Teledyne Technologies Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2022

Key Takeaways

  • Teledyne delivered its highest-ever first quarter sales, earnings and adjusted operating margin, with 7.8% organic sales growth despite a 100 bp currency headwind.
  • Digital Imaging segment sales rose 185% in Q1 due to the FLIR acquisition, with 13.1% organic growth and adjusted segment margin up 20 bps to 21.9%.
  • Instrumentation and Aerospace & Defense Electronics segments achieved robust growth (7.8% and 9.9%, respectively) and margin expansion, while Engineered Systems revenue declined 8.9% after exiting the cruise missile turbine engine business.
  • Teledyne raised its full-year organic growth outlook to approximately 6% (from 4–5%), targeting total revenue of ~$5.51 billion and lifted non-GAAP EPS guidance to $17.75–$18.
  • Free cash flow fell to $58.7 million from $110.1 million due to one-time Q1 bond interest, incentive payments and inventory investments, but net debt leverage improved to 2.8x.
AI Generated. May Contain Errors.
Earnings Conference Call
Teledyne Technologies Q1 2022
00:00 / 00:00

There are 10 speakers on the call.

Operator

Ladies and gentlemen, we'd like to thank you for standing by, and welcome to the Teledyne First Quarter Earnings Call of 2022. At this time, all participants are in a listen only mode. And later, we'll conduct a question and answer session with instructions being given at that time.

Speaker 1

22.

Operator

And as a reminder, today's call will be recorded. We would now like to turn the conference over to our facilitator, Mr. Jason Van Weef. Please go ahead,

Speaker 2

Sir? Thank you, Steve. This is Jason Van Wees, Vice Chairman of Teledyne, and I'd like to welcome everyone to Teledyne's Q1 2022 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 Mehrabian Senior Vice President and CFO, Sue Main and Senior Vice President, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibic.

Speaker 2

Also joining today is Edwin Rox, Executive VP of Teledyne. After remarks by Robert and Sue, we will ask for your questions. Of course, though, before we get started, our attorneys have reminded me to tell you that all forward looking statements made this morning are subject to various assumptions, risks and caveats As noted in the earnings release and our periodic SEC filings, our 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 3

Thank you, Jason, and good morning, everyone, to our 90th earnings call since our spin off in November of 2019. At this point, our stock price was approximately $9 a share. We began today we began 2,002 we began with the greatest first quarter sales, earnings and adjusted operating margin in our company's history. Our results and operational execution continue to reflect Exceptionally well balanced business portfolio across both end markets and geographies. Demand throughout our short cycle instrumentation and imaging businesses remain very robust, resulting in total organic sales growth of 7.8%, including approximately 100 basis points of currency translation headwind.

Speaker 3

We achieved record orders for our electronic test and measurement instrumentation and Industrial Imaging Sensors and Systems, even in a typically weak Q1 for these businesses. Sales from our longer cycle commercial aerospace and marine businesses increased considerably from last year and backlog also grew. Both our GAAP and non GAAP earnings were 1st quarter records. GAAP earnings per share was exactly double compared with 2021 and non GAAP earnings increased 34%. I want to emphasize that our non GAAP earnings exclude only acquired intangible asset amortization, But in the Q1, it also excluded a large tax benefit related to clear foreign tax matters, which only appear in the GAAP results.

Speaker 3

While free cash flow was lower than last year, It reflected the following guidance. 1st, bond interest payments of over $36,000,000 made only in the Q1 and again will be made in the 3rd quarter. 2nd, annual incentive paid only in the Q1 and third, a significant investment in inventory to derisk revenue in future periods. These items will not be repeated in the Q2. Nevertheless, Our leverage ratio declined to 2.8x from 3.8x immediately after the FLIR transaction in May of 2021.

Speaker 3

Turning to our 2022 outlook, the overall demand environment across our businesses remain favorable. Even with supply chain constraints and currency translation headwind, We are increasing our expectation for the full year organic growth to approximately 6% from 4% to 5% communicated in January. Coupled with a full year sales contribution, Slightly less than $2,000,000,000 from FLIR, this equates to total revenue of just over 5.5 $1,000,000,000 for the year, roughly equal to the current consensus. I will now further comment on the performance of our 4 business segments. In our Digital Imaging segment, 1st quarter sales increased 185%, largely due to FLIR Acquisition.

