Teledyne Technologies Q2 2021 Earnings Call Transcript

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Provided by Quartr
July 28, 2021

Key Takeaways

  • Teledyne accelerated its FLIR merger integration, cutting corporate overhead and targeting $80 million in annual cost savings by end-2022 (two years ahead of plan) with upside to $100 million.
  • The company delivered a record Q2 with double-digit organic growth—17% in digital imaging and nearly 25% in environmental and test & measurement—and achieved a record non-GAAP operating margin of 22.8%.
  • Full-year guidance was raised to approximately $4.58 billion in sales, with legacy organic growth of ~6.5%, nearly $1.3 billion in FLIR sales, and a non-GAAP EPS outlook of $15.25–$15.50.
  • Q2 free cash flow surged to $257 million (up from $139 million year-over-year), with net debt at $4.05 billion and plans to reduce net debt/EBITDA to 3.3× by year-end 2021 and 2.7× by end-2022.
  • Segment margins improved sharply: legacy digital imaging margin expanded ~280 bps, instrumentation sales rose 10.6% with a 24.6% jump in electronic test & measurement, and Aerospace & Defense Electronics saw a 640 bps margin increase.
AI Generated. May Contain Errors.
Earnings Conference Call
Teledyne Technologies Q2 2021
00:00 / 00:00

There are 10 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Teledyne Second Quarter Earnings Call 2021. At this time, all participants are in a listen only mode. Later, we'll conduct a question and answer session. Instructions will be given at that time. As a reminder, today's conference is being recorded.

Operator

And I'd now like to turn the conference over to your host, Jason Van Weese. Please go ahead.

Speaker 1

Thank you, and good morning, everyone. This is Jason Van Weese, Executive Vice President, and I'd like to welcome everyone to Teledyne's 2nd quarter earnings release conference call. And of course, we released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Executive Chairman, Robert Marabian President and CEO, Al Pacilli Senior Vice President and CFO, Soumain and Senior Vice President, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibic. After remarks by Robert, Alan Su, we will ask for your questions.

Speaker 1

Again, though, before we get started, 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. In order to avoid potential selective disclosures, this call is simultaneously being webcast and a replay via webcast and dial in will be available for approximately 1 month. Here's Robert.

Speaker 2

Thank you, Jason, and good morning and thank you for joining our earnings call. For over 2 decades now, we've continuously improved our portfolio of businesses, our operations and our financial performance and along the way significantly compounded earnings, cash flow and shareholder returns. It is worth noting that just over 10 years ago, a major milestone occurred when we divested our aviation piston engine business and all of its associated liabilities. While initiated earlier, immediately following that divestiture, we accelerated our pace of change by making increasingly significant and successful acquisitions within our digital imaging and instrumentation businesses. Our recent acquisition of Flare accelerates Teledyne's evolution into a more attractive higher margin industrial technology company, while at the same time maintaining our balanced portfolio, primarily focused on commercial markets, but with a resilient and predictable backbone of government businesses.

Speaker 2

For example, in the Q2 of 2021, 75% of total company Sales were derived from U. S. Commercial and international customers and 25% of sales from the U. S. Government.

Speaker 2

In the past several weeks, we've made rapid progress integrating FLIR by implementing Teledyne processes such as acceleration of financial forecasting and reporting, Increasing visibility of sales and costs across the organization, while continuing to enhance FLIR's compliance standards. Furthermore, we've eliminated significant corporate overhead, Consultants and other third party service providers and as a result, We now expect to achieve our annualized cost savings target of $80,000,000 before the end of 2022 as opposed to 2024 as described in our final merger proxy. Turning to the 2nd quarter results. The Q2 was truly a record for Teledyne with sales, operating margin and earnings That's excluding acquisition related costs. All of these increased significantly from prior period.

