Teledyne Technologies Q3 2021 Earnings Call Transcript

Participants

Corporate Executives

• Jason VanWees, Vice Chairman
• Robert Mehrabian, Chairman, President and Chief Executive Officer
• Susan L. Main, Senior Vice President and Chief Financial Officer

Analysts

• Greg Konrad, Jefferies Group
• Michael Maugeri, Wolfe Research
• Elizabeth Grenfell, Bank of America Co.
• James Ricchiuti, Needham & Company LLC
• Andrew Buscaglia, Berenberg Bank
• Joe Giordano, Cowen Inc

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Teledyne Third Quarter Earnings Call. [Operator Instructions] Later we will conduct a question-and-answer session, instructions will be given at that time. [Operator Instructions]

I'd now like to turn the conference over to our host, Mr. Jason VanWees. Please go ahead, sir.

[Jason VanWees, Vice Chairman at Teledyne Technologies]

Thanks, Brad, and good morning, everyone. This is Jason VanWees, Vice Chairman of Teledyne. And I'd like to welcome everyone to our third quarter earnings release conference call. And of course, we released our earnings earlier this market -- morning where the market opened.

Joining me today are Teledyne's Chairman, President, and CEO, Robert Mehrabian; Senior Vice President and CFO, Sue Main; and Senior Vice President, General Counsel Chief Compliance Officer, and Secretary, Melanie Cibik. After remarks by Robert and Sue, we will ask for your questions.

However, 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, both via webcast and dial-in, will be available for approximately one month.

Here is Robert.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Thank you, Jason. Good morning and thank you for joining our earnings call. I'm very pleased with both our operational execution and our financial performance in the third quarter. We achieved record revenue, 75.2% greater than last year, driven by organic growth of 11.9% and the remaining 62.3% of sales increase contributed by Teledyne FLIR. Revenue increased organically in every major business group but was especially strong in our commercial imaging and electronic test and measurement instrumentation businesses where organic growth for each was greater than 20% in the quarter.

Furthermore, orders exceeded sales for the fourth consecutive quarter with the third quarter book-to-bill of 1.1 GAAP earnings per share of $2.81 increased 13.3% compared to last year, and was $0.03 less than our record GAAP third quarter earnings achieved in 2019. However, excluding acquisition-related charges, earnings were $4.34 per share in the third quarter, an increase of 61.9% on a comparable basis from 2020.

Cash flow was a third quarter record allowing repayment of $300 million of debt while our leverage ratio declined to 3.3 from 3.7 at the end of the second quarter. Teledyne FLIR performed strongly in its first full quarter. Integration efforts have been swift and we are increasingly excited about the long-term future with Teledyne. We continue to accelerate the pace of plant synergies and currently expect to achieve our annualized cost saving target of $80 million before the middle of 2022 as opposed to the end of 2022 as we described in our July earnings call, and compared with 2024 as noted when we announced the transaction in January of 2021.

Regarding our execution in the quarter, Teledyne is not immune to supply chain issues, inflation, and other operational challenges. However, to-date, we have been successfully navigating and managing these issues, and today, we are pleased to increase our full year sales, margin, and earnings outlook compared with the outlook we presented in July.

On a full year basis, we now think a reasonable outlook for organic sales growth in 2021 is approximately 7% to 7.5%, led by forecasted growth of almost 13% in digital imaging, which excludes Teledyne FLIR. This translates to total sales of $4.59 billion with contribution of $2.4 billion from digital imaging, including FLIR.

I will now further comment on the performance of the four business segments. In our Digital Imaging segment, third quarter sales increased 217.3% largely due to the FLIR acquisition but organic growth in our combined commercial and government imaging businesses was also very strong at 17.9%. Sales of industrial and scientific vision systems were a record and healthcare sales return to pre-pandemic levels. GAAP segment operating margin was 12.5%, but adjusted for transaction costs and purchase accounting segment margin was 23.9%.

