Teledyne Technologies Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2022

There are 11 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Teledyne Technologies Third Quarter Earnings Conference Call. At this time, all parties are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time.

Operator

As a reminder, this call is being recorded. I'd now like to turn the call over to our host, Mr. Jason Van Wees. Please go ahead.

Speaker 1

Good morning, everyone. This is Jason Van Wees, Vice Chairman of Teledyne, and I'd like to welcome everyone to Teledyne's Q3 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, Sumain SVP, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibic And also Edwin Rocks, Executive VP of Teledyne. After remarks by Robert and Sue, we will ask for your questions.

Speaker 1

Of course, 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, both via webcast and dial in, Will be available for approximately 1 month. Here's Robert.

Speaker 2

Thank you, Jason. Good morning and Thank you for joining our earnings call. I'm very pleased with our performance this quarter As well as Teledyne's long history of navigating challenging markets. Despite the strong dollar, Supply chain constraints and inflation, we achieved record 3rd quarter sales, Earnings, operating margin and free cash flow. Excluding foreign currency headwind, Which negatively impacted 3rd quarter sales growth by approximately 3% or $39,000,000 Core growth in local currency would have been 6.9%.

Speaker 2

In addition, year over year reported sales increased In all segments, despite the FX headwind. Non GAAP earnings Our $4.54 was a 3rd quarter record and just shy of our all time record And our earnings quality was also very high given our largest effective tax rate in several years. Overall, orders and demand remain strong, which is a testament to the strength of our balanced business portfolio. Total company book to bill was 1.06 And while orders remained reasonably healthy in our short cycle commercial businesses, They were particularly strong in our longer cycle government, marine and aviation businesses And quarterend external backlog of approximately $3,200,000,000 was also a record. Record 3rd quarter free cash flow of $252,000,000 Improved for the 2nd consecutive quarter and was 116% of adjusted net income.

Speaker 2

Our acquisition pipeline is growing. We're pleased to announce we were pleased to announce The pending acquisition of Etm earlier this morning. Turning to our 20 22 full year outlook. With our strong operating performance in the 3rd quarter, We were able to increase our full year earnings outlook while derisking the prior heavily weighted Q4 forecast. On revenue, given our current exchange rate and the U.

Speaker 2

S. Government's continuing resolution As well as the evolving semiconductor and technology export controls, we're a bit cautious at this time and now Project full year sales of roughly $5,450,000,000 In the Q3, we also took the opportunity to refocus Teledyne FLIR by eliminating Some smaller money losing products to help improve our margins And as a result, we had some cost towards our revenue. Finally, While supply chain constraints continue to limit shipments, we have seen a modest, very modest Improvement in recent weeks at least with regard to availability of certain printed circuit boards as well as electronic components. I will now further comment on the performance of our 4 segments. Starting with our Digital Imaging segment, 3rd quarter sales increased 2.3% despite currency translation headwind Nearly 4%.

Speaker 2

Sales growth was strongest for industrial and scientific vision sensors and systems as well as for our low dose high resolution digital X-ray detectors. Sales of commercial infrared imaging cameras also increased. GAAP segment operating margin was 17.2, But adjusted for intangible asset amortization, segment margin was 22.9%, 170 basis point improvement from the Q2 of this year. In our Instrumentation segment, overall 3rd quarter sales increased 6.7% versus last year. Sales of electronic test and measurement systems, which include oscilloscopes, digitizers And protocol analyzers remain strong and increased 9.7% year over year with growth in All major geographies and product categories.

Speaker 2

Sales of protocol analyzers across numerous Industry standards such as peripheral component, interconnect express or PCI Universal Serial Bus or USB and High Definition Multimedia Interface, HDMI, remained strong, As well as sales of oscilloscopes and our unique crossing product, which combine Increased 6.3% compared with last year with greater sales of both drug discovery And laboratory instruments as well as air monitoring and process gas analyzers. Sales of marine instrumentation increased 5.1% in the quarter, primarily due to new record Sales of autonomous underwater vehicles for both defense and commercial oceanography applications. Overall, Instrumentation segment profit increased 12.9% in the 3rd quarter With GAAP operating margin increasing 126 basis points to 23.2% and 83 basis points on a non GAAP basis, excluding intangible asset amortization, the margins increased to 24.5 percent. In the Aerospace and Defense Electronics segment, 3rd quarter sales increased 4.8%, primarily driven by a 20.7% increase In sales of commercial aerospace products, GAAP segment operating profit increased 23.4% With margin 349 basis points greater than last year. And finally, in our Engineered Systems segment, 3rd quarter revenue increased 7.2% and operating profit also increased slightly.

Speaker 2

Before turning the call over to Sue, I wanted to make a couple of Concluding remarks. Over the last 18 months, we have endured the same challenges as most companies, that is record inflation, supply chain constraint and Now strong U. S. Dollar. At the same time, we completed the integration of Teledyne Clear, our largest acquisition and then we rapidly deleveraged.