Speaker 2

We achieved double digit organic growth for the total company with sales from digital imaging, Environmental and electronic test and measurement instrumentation increasing from 17% to nearly 25% year over year. The operating margin of our legacy businesses collectively was an all time record and with Blair, our non GAAP operating margin of 22.8% was an all time record in the 2nd quarter. I should note that very strong non GAAP margin And earnings performance in Q2 resulted partially from a disproportionate amount of sales from FLIR relative to costs. That is, given FLIR's current lack of linearity in shipments, We essentially benefited from 8.5 weeks equivalent of sales volume and contribution margin relative to only 6 weeks of fixed cost. In the second half, FLIR's quarterly sales Relative to costs, we've normalized resulting in somewhat lower margins in all cases excluding transaction related expenses.

Speaker 2

In addition, the average share count in the 2nd quarter only partially reflected the stock issued in connection with the Flare transaction, which will impact EPS in the second half. On a full year basis and after a strong first half, we now think it's reasonable outlook For legacy Teledyne businesses, organic growth in 2021 to be approximately 6.5%, led by forecasted growth of nearly 12% in digital imaging, excluding fear. With normalized sales for Q3 and Q4, we expect FLIR to contribute sales of just under $1,300,000,000 in 2021. Collectively, therefore, we now expect reported sales for the year of approximately $4,580,000,000 Our new outlook, which excludes acquisition related transactions, transaction and purchase accounting expenses can be summarized as follows. In April, we provided A GAAP earnings outlook for legacy Teledyne businesses of about $12.10 On a comparable basis, our current outlook is approximately $12.40 which is $0.30 above the earlier outlook.

Speaker 2

Given the 50 basis points increase Inorganic growth from 6% to 6.5% today versus April and 40 basis points Additional margin improvement that's resulted in the overall $0.30 increase in our guidance. Intangible asset amortization from prior to clear transactions Divided by the pre FLIR share count would add around $0.80 to our earnings, resulting in a pre FLIR outlook of $13.20 Now incorporating FLIR, including its unusually strong period partial period performance in Q2 And excluding transaction costs, results in full year 2021 Accretion of over $2 per share and thus our current non GAAP outlook is $15.25 to $15.50 I will now turn the call over to Al, who will comment on the performance of our business segment.

Speaker 3

Thank you, Robert. In our digital imaging segment, 2nd quarter sales increased 143.9%, largely due to the FLIR acquisition, but organic growth was 17%. Segment operating margin was 14.6% and 27.5 percent when adjusting for transaction costs and purchase accounting, although this was unusually high, as Robert mentioned earlier. In our Instrumentation segment, overall 2nd quarter sales increased 10.6% versus last year. Sales of environmental instruments increased 19.6% from last year.

Speaker 3

Sales of most product categories increased and total quarterly sales were just slightly lower than the peak level before the COVID pandemic. Sales of electronic test and measurement systems were exceptionally strong and increased 24.6% year over year to record levels. Sales of our marine instrumentation decreased 4.5% in the quarter. However, orders were the strongest in the last 5 quarters with a 2nd quarter book to bill of 1.13. Overall, Instrumentation segment operating profit increased 33.2 percent with segment operating margin increasing over 360 basis points with or without intangible asset amortization.

Speaker 3

Moving to the Aerospace and Defense Electronics segment. 2nd quarter sales increased 6.5%, driven by an 8.1% growth in defense, space and industrial sales combined with flat year over year sales of commercial aerospace products. GAAP Segment operating profit increased 62.3 percent with margins 640 basis points greater than last year. In the Engineered Systems segment, 2nd quarter revenue decreased 1.5%, primarily due to greater sales from missile defense and marine manufacturing programs more than offset by lower sales of electronic manufacturing services products and turbine engines as we exited the cruise missile engine business at the end of the first quarter. Despite slightly lower sales, segment operating profit and margin increased slightly when compared with last year.

Speaker 3

I will now turn the call to Sue, who will offer some additional commentary regarding the Q3 and our full year 2021 earnings outlook.

Speaker 4

Thank you, Al, and good morning, everyone. I will first discuss some additional financials for the quarter not covered by Robert and Al, and then I will discuss our Q3 and full year 2021 outlook. In the Q2, cash flow from operating activities was $211,300,000 including all acquisition related costs. Excluding acquisition related cash costs, net of tax, Cash from operations was $278,000,000 compared with cash flow of $155,800,000 for the same period of 2020. Free cash flow, that is cash from operating activities less capital expenditures, excluding acquisition related costs, was $257,200,000 in the Q2 of 2021 compared with $139,200,000 in 2020.