In our Instrumentation segment overall quarter sales increased 9% versus last year. Sales of test and electronic test and measurement systems, which includes oscilloscopes and protocol analyzers were exceptionally strong and increased 20.8% year-over-year to record levels. Sales of environmental instruments increased 7.6% from last year with sales related to human health and safety market such as drug discovery and gas and flame detection being strongest in the quarter. Sales of marine instrumentation increased 3.2% in the quarter. In addition, orders were the strongest in the last six quarters with a quarter book-to-bill of 1.13. Overall, Instrumentation segment operating profit increased 24.3% with segment operating margin increasing 270 basis points or 247 basis points, excluding intangible asset amortization.

In the Aerospace and Defense Electronics segment, third quarter sales increased 11.7% driven by 8.4% growth in defense, space, and industrial sales combined with a 27% increase in sales of commercial aerospace products versus last year's pandemic-related tough quarter. GAAP operating profit increased 34.5% with margin 375 basis points greater than last year.

Finally in the Engineered System segment, third quarter revenue increased 1.4% but operating profit and margin declined slightly since we exited the higher margin turbine engine business earlier this year.

But before turning the call over to Sue, I want to comment on our margin and earnings outlook. For several years, we've been on a journey to move our overall operating margin from the low-teens to over 20%. Over the last 2.5 years, we made tremendous progress with it -- with stand -- notwithstanding the pandemic and the recent supply chain and inflationary pressures. To date, the approximate $1 increase in our earnings outlook is primarily the result of further improvement in our full-year 2021 forecasted operating margin which excluding acquisition-related charges is 100 basis points better at approximately 21% from our 20% forecast in July.

And now to Sue.

[Susan L. Main, Senior Vice President and Chief Financial Officer at Teledyne Technologies]

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 fourth quarter and full year 2021 outlook. In the third quarter, cash flow from operating activities was $192.8 million including all acquisition-related costs. Excluding acquisition-related cash costs, net of tax, cash from operations was $194.9 million compared with cash flow of $150.3 million for the same period of 2020. Free cash flow that is cash from operating activities, less capital expenditures excluding acquisition-related costs was $165.7 million in the third quarter of 2021 compared with $135.1 million in 2020.

Capital expenditures were $29.2 million in the third quarter compared to $15.2 million for the same period of 2020. Depreciation and amortization expense was $90.2 million for the third quarter of 2021 compared to $29.2 million in 2020. In addition, non-cash inventory step-up expense for the third quarter of 2021 was $35.2 million.

We ended the quarter with approximately $3.89 billion of net debt that is approximately $4.44 billion of debt less cash of $551.8 million. Stock option compensation expense was $5.8 million for the third quarter of 2021 compared to $5.7 million for the same period of 2020. Resulting from the FLIR acquisition, restricted stock unit expense for FLIR employees was $1.8 million in the third quarter of 2021.

Turning to our outlook. Management currently believes that GAAP earnings per share in the fourth quarter of 2021 will be in the range of $2.53 to $2.69 per share, with non-GAAP earnings in the range of $4.07 to $4.17. And for the full year 2021, our GAAP earnings per share outlook is $9.13 to $9.29 and on a non-GAAP basis $16.35 to $16.45 compared with our prior outlook of $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.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Thank you. So we would now like to take your questions. Operator, Brad, if you're ready to proceed with the question and answers, please go ahead. Brad?

Questions and Answers

[Operator]

[Operator Instructions] And we can go right now to Greg Konrad with Jefferies. Please go ahead.

[Greg Konrad, Analyst at Jefferies Group]

Good morning, and great quarter.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Thank you, Greg.

[Greg Konrad, Analyst at Jefferies Group]

Maybe just to start, I mean you talked about a lot of the higher outlook based on the margin, at least on the beat, it seems pretty broad based across segments. I mean how do you think about the drivers there and just sustainability given tailwinds or potential headwinds? And I think previously you've always had a target of how much margin expansion you'd like to capture per year. I mean, has anything changed around that as margins have reset higher?