Speaker 3

But organic growth in our combined commercial and government imaging businesses was also very strong at 13.1%. Sales growth was strongest for industrial vision sensors and systems as well as our low dose high resolution digital X-ray detectors. GAAP segment operating margin was 15.4%, but adjusted For intangible asset amortization, segment margin was 21.9% or about 20 basis points greater than last year. In our Instrumentation segment, overall first quarter Sales increased 7.8% versus last year. Sales of electronic test and measurement systems, which include oscilloscopes and protocol analyzers were very strong and increased 19.1% year over year to record levels.

Speaker 3

Sales in the environmental instruments were flat compared to last year with greater sales from certain human health and Drug Discovery Products, offset by lower sales of industrial and laboratory gas detection devices. Sales of marine instrumentation increased 9.7% organically due to improved energy markets, but also record sales of autonomous underwater vehicles for both defense and Commercial Oceanography Applications. Overall, Instrumentation segment GAAP operating Profit increased 20.5 percent in the 1st quarter with operating margin increasing 245 basis points or 2 29 basis points excluding intangible asset amortization. Moving to our Aerospace and Defense Electronics segment. 1st quarter sales increased 9.9% driven by modest growth in defense, space and industrial share sales combined with greater than 50% increase in sales of commercial aerospace products.

Speaker 3

GAAP segment operating profit increased 51.6 percent with margin 7 10 basis points greater than last year. Finally, in our Engineered Systems segment, 1st quarter revenue decreased 8.9% and operating profit and margin declined due to lower sales, but especially since we exited the higher margin cruise missile turbine engine business following the Q1 of last year. Before turning the call over to Sue, I wanted to make a couple of Concluding remarks. Effective just this week, FLARE successfully fulfilled the terms of its Consent agreement with the U. S.

Speaker 3

Department of State. Compliance has been always and will always be a critical component of our culture at Teledyne. But Teledyne flair has now moved beyond the Finally, regarding our global defense business, which represents approximately 25% of our total sales. Over the last 6 months, defense sales including that of Teledyne FLIR declined slightly Year over year and backlog also increased. However, this was more than offset by very strong commercial orders and sales across the company.

Speaker 3

But now With firmer U. S. And NATO budgets, the outlook for our defense has changed, creating opportunities for greater defense sales, but also limiting risk for Teledyne if general economic growth decelerates in the future periods. While the improvement in defense may benefit future years the most, we are nevertheless seeing an increase in near term bookings and opportunities, some of which we expect to benefit the second half of twenty twenty two. This is especially true for the Teledyne FLIR business portfolio, where our commercially derived, but military qualified products may only require a purchase order as opposed to a lengthy appropriations process.

Speaker 3

I will now turn the call over to Sue.

Speaker 4

Thank you, Robert, and good morning, everyone. I will first discuss some additional financials for the quarter not covered by Robert, the same period of 2021. The adjusted cash flow excludes a one time payment of $296,400,000 to the Swedish Tax Authority related to a disputed pre acquisition 2018 tax reassessment issued to a FLIR subsidiary in Sweden. Adjusted free cash flow, that is cash from operating activities less capital expenditures, was $58,700,000 in the Q1 of 2022 compared with $110,100,000 in 2021. Capital expenditures $21,000,000 in the Q1 compared to $17,600,000 for the same period of 2021.

Speaker 4

Depreciation and amortization expense was $86,900,000 for the Q1 of 2022 compared to $29,300,000 in 2021. We ended the quarter with approximately $3,850,000,000 of net debt, That is approximately $4,130,000,000 of debt less cash of $284,300,000 Our stock compensation expense was $4,300,000 in the Q1 of 2022 compared to $4,200,000 for the same period of 2021. Turning to our outlook. Management currently believes that GAAP earnings per share in the Q2 of 2022 will be in the range of $3.44 to $3.55 per share with non GAAP earnings in the range of $4.32 to $4.40 For the full year 2022, our GAAP earnings per share outlook is $15.34 to $15.66 and on a non GAAP basis, dollars 17.75 to $18 the latter being an increase at the midpoint to our prior outlook of $17.60 to $18 that we provided in January. The 2022 full year estimated tax rate excluding discrete items is expected to be 23.1%.