Speaker 4

Capital expenditures were $20,800,000 in the second quarter compared to $16,600,000 for the same period of 2020. Depreciation and amortization expense was $59,700,000 for the Q2 of 2021 compared with $29,000,000 in 2020. In addition, non cash inventory step up expense for the Q2 of 2021 was $23,400,000 We ended the quarter with approximately $4,050,000,000 of net debt. That is approximately $4,740,000,000 of debt less cash of $695,100,000 The higher debt balance at July 4, 2021 included the debt incurred to fund the cash portion of the FLIR acquisition. Stock option compensation expense was $3,600,000 for the Q2 of 2021 compared to $5,700,000 for the same period of 2020.

Speaker 4

Resulting from the FLIR acquisition, restricted stock unit expense for FLIR employees was $4,400,000 in the second quarter of 2021. Turning to our outlook. Management currently believes that GAAP earnings per share in the Q3 of 2021 will will be in the range of $2 to $2.15 per share with non GAAP earnings in the range of $3.55 to $3.65 And for the full year 2021, our GAAP earnings per share outlook is $8.05 to $8.45 and on a non GAAP basis, dollars 15.25 to $15.50 The 2021 full year estimated tax rate excluding discrete items is expected to be 23.9%. In addition, we currently expect less discrete tax items in 2021 compared with 2020. I'll now pass the call back to Robert.

Speaker 2

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

Operator

Yes, thank you. Ladies and gentlemen, if you wish to ask a question, please press 1,000. If you are using a speakerphone, please pick up your handset before pressing the numbers. Our first question comes from Mike Mueger with Wolfe Research. Please go ahead.

Speaker 5

Hey, good morning. Thanks for the time. Can you just add some color around the operating performance at Legacy Digital Imaging? You touched on it a bit with the 6 weeks versus the 8 weeks, but can you just Color in some of that performance?

Speaker 2

Right. Thanks, Mike. On the legacy Digital Imaging Business standalone, the margins were 24.4%. And that last year, if you add back the intangibles, the margins were 21.5%. So in the legacy digital imaging, the margins improved about 280 basis points.

Speaker 6

Okay.

Speaker 5

That's great. And what sort of drove that? Were there some sort of cost initiatives? Or was it just mix? Any other color?

Speaker 5

Well, our

Speaker 2

Paul, our costs from a labor costs were maintained flat year over year and sales increased 17%. And the other one was the mix, Mike. We have better mix of machine vision, which has our highest margins.

Speaker 5

Got it. Thank you. And then can you discuss your capital deployment Priorities post FLIR, if we should expect any sort of shift in your behavior, whether that's Because of the higher debt balance or any sort of color that you can add there?

Speaker 2

Yes. Our primary objective this year, Mike, in capital deployment is to reduce our debt as fast as we can. We have we expect to generate more cash the rest of the year We anticipate that by year end this year, our debt to cap would be better than What we projected or about 3.3 in terms of ratio of net debt to EBITDA. We also expect that by the end of 2022, We can reduce that net debt to EBITDA to 2.7, which is where at the high end of what we feel is comfortable for us. So our immediate Task is to pay down debt, generate cash, pay down debt.

Speaker 2

Having said all of that, we do have the capacity to make smaller bolt on acquisitions that we've done historically, and we would do that if such opportunities arise.

Speaker 7

Great. Thank you.

Speaker 2

Thank you, Mike.

Operator

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

Speaker 6

Hey, guys. Good morning.

Speaker 2

Good morning, Joe.

Speaker 6

So I know it's early to talk 2022, but can you just give us some high level thoughts on how FLIR contribution starts to look On a normalized basis for a full year once we if we start thinking about $80,000,000 in run rate savings into next year?