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Well, I think Greg, our expectation is that our margins will keep increasing as we projected. We think it's still 50 maybe 60 basis points per year above where we are. And I say that perhaps earlier I may have said the 100 basis points but our margins have moved up to 21% on Q3, so it's going to be a little tougher. But we intend to improve margins as we go along.

[Greg Konrad, Analyst at Jefferies Group]

And then just -- I mean you mentioned accelerating the FLIR synergies, the middle of next year. I mean what allowed you to pull that forward and maybe what does that mean for the longer-term potential to drive productivity and take cost out of the business?

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

I think, in addition to wages, which are significant but net benefits about $45 million. The more important thing that we've been able to manage to do is reduce dependence on third-party consultants, legal savings, and frankly lobbyists. As you know, Greg, we don't do -- we don't have lobbyists at Teledyne. So, of course, the Board fees and public relations and so on those help but third-party consultants and legal and lobbyists are the -- and others, I'd say $28 million, $30 million.

[Greg Konrad, Analyst at Jefferies Group]

And then just last one from me. I mean you briefly mentioned inflation before. I mean how do you think about the offsets there? How much within the supply chain versus -- are there specific areas of the business, where maybe you have more flexibility around pricing. Just trying to think about broader risk of price mix.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

So far, well, we look at the PPI, inflations are pretty high. We're not experiencing as much as we anticipated in the price pressures to us from our suppliers. Having said that, some of our suppliers more recently have come out with 20%, 25% price increases. Good part of it is we have long-term agreements with some of them, so those would moderate. As for ourselves, so far this year, we've been able to increase prices on the average about 2%. What that means in some businesses we can't obviously increase prices, because we have long-term contracts, Greg, but in other businesses, we do have the ability to increase prices. On the average, we've increased 2%. Our intention is to continue doing that and perhaps especially next year, we'll start early and see how much elasticity we have in our prices.

[Greg Konrad, Analyst at Jefferies Group]

Thank you.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Thank you, Greg.

[Operator]

And next, we can go to line of Mike Maugeri with Wolfe Research. Please go ahead.

[Michael Maugeri, Analyst at Wolfe Research]

Hey. Good morning, everyone Thank you for the time. So I'm just curious within your government business, are there any watch items like new starts or programs a significant ramps that you're keeping a closer eye on while the U.S. is operating under this continuing resolution?

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Yes. Mike, I think, first, let me start by saying, our government businesses are about 26%, 27% of our total. The two opportunities that we are keeping an eye on are underwater vehicles and there is a medium underwater, UUV, that the government is soliciting proposals on and we are bidding on that across our -- our -- the Engineered Systems and our marine businesses together, just like we do with gliders, and other things. And then there is the large underwater vehicles that we expect to bid on.

Some of the other -- the -- in Digital Imaging, we have so wide field-of-view or what's called WFoV fairly warning satellites, that's an opportunity for us. Next Generation Overhead Persistent Infrared OPIR is another one. And the downside -- if there is a downside is we have to rebid in -- at our national program what we call, MOSSI, which is the mission systems program. Later this year we bid on it yet, but the decision would be later and there is always a risk, when you're doing that. But overall, there is a whole range of new programs that are available to us, even under the continuing resolution.

[Michael Maugeri, Analyst at Wolfe Research]

Got it. And then to the point in your release about the recovery in the longer-cycle business. Now that you have that, would you sort of be willing to talk about the early trends that you're seeing into next year within the business?

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Right now, I would say, the opportunities would be in our marine businesses, primarily because the oil prices, as you're well aware, might have moved up significantly and we had a book-to-bill of 1.13 this quarter. We also think that we will have more opportunities in Aerospace and Defense businesses, especially on the aerospace side as people start traveling more. We think that marine may have an upside next year of maybe $25 million and controls, which is our computers that go on various aircraft that can have a similar number $20 million to $25 million. Those are longer cycle businesses and so far, they look all right.

On the shorter cycle which the other side of the instrument, we enjoyed a 9% increase overall, and T&M our test and measurement is doing well. And we hope that with our new products that we keep developing, that will have a -- that will have some bump next years too.