Speaker 4

I'll now pass the call back to Robert.

Speaker 3

Thank you, Sue. And operator, we'd like to take questions. If you're ready to proceed with the questions and answers, please go ahead.

Operator

Ladies and gentlemen, we'll now begin the question and answer session of today's conference. 22. 22. Our first question will come from the line of Greg Konrad of Jefferies. Please go ahead.

Speaker 5

Good morning.

Speaker 3

Good morning, Drew.

Speaker 5

This might be a little bit greedy and I appreciate the conservative nature of forecasting, but It sounded like you took up the organic growth outlook quite a bit with maybe a more minimal change in EPS that you announced this morning for the year. Can you maybe talk about the dynamics there? And maybe given the comments on the supply maybe some of the offsets to what seems like maybe slightly better volume?

Speaker 3

I don't know, Greg. What did you call it? Greedy?

Speaker 6

Yes. Greedy part,

Speaker 3

Sal? Frankly, we're a conservative Right now, sitting here, we're worried about inflation, Which is, as you know, is difficult. Supply chain issues, while we're managing them And have managed them successfully, are still uncertain. There is no certainty as when that will change. So having said that, we expect revenue to grow.

Speaker 3

It was about I think in January, I said it was 4.6% organic growth. Now I'm indicating it would be 6% Or maybe a little more. Nevertheless, having said that, we have to be conservative because there's too much uncertainty. There's the Supply chain, there's the inflation, there's the war in Europe, there's the shutdowns in China And this is not the time to be a Ferguson. This is the time to kind of focused on what we know we can deliver and go from there.

Speaker 3

So that's my answers to that. I don't know if that helps, Greg, or not.

Speaker 5

That's helpful. And then I mean just kind of baselining the outlook with the quarter. When I look at The margin, some of the segments were well ahead of at least our expectations, maybe Digital Imaging fell a little bit short. Can you maybe just level set us on the outlook for the year for margins by segment and kind of what you're expecting today?

Speaker 3

Sure. Let's start with Digital Imaging. For the full year, and I'm going to combine digital imaging together, FLIR and legacy Teledyne. We think for the full year, it will be about 23.3%. That's full year 2022, slightly less than what it was in full year 2021.

Speaker 3

Now in January, we were a little more effervescent about that. We thought it would be closer to 23.9 percent, but we think now 23.3 percent is a better number, primarily because We are experiencing some supply chain issues there plus we're having to pay higher prices when we do find the components that we need. Moving to the Instrumentation segment, in January, I mentioned that it would be about 23.8 percent margin. We're increasing that now by 50 basis points because of the tailwind that we have in test and measurement, oscilloscopes and protocol, we're increasing that margin now from 23.8 percent to 24.3 percent. Moving to Aerospace and Defense, The margin we expect to increase substantially from what we projected In January, we projected a margin of 21.9% And we expect it to grow almost 190 basis points to 24%.

Speaker 3

On the flip side, in our Engineered Systems segment, which has revenue of about 400 $1,000,000 and it's primarily government businesses. We expect margins to end lower than what we expected in January and be at 10.4 So when you roll all of that up for the segments, right now we're expecting the margin for all the segments combined To be 22.7 percent and then when you put in corporate expense, etcetera, The total company margin would be 24.5%. I hope that helps, Greg. That's helpful. And I'm just

Speaker 5

going to sneak in one last one. I mean, you mentioned defense and kind of the increased opportunities. And I think at one point people were worried about defense maybe bringing down the overall growth rate of Teledyne. Is there any way to Maybe quantify what you're seeing in terms of maybe what you thought of kind of the long term defense growth rate prior and Post some of the budget tailwinds in NATO, kind of what you're thinking at going forward today?

Speaker 3

Okay. Okay. Let me start with Q1. Overall, We saw some decrease in defense across our portfolio from Q1 of last year, About 2.5%. And most of that Experience came in Teledyne's fleet.