Speaker 2

Well, let me start with what we have this year, Joe, if I may. As I mentioned before, We think that on a non GAAP basis, we'll have an upside of about with $2 to $2.20 in terms of earnings. If we can maintain That momentum for next year where we would enjoy probably the full year benefit of the cost reduction, I would say we may be able to increase that to as high as $2.50 from this year's To $2.20 Only reason I say that is the full year dilution we will experience from Share count. Our share count in Q3, Q2 was 43.7 percent, 44 44,000,000 shares. Next year, full year, we'll have a 48,000,000 share count Plus as we will have in Q3, Q4 of this year.

Speaker 2

So there's going to be some of that. And Frankly, the other side of it, Joe, is that we haven't really had an opportunity to put all of our Internal cost reduction inside Clear for next year yet. These cost reductions we spoke about were generally related to corporate expenses, employee expenses, costs and third party expenses And consultants, there I hope that there'll be other opportunities that we can enjoy over the 2022, but Yes, it's only 8 weeks in. It's a little hard to predict right now.

Speaker 6

So you brought the $80,000,000 in 2 years basically. What are your thoughts on upside to that target? I know it's still pretty early, but thoughts on like longer term there and Maybe on revenue synergy potential from the deal?

Speaker 2

Yes. I would say, Joe, I would raise that to $100,000,000 From 80 to 100 on the upside, I would say from a revenue synergies, We haven't looked at that very carefully, but there are areas that we intend to enjoy some synergies. Specifically, for example, Clear has, as you know, a pretty strong gray marine business and marine Thermal Products business, we have a very broad portfolio of marine underwater as well as sonar and other products. So there should be some synergies there. There's also going to be synergies in our unmanned Product clearly is very strong in UAVs and ground based unmanned vehicles.

Speaker 2

And of course, we have a Tremendous portfolio from the water vehicles. So we think there might be revenue synergies for both of us there. So that's the beginning. We're kind of looking at it right now. And finally, I'd say FLIR does have an extremely good channel for some of our Some of the products which we might be able to enjoy in some of our own infrared products through those channels.

Speaker 6

And then just last for me, I know you mentioned FLIR, you expect $1,300,000,000 in sales this year. What does that take if you owned it for the full year, where do you think organic for FLIR is in 2021? And what do you think like a more Normalized growth rate is once we get over the comps from like the thermal sensing with COVID.

Speaker 2

Yes. I think As you know, last year, the full year revenue was 1.923. We expected on a full year basis to remain flat at about 1.9%, 1.5%, 1.9%, 1.92%, so flat. Having said that, as you mentioned, Joe, the big headwind that we have year over year in Teledyne FLIR is that last year they enjoyed about $100,000,000 of elevated skin temperature product sales. This year That's gone away.

Speaker 2

Essentially, it's disappeared. So we're making that up with other products, some of it in the solutions business, some of it in Raymarine And some of it in the defense business, especially in the unmanned integrated systems businesses. So That kind of sets the tone year over year of no growth, but being able to Set the $100,000,000 of headwind in UIS I mean in ESP. Having said that, if I'm going to look forward to just enjoying the same kind of growth that we enjoyed this year, Excluding, EST, you take that out of the 1.92, the rest of The portfolio grew about 5% organically. So my expectation would be that if everything else being equal and not No wheels come off the truck that we'll be able to enjoy that next year.

Speaker 6

All right. Thanks. I'll jump back in queue. Sure.

Operator

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

Speaker 8

Hi. Good morning, Ken.

Speaker 2

Good morning, Ken.

Speaker 8

Congratulations on this Q1 with FLIR. Robert, I wonder,

Speaker 2

if you could

Speaker 8

talk a little bit, about how we might think about the gross margins of the combined company going forward as you really move through the integration process?

Speaker 2

Well, that's a very good question. So let me see if I can answer it properly. Our gross margins as Teledyne, as a standalone company, Historical margins have been around 38% to 39%. Last year, It was 38.3 percent. This year, 1st quarter was 38.9 And 2nd quarter, on a non GAAP basis, excluding The one time cost.

Speaker 2

I think what's going to happen on the gross margins, if you take ours in 2020 at 38.3%, I think it'd be safe to say that we can move that up to 43%, maybe 43.3%. And that would be a nice 4% improvement in gross margin with Teledyne FLIR. That's about the best I can do at this time for this year. We are right now looking at what Will happen in the future. Again, let me go back and emphasize one thing.