[Michael Maugeri, Analyst at Wolfe Research]

Got it. Thank you.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Thank you, Mike.

[Operator]

And next, we can go to line of Elizabeth Grenfell with Bank of America. Please go ahead.

[Elizabeth Grenfell, Analyst at Bank of America]

Hi, good morning. When we think about the FLIR integration and the acceleration and the timeline to achieving the initial cost savings. Where do you think we could potentially see additional upside to -- I think before the top side had been $100 million. I mean how much additional headwind is or how much additional headroom is there into achieving additional cost synergies in savings?

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Elizabeth, let me start with -- I hope I didn't miss quote myself. Our top side savings for which we moved forward from 2024 so 2022 is $80 million. Having said that, there are other opportunities but there would be more opportunities in developing products between FLIR's offerings and Teledyne's offerings. And as we move the revenue up and keep our costs down, we think that will help improve our margins. But we haven't factored that in the revenue synergies yet because right now we're still integrating. We've integrated some of the businesses very quickly like they make mid-range vision systems, MA client vision systems and those we've coupled right away and that's worked out really well. But we're still working on the rest of the stuff.

Like in the marine, gray marine and our marine businesses, there are opportunities between their gray marine businesses and our software businesses and underwater software businesses that cares. We are working on all of those. As we do that, I think those would create more savings as we go forward.

[Elizabeth Grenfell, Analyst at Bank of America]

Okay. And then as you continue to deliver, how are you considering or thinking about the M&A environment and additional opportunities to grow inorganically?

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Yeah. And Elizabeth, first on the delevering, we are not sitting at 3.3x net debt to EBITDA. We hope to take that down to about 2.7 by the end of 2022, that would be our markers. As we look at that, when you're kind of start getting confident that you're going to go there, you start looking at larger acquisition potentials because those things take a little time to get eight, nine months. But in the interim, we will look at -- and we are looking at smaller acquisitions. As we did back in 2017 when we acquired e2v, our debt-to-be EBITDA ratio was pretty high.

We very quickly delevered over the next three years, but in the interim, we also bought about $500 million of smaller assets. So we'll do the shorter term, we do smaller acquisitions. In the longer term, we've promised -- I have promised the rating agencies that we won't do anything very big. I think we assure we can hit our targets.

[Elizabeth Grenfell, Analyst at Bank of America]

Okay. Thank you.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Thank you, Elizabeth.

[Operator]

And next, we can go to the line of Jim Ricchiuti with Needham & Company. Please go ahead.

[James Ricchiuti, Analyst at Needham & Company LLC]

Hi, good morning, Robert, question on the FLIR business, it -- organic growth there, looks like it was fairly modest. And I don't recall them having much of an EST contribution in last year's Q3. Is any of this either portfolio realignment? Their commercial business appears to be doing okay. I think the machine vision business probably was pretty healthy. Is it their government-related business that was a little slower?

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

No, actually, Jim, if I may, their EST business which was -- part of the component was they make the sensors and the solutions businesses, their commercial solution businesses was it generated about $40 million in revenue last year in Q3, I'd say $35 million to 40 million. And their Q3 last year including that was about $466 million. This year third quarter, the revenue is $474 million. So if you -- and there is no EST revenue. So if you were to look at it apples-to-apples and take the $40 million out of the $466 million, we are looking more like a $426 million, $427 million last year versus the $474. This is a significant growth there.

Second, they've had, we've had a reasonably good growth in our defense segment, the FLIR defense segment of about 3.5% this year versus last year, primarily coming from the unmanned systems. So there has been growth in the commercial as well as the -- in the defense businesses if you were to moderate things, if you were to subtract the ESP sales last year third quarter.