Speaker 3

Now having said that, So longer term, we think our defense sales should decrease In the mid single digits, which is if you take a negative 2.5% and go to, Let's say 5% or so, that's 7.5% turnaround. That would be though at the end of 2022, more likely 2023 and 20 20 And the reason I say that is while we've kind of chewed away on our defense backlog, We're now seeing significant opportunities, both in Europe as well as across the board in FMS sales. And I can give you examples of that, but We're seeing real demand for products that we have, especially in the Clear businesses, Teledyne, Clear Businesses, some of them directly a result of the Ukraine Conflict and some of them are of course because of the increased budgets that are coming in the NATO alliance. Thank you. Thank you, Greg.

Operator

Our next question will come from the line Jim Ricchiuti of Needham and Company. Please go ahead.

Speaker 7

Hi. Thank you. Good morning. Robert, just in light of the comments you just made, I'm wondering, are you is Teledyne thinking differently about Longer term inorganic opportunities in defense, over the years you guys have focused mainly on building up the commercial portfolio You've done that quite well. But I'm just wondering, as you think about the business, are you has anything changed in the way you're thinking about M and A going

Speaker 3

Okay. Jim, good morning to you. First, let me back up and say, The way we look at defense, which is now about with FLIR included, Teledyne FLIR, It's about 25% of our portfolio. The way we like to think about that part of our portfolio It's kind of like a shock absorber. When commercial businesses go up and down, especially if they go down and you have serious inflation and other things become very negative, it acts like a shock absorber.

Speaker 3

But having said that, you also have to look at what's happening across the world. And the way we see it is that the conflicts have caused significant change in demand for products, especially our products from our perspective. And We think we should be ready, which we are, to enjoy the fruits of that. Having said that, I am not really that convinced That we should change the balance of portfolio towards defense. And I say that with an M and A.

Speaker 3

And I say that because That I don't really think it's very prudent for a company like Teledyne to Change strategy because of something that has happened or is happening. And I think our primary growth engine has always been our commercial businesses and we have more Opportunities there. So I think in M and A, we'll probably focus on commercial businesses. Having said that, We bought FLIR and FLIR had a substantial defense business and we absorbed it, but Defense is good. It's got a predictable backlog, but it's not really it doesn't have the kind of margins you can enjoy in the Commercial domain.

Speaker 7

Got it. Thank you for that. And also appreciate the color on the segments in terms of the way you're viewing the operating margins for the year. I wonder if you could Turn for a moment to gross margins, which were quite strong in Q1. And I'm wondering if you could elaborate on what some of the biggest factors There's more in that and maybe how we should be thinking about gross margins going forward.

Speaker 7

I know there's some puts and takes, obviously, some of the cost pressures, but mix also, but is there any color you could provide on the strength there?

Speaker 3

Yes. Jim, you're obviously very familiar with Teledyne. If you look at our Q1 gross margins last year, It was about 38.9 percent for the legacy Teledyne. We didn't have FLIR at the time. Our FLIR on the other hand, Teledyne FLIR enjoys higher gross margins Thanos, about 55% or did historically or 50%, I'm sorry.

Speaker 3

So When you combine those 2 together, the combined company gross margin in the first quarter moved from 38.9% to 43%. Having said that, We also enjoyed higher margins in our test and measurement businesses because they grew 19.2%, that's in our instruments group. And our aerospace and defense margins moved up Huge because of the about 50% increase in our commercial aerospace business. So we enjoyed 2 tailwinds. 1, buying a business, which is not a significant part of our portfolio that had higher gross margins that are legacy businesses and then turnaround that we experienced In our commercial aerospace business and then really good record Or there's not revenue in our test and measurement businesses.

Speaker 7

In commercial air, presumably, you see that recovery continuing, it looks like from at least from what we're hearing from hearing elsewhere. Is that fair to say?

Speaker 3

Yes, I would say so. We do have

Operator

Some

Speaker 3

concern going forward only because the comps are going to be a little tougher in Q3, Q4. Last year, Q1, we were in That's Ralph, as you remember. We're really encouraged. We do a lot of Both OEM products for commercial aircraft, but we also do A lot of aftermarket products. So we're encouraged, let me put it there.

Speaker 7

Okay. Thanks. I'll jump back in the queue.

Speaker 3

Thanks, Jim.

