our margins are over 30% because of we kept the lower cost and improved revenue year over year. But by and large, the aerospace business, like most of our other businesses, is a small fraction of our overall portfolio. And that's why I always kind of emphasize the fact that we like to have a balanced portfolio. Even in digital imaging,

Operator

we have

Speaker 2

a balanced portfolio between machine vision, healthcare, aerospace, geospatial, thermal, unmanned, surveillance, components, etcetera. So none of these businesses get hurt. And going back to Aerospace and Defense, the other thing that's happened is we work very hard to improve our margins in the defense part of that business. So if you look year over year, the margins in our Aerospace and Defense business from 2021 to 2022 because of the good comps. The overall year margin went to 21.3% and increased 745 basis points with respect to 2020.

Speaker 2

And we think in 2022, we can increase it another 80 basis points. I hope that answers your question.

Speaker 8

Thanks, Robert.

Speaker 2

For sure.

Operator

Our next question comes from Joe Giordano with Cowen. Please go ahead.

Speaker 5

Hey, guys. Good morning.

Speaker 9

Does anything

Speaker 5

as you look across all the different parts of your business, does anything feel kind of unsustainably high? Or and conversely, does anything feel like it's clearly collecting off of levels and moving higher?

Speaker 2

Oh, boy. You would ask that, Joe. I think the only thing I would say, No, nothing looks sustaining the idea. It just causes the comps to be a little tougher, right? I mentioned about digital imaging.

Speaker 2

When you kind of hit the ball out of the park, now you go up to bat again, You might hit singles rather than hit it out of the park. Some of the later cycle businesses like aerospace, We're enjoying get bombs and I think that's going to keep moving and it's going to be good. And our marine businesses We have the best book to bill ratio in our instruments is in our marine businesses. So we think that's going to go up significantly. But again, going back, you look at our overall marine business, which ranges from Defense to underwater vehicles, some oil, gas and oil, overall, it's about $425,000,000 this year, maybe over $460,000,000 next year is not a big chunk of our portfolio.

Speaker 2

So if it goes down or up 10%, 15%, it doesn't affect us very much. So I don't see things getting out of whack. There are some areas that I think if we do the right things, we're going to enjoy significant benefits. Let me give you one example. We have about $450,000,000 of unmanned vehicle business portfolio.

Speaker 2

About 150 is underwater. It's 150 is underground and 150 is in our drones that we got from FLIR. So if we can combine some of those technologies, if we can couple those Capabilities together, then I think over the long run, that business can grow much faster than any of the businesses On their own stand alone. So and that's the kind of stuff that excites me at this time. Can we put those things together and kind of get the kind of bounce that You're talking about.

Speaker 5

Yes. That was going to be my next question. Like kind of where do you think I know you don't want Revenue synergies or anything like that was clear, but kind of where do you think this can go in terms of like an overall pitch of the portfolio? Like How does the scale help you when you're going to market or bidding certain applications?

Speaker 2

Well, by now that we're by nature relatively conservative. Let me say that We have managed to take significant amount of cost out from flares. And We took as much cost this year as we thought we'd take between this year and next year combined. So that business is now stabilized. We're not going to squeeze that business anymore.

Speaker 2

We just took a lot of cost out in the whole management, top management, The, of course, public company and then they had zillions of consultants that we don't need. And we did all of that without increasing our own corporate budget, which is important. So where else do we have synergies? We have some synergies In costs right there. The other areas are some of our purchasing powers have improved because of the coupling of the And then go to market together is important.

Speaker 2

And I think those synergies are Small in each area, but they add up to significant numbers. Let me give you one example. We have a gas and flame business that we bought from 3 ms, it's a really good business. When we bought it, it had about 12% margins. Last year, the margins went over 20%.

Speaker 2

FLIR has a gas detection camera that we're trying to couple the 2 and sell it together. The same thing goes with enormous number of FLIR commercial products in the thermography business and a lot of our visible cameras. And we're trying to couple those together. And fleet had some mid market cameras. We've coupled that already with high end cameras.

Speaker 2

So there are a lot of synergies. I've kind of baked that in so far for next year in our 5.5 percent overall revenue growth to about 3 point $2,000,000,000 But I think if we have the synergies going forward, it could improve more than that. But right now, we're trying to keep our stable, our cost reductions, So that we don't get smacked with some cost increases and then try and slowly work our synergies as we go forward.