Speaker 2

Because of the hockey stick nature of the revenue in Q2 at Clear, the SG and A for Q2 was significantly lower than it normalized should be. It was more like 20% and it really should be between I've averaged about 25% to 27%. So that's I'm factoring those in at this time.

Speaker 8

Got it. That's helpful. And what can you say about this hockey stick performance From FLIR in Q2, what contributed to that? And if I may, just a question and then I'll jump back into the queue. If You are out.

Speaker 8

Could you just give us any flavor for how your bookings look for the combined company? Thank you.

Speaker 2

Sure, Jim. First, the hockey stick nature. I think that's been a historical Practice at Teledyne Clear. They've always shipped more In the last 2 weeks of the month and in the 1st 2 weeks of the month and the last 2 weeks of the quarter, I should say, and the last 2 weeks of the year. Now, we're not exactly Totally blameless ourselves.

Speaker 2

I can't say our revenues are totally linear, but we've worked very, very hard over the years To linearize our revenues within the month and within the quarter, month over month, everybody has To report on the revenues and bookings weekly. So this is an issue that doesn't have An overnight answer, but we're going to work very hard to introduce some of our own practices working with The FLIR segment exact, sub segment exact, which by the way are really outstanding and get that Linearize the shipment. The danger of doing that is that it comes out to the end of the month or end of the quarter, Something happens or something doesn't get shipped. Now you really suffer. You suffer in revenue, you suffer in earnings.

Speaker 2

So We're going to work on that. Let me go back to book to bill, the question you asked. In terms of Teledyne standalone first, what I'd call legacy Teledyne at this point, We expect that our book to bill will be above 1. Especially in instruments, I think it'd be about 1.07. That includes very strong orders in marine, as I mentioned, In the second and third quarter, in digital imaging excluding FLIR, It was about 1.16 in Q2, but FLIR's is below 1.

Speaker 2

So combined, we think we'd be slightly over 1 in Q2, about 1.03, 1.04. Aerospace and Defense in Teledyne, good orders, bookings, the Book to bill is about 1.2. Engineered systems, which is very lumpy, is about 1.17. So overall, I'd say, including Teledyne, FLIR, we're going to be over 1 in Q2, maybe 1.06, 1.07.

Speaker 8

Got it. Thanks very much.

Speaker 2

Sure, Jim.

Operator

Our next question comes from Greg Kennard with Jefferies. Please go ahead.

Speaker 9

Good morning.

Speaker 2

Good morning, Greg.

Speaker 9

Just to start on organic growth, I mean, you brought up the forecast for the year a bit to 6.5%, which Yes, a little bit of acceleration from what you saw in Q2. You gave some color around digital imaging, but can you maybe talk about Different segments, expectations for organic growth and maybe how that changed and maybe where there's risks and opportunities in the back half of the year? Sure.

Speaker 2

Greg, first, if you go back to January of 2021, We project the net organic growth of about 5.5%, 5.6%. In April, things were started improving with projected organic growth of about 6%. And in this earnings, we've moved that up to 6.6%. That's overall, What I would say legacy Teledyne, that excluding the Clear acquisition. If you break that down into its components, Instruments, we anticipate with some risks

Speaker 3

In there, about

Speaker 2

6.2 percent. Digital Imaging, 11.8 Almost 12% for the year. That's our fastest moving business. We think in aerospace and defense, Especially now, we're seeing a little more recovery in the aerospace businesses. We think that will be about 4.4%, 4.5%.

Speaker 2

We see a slight decrease in engineered system, something out the order of 1.5%, Primarily because as Val said, we don't have the turbine engines for the rest of the year. You roll all of that up, you end up with 6.5%, 6.6%. Now, if the economy continues to improve at a pace that It's going, especially in our instrumentation and digital imaging businesses, we could improve on that somewhat. But right now to the best of our ability to project, we're projecting revenue for the year Without FLARE, about 3,290 and with FLARE, about 4,582.