Operator

Our next question will come from the line of Joe Giordano of Cowen. Please go ahead.

Speaker 6

Hey, good morning guys.

Speaker 3

Good morning, Joe.

Speaker 6

So just wanted to start with The growth rate in the FLIR defense portfolio for the quarter, I know that was down. So FLIR overall was down year on year. Just How was that how did that 1Q play out relative to what you were thinking internally 3 months ago? And Has your overall like mid single digit growth for the FLIR portfolio this year changed? And maybe you can if you want to loop that in with like Your updated views on organic growth by segment, that's probably helpful too.

Speaker 3

Sure. As you well know, Joe, FLIR, as you mentioned, Defense Businesses in FLIR, they declined year over year if you went to the historical defense business. They declined about 10.9% year over year. But that's also consistent with our own Engineered Systems segment That declined about 9% year over year. Some of the primes that we were listening to this week, Their businesses declined about 8%.

Speaker 3

Having said that, we think in Q2, The clear defense and our overall defense Should be relatively flat and the pickup in the 3rd and 4th quarters, I'm going to say, +5%. And the reason I say that is because The overall market that we're seeing and the opportunities that we're seeing In the defense businesses are positive, both in Europe as well as in this country. So when you look at it that way, yes, we did have a decline in Q1, but we had a decline in our existing defense business in Specialty Engineered Systems, which also we've recovered as the year goes forward. In the year overall, if now you got to look at the other side of FLIR, which is their commercial businesses. The commercial businesses did reasonably well in the Q1.

Speaker 3

They went up about 2.3% compared to last year. And last year, they had a little bit, not much, but they had a little bit of sales in elevated skin temperature products. So in total, I think we expect for the year The revenue year over year to go up for the overall flare business, Teledyne flare, I should say, To about from what was last year, dollars 1.89 $5,000,000,000 if you rolled it out in historical as well as after the acquisition to about 1.970, which would be the highest over the last 3 years. That'd be a combination of defense and commercial. I hope that answers the question,

Speaker 6

Joe. No, That's helpful. Thank you. I was just I'm curious like your point on this is not Time to be effervescent and full year outlooks because of what's going on in supply chain and what's going on with inflation. I think that's totally fair.

Speaker 6

If you look at your portfolio, like what's the most concerning part? Like, which do you think is the least protected of all your businesses if something was to happen negative globally?

Speaker 3

I don't want to venture to guess, Joe, because I don't know. Well, let me say this. We have intentionally balanced our portfolio For just these kinds of times, when times get uncertain, Various parts of our portfolio absorb the shock from the markets and from the economies. That's why if you look at our history, when things bad things happened, Right afterwards, some other companies may not deal with it as well. Right afterwards, We buy someone that has not done as well.

Speaker 3

So I would say that I feel comfortable with our portfolio. We're guiding the street on what we think we can deliver. And we don't want to be too as the word effervescent. On the other hand, If bad things continue happening as they are now, might be a good opportunity for us coming out of this with a significant M and A. We don't see a warning sign at this time, Joe.

Speaker 6

Okay. And if I could just one last quick one. The test and measurement growth is really strong again. How sustainable is that at that level? Do we start moderating on the rates and kind of stay on a gross dollar basis At similar levels, how do you think about that business?

Speaker 3

Well, again, going with our theme, I'm going to say, net GAAP earnings GAAP growth net growth for the year Should be about 4.5%, 5%, even though we had such a good Q1. We're seeing better orders by the way, even the last 3 weeks. But that's an area that we sell significant amount of products in China. And nobody knows what's going to happen with the lockdowns there. And It's a short cycle business and the comps are going to be tougher as we move forward because we did pretty well the last 3 quarters of last year.

Speaker 3

So I would say we've increased our outlook from January a little bit from, let's say, 4% to 4.5%. We'll stay with that for now to see how things evolve as time goes on.

Speaker 6

Thanks guys.

Operator

Our next question comes from the line of Andrew Buscaglia of Berenberg, please go ahead.

Speaker 1

Hey, good morning, guys.

Speaker 3

Good morning, Andrew.