Speaker 5

Can I just have you clarify one thing? We went through a lot of numbers and I was trying to write everything down, I might have missed some stuff. I know that organic is a little bit tricky because Part of FLIR is inorganic for the year. And if you were to totally segregate these two things, how fast organically do you think FLIR On its own, like the totality of FLIR is going to grow in 2022 and then total legacy ex FLIR Teledyne? And then where do you think the market is FLIR are in where were they in 'twenty one and where are they in 'twenty two, just FLIR?

Speaker 2

Yes. Just clear, let me go back to 2020 because that's a good starting position. They were at 1,924,000,000 In 2020. In 2021, if you take before and after the acquisition, they went down 1 point 5% to $1,895, and that was primarily because of They didn't have the elevated skin temperature sales. Okay.

Speaker 2

So if you take that as a basis, 1.895, We're projecting a 5.5 percent revenue increase in 2022, all organic to about $2,000,000,000 If you take our legacy digital imaging businesses, They went up 15.6% from 2020 to 2021. We don't think that's sustainable at this time. Let me always emphasize at this time. We think that can go from $1,140,000,000 to $1,200,000,000 which is another 5.3% increase. So if you combine the 2, you're talking about somewhere between 5 about 5.4% increase in revenue Organically, all in.

Speaker 2

Does that answer the question?

Speaker 5

And the FLIR margins?

Speaker 2

Our flare margin is going to go down a little bit primarily because of, As I mentioned before, I don't know if you were on the call there, where Q2 was really good because They produced most of that material early in Q2. Their margins are going to be close to 24% and our On legacy margins are going to be about 23.8%, which by the way, that's 200 basis points higher than what we had in 2020. So if you can maintain that and increase it together, I think it's going to be tough. We may have a little reduction in overall margin, let's say, 30 basis, 40 basis points, maybe close to 24%, which is pretty good. Our margins in digital imaging and our instrumentation are very close to one another as we're projecting in 2022.

Speaker 2

They're almost 24% each. And as I said, in defense and aerospace and defense, we have crawled up to 22%. So I'm happy with that scenario.

Speaker 5

Perfect. Thank you.

Speaker 2

Thank you.

Operator

We now go to Noah Poponak with Goldman Sachs. Please go ahead. Hello, everyone.

Speaker 2

Hello, Noah.

Speaker 8

Robert, could you spend a little more time on exactly why digital imaging And legacy, ex FLIR, has had suddenly such high growth rates. I mean, I know the compares are Kind of easy, but they're not that easy. It didn't draw down that much in 2020. And I understand you've given the detail on what each of the pieces did and know the trends in those businesses, but it's sort of an out of nowhere step function in the growth rate that you've had for a few quarters here. If you could just Better educate me on what the successes are driving that.

Speaker 2

Sure. And I'll try not to emphasize brilliant management Don Edmondo, Sarkozy is sitting here.

Speaker 8

Whatever the right answer is,

Speaker 2

No, let me take a couple of When the pandemic hit, our healthcare businesses suffered because a lot of the selective X-ray treatment and even cancer treatments took a significant hit because the hospitals were overloaded. As things eased up a little bit, both our X-ray business and our X-ray source business went picked up and so it enjoyed a 14% increase. That's the highest in the quarter that was up 19.5%. So it averaged about 13.4%. So we picked it up as the year went on.

Speaker 2

And that was really driven by the fact that People started having more surgeries and treatments, etcetera. In the machine vision business, Our inspection businesses went up significantly throughout the year. And if you take Our scientific cameras, which are also very important, we data used in all kinds of applications, including looking at Details of COVID sources and there you have to have very fast cameras, which we do. I started the year okay, but then it started picking up and by quarter 4, It was over 36%. So it's nothing that happened now suddenly.

Speaker 2

It was just a slow increase in those businesses as we went along. And MEMS, we have a unique In both ProMond and then we bought this Microline MEMS business, There's a scarcity of independent MEMS foundries. And we have probably one of the top independent foundries in the world. And so with the shortages that are happening, Customers are coming where they can get stuff and where we can make them. And so that's helped us a lot too.

Speaker 2

That overall Year over year increased 10%, 9.4%, but picked up almost 18% in Q4. So It's not any one thing. It's a lot of these little things adding up. What we're trying to do is we're trying to give conservative guidance for 2022 because the comps are so tough. And then as I said before, we have to kind of tiptoe our way through this supply chain issues.

Speaker 8

I mean, I guess, the numbers are impressive, but a decent amount of that detail you gave there is COVID and some of the The movement around that and then supply chain, all of which hopefully don't last forever, at least to the degree they do impact Do you worry about not only a tough compare, but then just a resetting back to normal of some of those items or you just have enough incremental penetration you can find to keep growing that business?