Speaker 9

That's very helpful. And then you gave a little color on digital imaging margins, but the instrumentation was also Very impressive in the quarter. I mean, how do you think about margins there? Was that mix? I mean And obviously, marine was down a little bit.

Speaker 9

I mean, how do you see those margins kind of playing out?

Speaker 2

Well, let me start with Instrumentation overall. Yes, Marine was a little down, but it was down in revenue. The margins were pretty healthy. Overall instrumentation margin in Q2 on a non GAAP basis, the reason I'm doing this non GAAP is we do have some Intangibles that come in all of these groups and to compare year over year, if I do it non GAAP, Exclude Teledyne legacy GAAP, I mean intangible amortization, last year instrumentation overall margin was 20.4%. This year Q2 is 24% We expect to finish the year at 23.2%, which would be almost a 200 basis point improvement, the 192 basis point improvement over 2020.

Speaker 2

And I would attribute that to the fact that the mix of businesses are very good. Our Environmental businesses are doing very well and our T and M business Which have really high margins because of our oscilloscopes and of course our protocols, those margins are superior. Almost 200 basis point improvement year over year in instruments margin, including a marine We're very happy about that. In legacy Digital Imaging, again, Our margins for Q2 were really good at 24.4% versus last year's Q2 of 21 point 5%. We anticipate to end the year that is excluding Teledyne FLIR with margins of 23.1 percent versus last year's of 21.5% 21.4 percent, so an improvement of 175 basis points.

Speaker 2

Clear, of course, We had tremendous margin in Q2 or just 30% or slightly over. I think the outcome down is Closer to 22% as the year goes on based on the hockey stick nature that I described before. And so overall, digital imaging Should end up about this year about 22.7% with Teledyne Clear. Our aerospace and defense businesses are doing really well, but year over year comparisons, We think we will end the year at 18.8% margins, which is 4.92 basis points Improvement over last year. But last year, we took some one time charges.

Speaker 2

We took a lot of cost out of that, the Aerospace side of the business, but nevertheless, that's almost a 500 basis point improvement in margin And I expect Engineered Systems to be relatively flat. Roll all of that up, we From a segment perspective, on a non GAAP basis, we should enjoy margins of 1.3% based on everything I know right now versus last year, 18.7 And if you're throwing the corporate expenses, again, I should reiterate on a non GAAP basis, We'll end up about 20% in margin versus 16.8% last year, which is over 300 basis points improvement. Does that help?

Speaker 9

Yes, that's perfect. And then just one last one for me, kind of big picture. I mean, Teledyne has always been consistent with, let's say, bias to the upside, whether that's margin expansion each year or Organic growth through the cycle. I mean, how do you think about this, the FLIR acquisition changing The enterprise, I mean, I get a lot of questions about 2022. You already pulled forward the synergies from when you first expected.

Speaker 9

Yes. How does it kind of change the opportunity set, whether it's annual margin expansion or organic growth as we kind of go forward?

Speaker 2

Well, let me start by saying behaviors don't change. We're going to be the same. We're not going to change. We're going to be conservative in our projections. We're always going to try and do better than that.

Speaker 2

We don't like taking risks By being too effervescence in our projection. Having said that, having met now the FLIR executive team And they've made presentations to the board yesterday over the next 3 days. All of them are going to be Working with us, they are really good. They have 3 outstanding executives that report to our Executive Vice President, Edwin Droks. And we anticipate that they will do the same as the rest of Teledyne, Focus on cost, focus on improving margins, focus on growing their top line And where appropriate, we'll make the small acquisitions until we pay down our debt.

Speaker 2

I don't expect our behavior to change. We'll keep improving.

Speaker 6

Thank you.

Operator

Our next question comes from Andrew Buscaglia with Berenbergen. Please go ahead.

Speaker 2

Good morning, Andrew.

Speaker 7

Good morning. It's Berenberg. Good morning. So can you hey, Robert, can you

Speaker 2

go We're not going to try Moravian sometimes.