[James Ricchiuti, Analyst at Needham & Company LLC]

No, thanks for clarifying that. You're right, they did about $90 million in Q2. And even though it was down to $40 million in Q3, that's still a fairly significant contribution. Thanks for pointing that out, Robert. On the test and measurement business, you guys have performed really well there and what I'm wondering is, structurally, is there anything changing in that business in that market? Is it market share gains? Is it the activity you're seeing in the protocol analyzer business? Are you gaining share, do you think, in the scopes business?

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Yeah. Jim, both. What -- first of all, we are hitting on all cylinders on our protocol analyzer businesses. If you combine our protocol analyzer and oscilloscopes sales, that was a record for us, all-time record this quarter. We see very strong demand for our protocol analyzers like PCI Express as well as high definition multimedia video products. The other thing that we've been successful at is we've combined our oscilloscopes with our protocol analyzers which saves significant amount of time for engineers that are developing interfaces between product, and that's been a real winner for us. So it's a combination. Good market for oscilloscopes, great market for protocol analyzers, and an upside when you combine the two together with new product.

[James Ricchiuti, Analyst at Needham & Company LLC]

Got it. And two quick final questions. Is -- and this next question may be difficult to answer, but you do seem to be navigating the component environment fairly well. But I'm wondering if you can say whether there has been any identifiable disruption to revenues or in other words, revenues that you perhaps would have been able to achieve in the quarter, but you just -- it's just challenging to get parts?

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Yeah. Jim, that's a great question. Yeah, I can answer that because we track that one very closely. First, in the quarter I'd say, we probably didn't enjoy about $40 million of revenue that we could have because of shortages. Now we were fortunate because the way our portfolio of business is laid out as you are very familiar with, we can make some of that up in other places. We have a balanced portfolio and these shortages are not hitting everything we do. And by the way, those are not lost sales, they just move to Q4. We expect to have a similar number in Q4. We're looking at Q1 of next year and see similar issues. So we -- it's kind of a shifting game. But we make it up by pulling in from other parts of our portfolio.

Having said that, we have an extremely active program from the procurement side where we have a major initiative in procurement automation but we also have a procurement working with our -- interestingly, with our suppliers in the Far East, who provide us PCBAs. They have access to components that go to -- into those PCBAs and they are helping us get some of the computer chips and other components that we need. And we also have some dedicated people in the Far East doing the same thing. So it's a combination.

Take the $40 million, push it forward, then take the $40 million from next this current quarter push it forward, pull in some stuff where we can, and kind of as I said before we're navigating it. I think so far we've done okay.

[James Ricchiuti, Analyst at Needham & Company LLC]

Got it. And then last question, Robert. You alluded to fairly strong book-to-bill in marine. Can you give us a sense of book-to-bill in the various segments, Digital Imaging and the A&D and...

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Sure, sure. Let me start with marine, I gave that. In environmental and test and measurement, it's 1.5 in Q3. Recall that we had in T&M we had record sales in Q3, so 1.5 is pretty good. Digital Imaging, I would say 1.12. And AD&E which is our Defense and Aerospace businesses, 1.06. Engineered Systems 1.05 about. Jim, I know overall that brings it to about 1.1.

[James Ricchiuti, Analyst at Needham & Company LLC]

Got it. Thanks very much. Congratulations on the quarter.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Thank you, Jim.

[Operator]

And we'll move to the line of Andrew Buscaglia with Berenberg. Please go ahead.

[Andrew Buscaglia, Analyst at Berenberg Bank]

Morning, guys.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Good morning.

[Andrew Buscaglia, Analyst at Berenberg Bank]

On that book-to-bill comment, can you -- in Digital Imaging, can you indicate how bookings are for full year?

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

So, moderate but better in the 1.1 in the Digital Imaging side.

[Andrew Buscaglia, Analyst at Berenberg Bank]

Okay. Okay. So it's still above 1 though?

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Yeah.

[Andrew Buscaglia, Analyst at Berenberg Bank]

Okay. Okay. And then -- sorry, what was that?

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

No, I said in the Digital Imaging side. The...

[Andrew Buscaglia, Analyst at Berenberg Bank]

Yeah. Right. Okay.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Yeah.