Speaker 1

So, I was hoping you could maybe add a little bit more commentary specifically, you obviously sound more positive on defense Government Business, specifically with FLIR too. And FLIR had always kind of talked about these big longer term programs of record they were after And very positive on their unmanned systems business, which was small, but definitely an area they saw as a big source of growth. Are the when you make those comments, are you referencing the things like that? Or is there any other color you can give specifically into what kind of the nature of these awards are or potential opportunities you said?

Speaker 3

Yes. Let Let me first comment on the long term legacy Systems and programs of record, some of that has happened, will happen. Some of it, I'm not so sure because I don't look through the same lens as The previous management did. Having said that, there are significant opportunities in soldier borne sensor systems. And when you mentioned the unmanned systems, There is a range of them, as you well know.

Speaker 3

If you move to the air, there is, of course, the Black Hornet, Black Hornet III, which is 5 inches in size, very silent and go about a mile, come back. The GPS performing GPS denied environment, we're seeing real interest in that And that's doing very well. On the flip side, we on the ground systems, Our PAC bots are doing really well. Actually, some of them we saw some videos are being used in Ukraine, right, the Ukrainian Forces that we've trained before the war. In the Gimbal that we have, they're used and they're doing very well.

Speaker 3

Some of them actually are around the new Our IR sensors go into various drone manufacturers And we're seeing a lot of demand across all of our unmanned systems for not just Drones, but also for the sensors that go on top of those. We also have in the longer term, as you said, programs, We also have an interesting opportunity, which has to do with a larger drone. That's a little bit like what is known as the Switchblade. That drone would be if we can achieve a program of record coming to the words you said, if we can achieve program of record for that drone, That would be a real winner. It's in the final stages of Prototyping, we should be able to get some revenue by the end of the year.

Speaker 3

It has a really Strong capability, it's a vertical takeoff and landing drone. It has Opportunities to carry munitions, it's Recover Broad, that is if you waive off And assignment, you can waive it out within the last two seconds and bring it back. It's got a 30 minute flight time, and you can go out 20 kilometers. So When I think about something like that, that's akin to an opportunity that We can enjoy when we get that certified and flying. Having said all of that, I think it's important to recognize that getting into programs of record is not that easy.

Speaker 3

And what we like to focus on is get what you can now, What you can now and then plan for the future over the long term, but don't hedge all of your eggs in that basket. I don't know whether that helps,

Speaker 1

Nelini. No, very helpful. No, it sounds encouraging. And maybe you could comment to the other news this quarter is that The consent agreement is going away. Can you just remind us the impact of that?

Speaker 1

It sounds like, I forget if that is included in your kind of annual synergy estimate and where we stand with synergies from FLIR at this point?

Speaker 3

Yes. That the total cost of that for flare and then Teledyne Was at the order of $80 some $1,000,000 It started in 2018 And we successfully ended it this quarter. We had Some expenses in Q1, we also had to pay $3,500,000 to the government that we are obligated to pay. We've built that into the synergies for going forward already. But part of the reason that we are able to have the synergies that we enjoyed with Teledyne FLIR is that when we bought them, we said, look, we expected to have accretion In the 1st year and we thought that at the time The attrition would be somewhere between $40,000,000 to $80,000,000 this year.

Speaker 3

So where I sit right now, I would guess $80,000,000 would be the low end And it would be closer to $100,000,000 in synergies. And that kind of absorbs Some of the opportunities that we see now that the consent decrease behind us. Okay, got it.

Speaker 1

Okay. All right. Thank you.

Speaker 3

Thank you. Thank you, Andrew.

Operator

Our next question will come from the line of Christine Leewag of Morgan Stanley. Please go ahead.

Speaker 8

Hey, good morning, everyone.

Speaker 3

Good morning, Christy.

Speaker 8

Looking at the supply chain constraints, last quarter you had mentioned that Alternative sourcing has thus far proven successful in about 60% to 70% of cases. Are these trends holding steady, improving or worsening? And also what other initiatives can you implement to manage the risk?

Speaker 3

Thank you, Kristin. That's a very good question. Let me start with the effects. So net effect, We think in the Q1 of this year, the one just behind us, the effect of Shortages affected us by about $74,000,000 We think going forward, that's not going to be changing all that much. Having said that, We also were able to buy components, find components or redesign our products That let us sell over $100,000,000 of products that we couldn't have if we had not Enjoyed that.