Speaker 7

Yes, right. Well, yes, Robert, thanks. Appreciate your candidates on the call. And I was wondering, can Adding on to the kind of the last comment,

Speaker 6

can you talk a

Speaker 7

little bit about what are you seeing with FLIR that Has surprised you, whether it's good or bad. It sounds like some of these managers are surprising you in terms of the quality of how they're operating. But is there anything you would like to disclose that you didn't expect Since having made the acquisition or vice versa where you're surprised that some growth potential you see where You didn't expect that to be the case when you initially bought FLIR. Anything you could add there would be great.

Speaker 2

Well, when we look at the FLIR portfolio. There are really 4 segments made out of The former 8 businesses, 3 of the segments, which would be the Solutions segment, the Components or OEM segment and the Unmanned Integrated Systems segment, which comprise about $1,500,000,000 of the $1,900,000,000 We are pleasantly impressed with those 3 segments. They have good leadership in The 3 segments with Roger Wells leading Rio IS or Clayton leading OEM and Components And Roger and Ricard Lindval leading the solution businesses. These are really healthy businesses. From a personal perspective, while I wasn't surprised because we visited them many, many times before the acquisition, I was very pleased not only with what we've seen, but also their presentations Yesterday to the Board were just superb.

Speaker 2

The 4th sub segment is the one that had some issues and that's the surveillance segment, which is about $400,000,000 What's happened there in that segment is that they've had multiple leadership changes almost annually For the last 4, 5 years, they've been kind of milking that cow for the last few years in terms of cash and they have not paid attention to new product development as much as they should. In that case, what we've done is we've done something, we brought in a Teledyne Executive that worked for us before back to run that business. We have a Teledyne executive. Her name is Gih, capital f e n, Lee, l e I. We brought her to run the surveillance business.

Speaker 2

She used to be one of our executives in our digital imaging business. She went to the government to DoD to work in the research and Technology Groups, she ended up This year as acting deputy secretary for DoD's research and technology programs, which is a huge program, all of the laboratories, all of Businesses, she just joined us 2 weeks ago. I was able to I was fortunate to bring her back. She has been here 2.5 weeks. She will lead the surveillance segment, which is the one that we need to work on.

Speaker 2

And I know she will fix that with our with Edwin's help and we'll get some new products in there and put that on a healthy Having said that, once we solve that, I think the 4 sub segments are going to be superb With the leadership and then with Edwin leading it and then with the combination with the legacy Teledyne companies with all the synergies we can enjoy, We have great aspirations and hopes for the combined company.

Speaker 7

Okay. That's helpful. I'm curious like the decision to put FLIR all under digital imaging, why don't you break that up With your aerospace and defense exposure and tie it to that or is that a possibility in the future?

Speaker 2

Yes. I think the arrangements of the segments are a possibility, but You've got to walk before you start thinking about running. So right now, keeping it where it is and then Drawing lines of communication and collaboration is what we're doing. For example, one of the things we've done very successfully over the last 3 years at Teledyne is our procurement initiatives. We have significant savings that have come out of our Procurement, we buy about $1,200,000,000 worth of products.

Speaker 2

FLIR buys another $700,000,000 $800,000,000 of products. We're going to introduce our procurement initiatives there. Eventually, we may do some realignment, but not right now. Okay.

Speaker 7

And Lastly, Robert, I thought it was it's impressive if you can hit these net debt to EBITDA targets that you put out there. Do you care to provide some color on what free cash flow could be this year or how to think about that? I realize it's kind of a messy Couple of quarters.

Speaker 2

Yes, it is. I think the way I look at it is Where we're going to end up the year, everything else being equal. Sue mentioned where we were in Q2. We had a really good Q2. We think we'll be around $750,000,000 to $800,000,000 excluding charges.

Speaker 2

I want to get there because we want to increase our available cash to pay down debt From what is now about $670,000,000 $680,000,000 to over $1,000,000,000 So we can do that. On a go forward basis, if we don't have those charges and we go forward, I think $1,000,000,000 is a nice number. I feel comfortable If I can get that number maybe in 2022, maybe I think 2023 would be more appropriate because we have some more expenses in 2022.

Speaker 7

Okay. That's helpful. Thanks, Robert.

Speaker 2

Thank you.