[Andrew Buscaglia, Analyst at Berenberg Bank]

Okay.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Yeah.

[Andrew Buscaglia, Analyst at Berenberg Bank]

And you talked fairly positively about government, you still gaining your fair share of government awards potentially. Which FLIR help -- are there any that are related to FLIR that you could talk to? And then maybe not so much near term, but I think you see on the horizon in 2022 and that was always kind of a sore spot for them in terms of winning new awards that are meaningful.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Yeah. I got to tell you that we holding our own there. Things have moved there little to the right, but we've got some nice orders especially for examples in the U.S. Border Patrol, where we delivered light-vehicle surveillance system, we have some DARPA program on -- that could lead to other activities in the Personal Protective Biosystems. Overall, I think we're holding our own there and I expect we do okay. But again Andrew, what is -- to me what's important is, even if you look at our government businesses with FLIR, we have a balanced portfolio. And unfortunately, they may have suffered a little bit because two focused portfolio. We have a balanced portfolio between our Engineered Systems, the FLIR unmanned both ground and air systems and integrated systems. And then we have of course our defense programs and our Aerospace and Defense.

So we gained about 3.5% in those programs in our government programs in Q3. That may sound modest when you look at the overall growth of 11.9% organic, but I'm happy with that. If we can keep that pace in the -- this times going forward, we should be okay.

[Andrew Buscaglia, Analyst at Berenberg Bank]

Okay. And maybe just lastly, you're seeing some of your longer cycle businesses take up a bit. I know it's small, but can you just comment on what's going on with energy specifically? Your sales tied to energy exposure?

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Yeah. I think the first is because of the oil prices, we expect that we get about a 3% increase from 2021 to 2022 in total sales from, let's say, a $150 million up maybe to a $175 million, that's a little more of that 3% as I think about it, but it's more like 2.1. But having said that, again I'll fall back on what we've constructed our portfolio. We get 3% here, 4% there, we get defense, we get ASG, we get our short-cycle businesses, and then our course Digital Imaging which is hitting on all cylinders there.

We think we're going to be okay. So there is upside in energy, but I'm not counting on it to move the whole company. The whole company would know because of all the pieces that we have put together that protect us by the way of the downside as you will know, Andrew.

[Andrew Buscaglia, Analyst at Berenberg Bank]

Yeah, okay. Thanks, Robert.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Thank you. Brad, do we have any other questions coming up?

[Operator]

Currently, we just have Joe's line is open and nobody following Joe.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Okay. Joe?

[Joe Giordano, Analyst at Cowen]

Hey guys, can you hear me?

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Yes, yes.

[Joe Giordano, Analyst at Cowen]

Hey, good morning. So you kind of hinted at this already, but if you were to kind of think about FLIR ex the EST, what do you think is like the true growth rate that you're exiting '21 at into '22 and is that kind of a sustainable rate into '22?

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Right now, if you subtract EST, which as I mentioned, we had no revenue this year, I think it would be in the mid-single digits, just like we think Teledyne should be.

[Joe Giordano, Analyst at Cowen]

Yeah. And then if you were to contemplate -- yeah, go ahead.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

No, I'll just say this, when we started the year we -- Joe, when we started the year, we said our organic growth would be 5.5% to 6%. As we went to summer time, in July, we said we'd be 6.6%, and then when we came today, I said it'd be between 7% and 7.5%, 7.25%. So I'm hoping and use the words hoping that when I say mid-single digits like 5%, that would be a good beginning for us next year.

[Joe Giordano, Analyst at Cowen]

Yup, understood. If you're talking about getting to like an $80 million run rate in savings by mid '22 for FLIR, what does that kind of imply for a margin there? I mean you're going to talk EBITDA or whatever is easiest to talk about.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Well, I think I mentioned earlier, we anticipate to improve our margins 50 to 60 basis point across the company year-over-year, and whether it's non-GAAP or EBITDA, by the way, our EBITDA now is about -- this quarter was 24.2%. I think that will help improve our non-GAAP margins up. For FLIR's today, it's about 24%, which is significantly higher than we've enjoyed historically. And for '21, our overall margin, we expect the non-GAAP margin, which excludes of course intangibles and comp stock associated with purchase accounting. If you go to 21% and if we can enjoy 50 basis points on top of that, some of the contribution serious contribution coming FLIR, we'd be very happy with that.