Speaker 3

We have a very robust activity dealing with shortages in our procurement led by Paul De La Rosa and 30 of our business units. So they do 3 things. 1st, They identify who has the shortages and what are the common suppliers For those shortages. And we then deal directly as a company with that supplier and prioritize What we can buy from them. So we may have shortages in various businesses, but one may not affect our revenue as much as the other.

Speaker 3

So that help us focus on the high priority ones. 2nd, we source from 3rd parties, Especially, we have our own people in the Far East, plus we have some of our suppliers, primary suppliers For our semiconductor requirements that are looking for parts. So if we're missing like 700 parts Today, we may have already found maybe 450 parts that we can enjoy, But we have to, of course, bring them in and qualify them. We're not just going to take them and put them into our product. We have to qualify them like we do everything else.

Speaker 3

And then we also lastly look at redesign. That is, can we redesign Not just the specific part, but can we redesign the product, let's say the camera that we're selling to avoid the part that has significant shortage, especially if we see forward Looking forward. So long answer to your question is the following. 1, yes, we're going to have some revenue shortfall because of that, But it's not going to be killing us. It's going to be in the same level that we had.

Speaker 3

And Part of it is alleviated because we've also put in some inventory. That's one of the reasons that we talked about Our cash, we've increased our inventory, been setting on our shelves our products and also materials that we have either bought long term or products that once we get the part, we can get it out the door. There's a whole combination of these Things that's kind of so far has helped us avoid significant Effect on the company as a whole. I hope, Christine, that answers your question.

Speaker 8

Yes, Robert, that was really helpful. And then if I could do a follow on, is the supply chain issue that you're seeing for Legacy Teledyne the same as what you're seeing for FLIR or is there a difference between the 2?

Speaker 3

Not much difference, Christine. I think That is digital imaging as an example, which is now 60% of our business, it's the same because we make very similar products, Different end markets, similar product, complexity, etcetera. So I would say it's the same. There's some exceptions here and there. By and large though, 10%.

Speaker 8

Great. Thank you very much, Robert.

Speaker 3

Of course, Krishnan.

Operator

Our next question comes from the line of Noah Poponak of Goldman Sachs. Please go ahead.

Speaker 9

Hi, good morning everyone.

Speaker 3

Good morning Noah.

Speaker 9

Robert, can you quantify how much inventory you added in that buffer stock process?

Speaker 3

I'm going to say about $55,000,000 I hate to admit it, but it hurts me.

Speaker 9

Well, it seems sensible with what's happening at the moment. And it sounds like you're saying you don't expect that to alleviate Anytime soon. So you'll just hold that hold the inventory balance at that level as opposed to burning that down through the year? That actually is.

Speaker 3

We're going to burn it down, Noah. Okay. Either that or my close, but we're going to burn it down.

Speaker 9

I mean, if you're not expecting supply chain to improve, won't you need to hold buffer stock?

Speaker 3

Yes. We'll hold some. Of course, we will, Noah. But here's the thing. I think The combination of the things that I just mentioned is making us feel a little more comfortable.

Speaker 3

The other thing is Some of our businesses have been a little too conservative. We had a plan to reduce our inventory This year by a similar amount. So now it's gone up that much. So if we can bring it back, That we still have ample inventory. We just have to move it around so that the Measurement is such that it doesn't really hurt our cash flow.

Speaker 3

We have, for example, The problem we have, for example, with wafers, that's something that starts long term and we got to buy. We buy 30,000 wafers in digital imaging. And we got to buy it and we got to keep it because that's one that you cannot Buy in the market, whether it's East Asia or whether it's here, You can't buy that. So that one we do, but there are other things that we can get rid of this year.

Speaker 9

Okay. Are you still expecting total company bottom line full year free cash to net income conversion over 100%?

Speaker 3

Very close, very close.

Speaker 9

Okay.

Speaker 3

At this, that's what I told the board yesterday.

Speaker 9

Okay. On the cost input inflation piece, What is the rate of increase that you're seeing at the moment?