Operator

Our next question comes from Mike Munguery with Wolfe Research, please go ahead.

Speaker 5

Hey, thanks for getting me back in. Just kind of changing gears, in your commercial aerospace business, and I know that Asus is certified on A320 now, but have you seen any demand indicators ahead that would sort of point toward a change in behavior on monitoring the Cabin environment post COVID. And then generally just those types of products, do you sell those to the manufacturers or the airlines? Thank you.

Speaker 2

Right. As with most of our products in the aftermarket coming out of controls, it goes directly to airlines. And we have at this time, Mike, we have at least 2 major airlines Testing the cabin environmental sensors, we have great hopes for that. As you know, we qualified it on the 737 before in March and then yesterday on the A320, Which is the bulk of the carriers. We are right now introducing those.

Speaker 2

Of course, everybody wants us to give it to them for free, so they can test it, but we're not going to do that. So we have high expectations for that. Just like in some ways, a mini version of when we introduced the wireless ground link many years ago. Overall, on the Aerospace businesses, things are picking up. We were relatively flat Quarter so year over year, quarter over quarter, but things are picking up and we are Seeing something like in the second quarter orders about a 1.3 book to bill That's very healthy for us because that's a high margin business also.

Speaker 2

So we're optimistic with Boeing putting their Max In operations and some of the other airlines, especially becoming profitable, we're optimistic that business will come back

Operator

We do have a question from Joe Giordano with Cowen. Please go ahead.

Speaker 6

Hey guys, thanks for getting me back on. I was going to ask about free cash flow, but Robert, I think you just answered it a question ago. So maybe I'll just finish With all the buzz going on with new space launches and what's going on in the commercial landscape, can you maybe just talk about what gets you excited in the space as it applies to you, whether it's Through NASA or European Space Agency or commercial, like where you think you're best positioned and where are you most excited about?

Speaker 2

Well, I think, 1st and foremost, we really like our Work in infrared and visible in the space domain, anything to do with satellites. We practically supply all of the detectors for Space based observation, both looking out and looking to the earth, Including a lot of the environmental studies, whether it's carbon or whatever, we own A big chunk of that market. And now we're moving to the classified space. So we have some great imaging products In the classified space program. Now, in the Space travel as whatever you want to call that.

Speaker 2

Yes, we make some products In terms of equipment, but we're not that involved in this right now. I think our focus has to be remain with sensors and information technologies for the immediate future where we'd have a Strategic advantage because we can make infrared sensors that nobody else can. And with each of these visible sensors And now having other channels with FLIR for our infrared products, we think that, that would be the place I see an up I don't know if I'm a little cautious on commercial space Development, we do have some piece of communication in the OneWeb program, As you know, when everybody wants to not build thousands of satellites and There's a funding risk as you can imagine.

Speaker 6

Yes, definitely. Just one quick clarification. When you said $1,000,000,000 in cash flow for 2022, 2023 something like that. Was that a free cash flow comment or is that operating cash flow? Thank you.

Speaker 2

That's free.

Speaker 6

In 2020 That's what I thought.

Speaker 2

Thanks. I moved it a year the minute you said free.

Speaker 6

I caught it.

Speaker 2

Thank you. Operator, are there any other questions?

Operator

There is no one else in the queue.

Speaker 2

Thank you. In that case, I would like to ask Jason to conclude our conference call. And I want to thank all of you for doing so much homework to ask questions that kept me on my toes. Thank you. Jason?

Speaker 1

Thanks, Robert. And again, thanks everyone for being on our call today. If you have other follow-up questions or seek more detail, you can always call me as usual at the number on the earnings release. So Amy, if you would go ahead and give the replay information. Thank you very much.

Operator

Thank you. This conference will be available for replay starting today at 10 am Pacific through midnight on August 28. The dial in number is 1-eight 66 20,701,041 with an access code of 13,000,000 7,751. Again, those numbers are 1-eight sixty six-two zero seven 1041 with an access code of 13,000,000,751. That does conclude your conference for today.

Operator

Thank you for your participation and for using AT and T event conferencing service. You may now disconnect.

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