Again, bear with me on this, Joe. I'm giving you what I'm see in January happening throughout next year. As we get to January, nothing terrible happens in the world. Hopefully, we'll do better but right now I'll stay with the 50 basis points.

[Joe Giordano, Analyst at Cowen]

And then just one last question, more high level. There has been talk, stories recently about China with the nuclear gliders and suborbital and -- can you just talk about like what this means for space-based detection and sensing and where you guys are positioned there and how that market can develop further given like kind of new threats that we need to deal with?

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Yeah. We have two examples that I can give you. One of them is in our Engineered Systems segment, we have a contract where we are developing a wind tunnel for vehicles that are up to nature that you just mentioned. And that's very important because to test hypersonic vehicles, you want to have a wind tunnel to be able to do that, a hard wind tunnel. And we have a small program, about $50 million, which we think will be followed by a -- in all the bigger programs that is specifically for hypersonic vehicles.

And the other side, we do have sensors in the A&D segment of FLIR and also, especially that -- I meant Digital Imaging, in general, but we have sensors that are being developed and used computer, Edge computers that are located on various vehicles for detection of high-speed missiles. If that market starts growing, then we do have a series of products and then we have one that I cannot describe too much. We do have a very strong program, programs I say, multiple programs. In our imaging businesses here in Thousand Oaks, that's the one that locates infrared and other sensors on satellites space vehicles and those are classified programs. And we are enjoying some really good opportunities that's actually led to growth of our imaging programs.

[Joe Giordano, Analyst at Cowen]

Thanks, guys.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Thank you very much.

[Operator]

We do have a follow-up question. We'll go to the line of Mike Maugeri with Wolfe Research. Please go ahead.

[Michael Maugeri, Analyst at Wolfe Research]

Hey. Thanks for getting me back on. Unless I missed it somewhere, Robert, would you be able to go around the horn on the change in growth rate at the segments that drove the change in guidance?

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Yeah. Let me see. I can do that. So in July, we anticipated the growth rate in Instruments would be about 6%, 6.2% and we expect that to continue. In Digital Imaging in July, we anticipated about 11.8%, we're raising that to about 13%. In our Aerospace and Defense segment, in July we anticipated 4.4% about and now we think it be closer to 6%. Engineered Systems, we expected to shrink, about 1.7% and it will shrink 1.7%. When you add those up, Mike, in July, we anticipated that our organic growth would be about 6.6%. If you add the numbers up that I just mentioned, and round them up, it will be between 7% to 7.5%, let's say 7.25% organic growth. And that's kind of going around the horn as you mentioned.

[Michael Maugeri, Analyst at Wolfe Research]

Thank you.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

For sure.

[Operator]

And currently no further questions in queue.

[Robert Mehrabian, Chairman, President and Chief Executive Officer at Teledyne Technologies]

Thank you. Brad, I'll now ask Jason to conclude the conference call, please.

[Jason VanWees, Vice Chairman at Teledyne Technologies]

Thanks, Robert. And again, if anyone has follow-up questions, my number is on the earnings release. Please feel free to call and email me. And Brad, if you'd give the replay information, conclude the call, we'd be appreciated. Thanks, everyone. Certainly. Thank you. And ladies and gentlemen, the conference will be available for replay after 10 a.m. Pacific today and running through November 27 at midnight. You can access to AT&T replay system at any time by dialing 1866-207-1041 and entering the access code 7478140. International parties may dial 402-970-0847. Those numbers again are 1866-207-1041 and international 402-970-0847 with the access code 7478140. That does conclude our call for today. Thanks for participation and for using AT&T Teleconference. You may now disconnect.