Speaker 3

Yes. That's a good question. There is No, there's 2 parts to that. One of them is materials and the other one is wages. On the material side, with everything that's going on in the world, Our costs are increasing at this time about 3.5% of our gross Profit costs, cost of our goods.

Speaker 3

And frankly, we look at that from both the business And also look at it from the corporate side. Wage inflation is a little less, maybe 2.25%. So when you roll that up altogether, We're seeing about cost increases of 3%, let's say. Donna? The flip side is we also are increasing prices ourselves where we can, not in every program.

Speaker 3

We're pretty much offsetting that with price increases. So net net so far Being very careful and prudent in what we do, we've managed to negate those 2, Well, we have to work very hard to keep doing that.

Speaker 9

Are you raising price at a rate Equal to or slightly greater than the cost inflation or are you actually maintaining the price cost gap that you previously had?

Speaker 3

I think we're I would say we're maintaining.

Speaker 9

So you already had pricing and you're Accelerating the pricing to maintain the price cost cap?

Speaker 3

That's it.

Speaker 9

Okay. And then, last thing I wanted to ask is you've discussed A new opportunity set evolving on the national security front, As the combined business now, what percentage of your defense or government related to national security revenues Our domestic versus international?

Speaker 3

Let me think for example. I think About overall, we're 25%. I would say about Just under 20%, 19% is U. S. And DoD and I'd say about 5% to 6% is foreign At this time.

Speaker 9

Got it. Okay. Thank you. I appreciate it.

Speaker 3

Thank you, Noah.

Operator

Our next question is a follow-up from the line of Jim Ricchiuti of Needham and Company. Please go ahead.

Speaker 3

Yes, I may

Speaker 7

have missed it, but Robert, I was wondering if you provided any information on book to bill either for the company or for the segments, if there was much variability in the book to bills that you saw on the different segments?

Speaker 3

Yes. That's a good question, Jim. Let me start with the total company, if I may. Book to bill is pretty healthy. It's 1.09.

Speaker 3

We have really good backlog, by the way, the highest backlog that I remember we have about $2,950,000,000 of backlog. And with backlog, we define very carefully. It's Kind of money that we already know is going to come in. So our book to bill of 1.09 is pretty healthy, But it's variable across the company. Let's start with digital imaging.

Speaker 3

Digital Imaging is a little less than the whole company. It's about 1.04, but still healthy. In instruments, it's close to the company total. It's worth 1.08 with marine being a little higher Then environmental marine being at 1.13 and test and measurement being at 1.07 percent, environmental at 1.04 percent. So the total instrumentation is at same as the company at 1.08 Aerospace and Defense Electronics, as I mentioned, because of the commercial Aerospace come back.

Speaker 3

We have a 1.13 book to bill. [SPEAKER DANIEL MARTINEZ VALLE:] And in Engineered Systems, where our revenue went down for the reasons I mentioned, partly because we're not going to we got out of the Turbine engine business after the Q1 of last year plus we've been eating into our backlog. We have some really nice Additions are book to bill is 1.38, but I'm always cautious on that one because that's a long term program Long P program wins. So overall, 1.09, That's pretty good for us, in this time, in this environment.

Speaker 7

Got it. That's helpful.

Speaker 3

Thanks, Jim. Thank

Speaker 1

you.

Operator

There are no further questions in queue at this time.

Speaker 3

Thank you very much, operator. I'll now ask Jason to conclude our conference call, please.

Speaker 2

Thanks, Robert. And again, thanks everyone for joining us this morning. And If you do have follow-up questions, please feel free to call me at the number on the earnings release and of course our earnings releases are available on our website, teledyne.com. Steve, if you could conclude today's conference call and provide the replay information, we would much appreciate it. Goodbye, everyone.

Operator

Certainly, Mr. Van Wyss. Ladies and gentlemen, that does conclude our conference call for today, which will be available for replay today at 2 p. M. Eastern Time until May 27, midnight of that day.

Operator

You may access the replay by dialing 866 2071,041 and entering an access code of 5805,962. 22. 580-5962. Once again, on behalf of today's panel, we'd like to thank you for Joining today's Teledyne teleconference call and thank you for using our service. Have a wonderful day.

Operator

You may now disconnect.

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