Speaker 2

I think just to walk out of my shoes, my conservative shoes, I'd be surprised if we don't do better as we go along.

Speaker 8

Okay. Okay, great. And then in the FLIR piece, The numbers you've provided on a multiyear basis there, very helpful and transparent. Those are Pretty in line with where they were trending and what the outlook was for the business. So So it sounds like we know you haven't divested anything.

Speaker 8

And I thought there might have been some pieces in there you didn't quite see as Aligned with Teledyne for the long term, I thought you might have some stuff that you just kind of let roll off, with a focus on profitability and cash flow. It looks like that hasn't happened that you've determined essentially all of legacy FLIR stays with Teledyne. Is that right?

Speaker 2

Yes. The answer is yes. And then by the way, there's a little difference between you covered there for a long time. So you probably know of those businesses Historically, the trends better than I do. Having said that, they may have projected revenues, Robust revenues year over year, but I am not sure how many of them they hit.

Speaker 2

So when I say $2,000,000,000 in 2022, I kind of feel that we can achieve that. Having said that, let's talk about this divestiture issue. You recall that at one time, they were thinking of Selling their marine businesses.

Speaker 8

Right.

Speaker 2

Well, we don't because We have a huge number of marine businesses that fit tightly with that business. We have Our whole marine effort with all the capabilities we have in underwater imaging And then our LiDAR businesses, that's a go for us. And that business has done very well in 2021 and we're projecting And that's not even counting the synergies that we should enjoy in that domain. So Frankly, I don't see any part of that business that we would divest. It's a good That's why we paid a dear price for us to get it.

Speaker 8

Interesting. Okay. And just One last one, if I might. The Aerospace and Defense Electronics segment margin increased pretty significantly through the year last year, even though the sequential revenue change isn't that significant. And historically, it doesn't have that doesn't quite have that seasonality.

Speaker 8

So why I guess, why did it or should I be thinking about that? Why isn't the margin exiting the year kind of

Speaker 2

Well, two reasons, Noah. First, as I mentioned before, the aerospace portion of that business Came back because we took the cost out and the revenue any revenue increase just was really huge gross margins. So That increased tremendously. And frankly, in 2020, that was depressed versus 2019. That was depressed because of the cost cutting that we did in the aerospace portion of that.

Speaker 2

The other thing is on the defense portion of that, we had some really nice Programs and we've kind of stabilized that. We have really good new managers out there. And so that's And then lastly, in the aerospace part, we're enjoying good aftermarkets. The aftermarket in that domain is Pretty good. And OEM is coming back.

Speaker 2

While OEM margins are a little less than we've enjoyed, we'd like to think, especially in 2022 and 2023. With the aftermarket, because they have already our products on the aircraft, We think that will be good. And then we have some really exciting new products coming out like we've mentioned this, you may recall. We have an aircraft on aircraft monitoring air monitoring product that we're introducing. And it's kind of builds on their monitoring products that we have in our instrument businesses for Outside the aircraft.

Speaker 2

I think that's going to be a very good product because everybody, when you get on an airplane, what's the First thing to worry about nowadays is the quality of the year.

Speaker 8

Yes. So essentially relative to the Q4, you have to bring Cost back on compared to the drop through that you experienced in the Q4?

Speaker 2

No, I don't think so. I think the mix between OEM and aftermarket, the margin should stay about the same. But as we said, in overall aerospace As defense market, we expect an 80 basis point increase in margin between 2021 2022 for the full year.

Speaker 8

I appreciate all the detail, Robert. Thanks so much.

Speaker 2

Sure, Noah. Thank you.

Operator

And we have no additional questions in queue. The queue is clear.

Speaker 2

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

Speaker 1

Thanks, Robert. And again, thanks everyone for joining us this morning. Of course, if you have follow-up questions, please feel free to call me at the number mentioned on the earnings release. And always, all the earnings releases are available on our website. John, if you could conclude the call and provide the replay information.

Speaker 1

Thank you.

Operator

Ladies and gentlemen, this call will be available for replay from 10 am Pacific Time today through February 26 at midnight. To listen to the replay, dial 866-207-1041 and enter access code 7,478,140. International participants can dial 4029700847. Once again, those phone numbers are 866-207-1041 and international is 40297008 47 and the access code is 7,478,140. That does conclude your conference call for today.

Operator

Thank you for your

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