Speaker 2

While the operating environment remains challenging, we're glad to be back to doing what we do best, Investing in our businesses to drive organic growth, being vigilant on costs and simplifying our operations to increase margins and finally, acquiring and integrating complementary businesses. And now I'll turn the call over to Sue.

Speaker 3

Thank you, Robert, and good morning, everyone. I will first discuss some additional financials for the quarter, not covered by Robert, And then I will discuss our Q4 and full year 2022 outlook. In the 3rd quarter, cash flow from operating was $268,900,000 compared with cash flow of $192,800,000 for the same period of 2021. The Q3 of 2022 reflected stronger trade receivable collections compared with the Q3 of 2021. Free cash flow, that is cash from operating activities less capital expenditures, was $252,200,000 in the Q3 of 2022 compared with $163,600,000 in 2021, which included $2,100,000 of after cash payments related to the FLIR transaction.

Speaker 3

Capital expenditures were $15,700,000 in the Q3 of 2022 compared with $29,200,000 in 2021. Depreciation and amortization expense was $80,800,000 for the Q3 of 2022 compared with $90,200,000 In addition, non cash inventory step up expense for the Q3 of 2021 was 35,200,000 dollars with no comparable amount recorded in the Q3 of 2022. We ended the quarter with approximately $3,440,000,000 of net debt that is approximately $3,900,000,000 of debt less cash of $479,300,000 Stock option compensation expense was $3,700,000 in Q3 of 2022 compared with $5,800,000 in 2021. Turning to our outlook. Management currently believes that GAAP earnings per share in the Q4 of 2022 will be in the range of $3.67 to $3.80 per share with non GAAP earnings in the range of $4.46 to $4.56 As for the full year 2022, our GAAP earnings per share outlook is $15.46 to $15.60 And on a non GAAP basis, dollars 17.70 to $17.80 The 2022 full year estimated tax rate, Excluding discrete items, it is expected to be 23.1%.

Speaker 3

I will now pass the call back to Robert.

Speaker 2

Thank you very much, Sue. We would now like to take your questions. Operator, if you're ready to

Operator

We'll go first to Greg Konrad with Jefferies. Please go ahead.

Speaker 4

Good morning. Good morning, Derek. Maybe just to start, digital imaging had a nice Margin pickup and recovery from kind of H1. Can you maybe talk about the margin dynamics around price mix and how you think about the recovery there Or maybe expectations for the year?

Speaker 2

Well, let me start with expectations for the year And then see if I can answer the rest. Actually, if you look at the year, We have net pricing improvement across all of our businesses of about 3.6% of sales, but that includes Digital Imaging. On the other hand, we have also Against that, we have inflation, Greg, and price increases in the products that we buy. The price increases in the products that we buy have been about 3.4%. We also have salary increases of about 4%.

Speaker 2

So our net pricing increases have kind of offset the headwind that I have that we have from price increases to us that is inflation. The flip side of that is We've had to pay a little extra for scarce products like complex FPGAs and others That we could not built into our price, so that we've had a headwind there, I'm going to say about 2%, about $50,000,000 So Fundamentally, digital imaging is done well. They've improved their margins, But it's been a relatively tight year up to now.

Speaker 4

And then can you maybe comment on just the defense business more broadly? I mean, it seems like you're getting quite a few Contracts, some at FLIR, some in the broader business. I mean, broader market commentary seems to think that demand outstrips Supply right now, I mean, how do you think about the timing of some of these new defense opportunities and kind of the outlook there?

Speaker 2

I think the in general, what we're finding is that In our defense businesses, our book to bill has improved significantly. Now, For the Q3, actually our government businesses were down slightly, but the book to bill, which is an important part for us, Has improved both in FLIR, it's close to 1, but in our aerospace and defense electronics, it's close To 1.5 and in Engineered Systems to 1.35. What we're finding is that the demand for electronic components and systems, Including parts that are going to Javelin and other weapons That are being depleted. Those are coming back strong. We also have really good Orders in systems that are being developed like a Wide field of new tracking layer, which is for missile tracking basically.

Speaker 2

We've had Orders, good orders and we will have a programs of about $60,000,000 over 2 years. And that goes across a lot of our products. So in general, you're right. We've seen strength in our defense businesses and some moderation in our commercial Businesses as time has gone on.

Speaker 4

And then just last one, kind of a clarification question. I mean, you called out the 3% Headwinds from FX. Just want to clarify, is that only a translation headwind? Are you seeing any changes to competition when you're competing with maybe a local currency competitor?

Speaker 2

No, it's really a headwind from FX. It's a translation only. It started the year at about 1%, went to 2% 10% in Q2, 3% in Q3, and we're estimating about 2% in Q4 For a total, Greg, of $110,000,000 hit that we're taking to our revenue for the full year. So if we didn't have this translation only, we would have revenues and others understand $10,000,000 in revenues.

Speaker 4

Thank you.

Speaker 2

Thank you, Greg.

Operator

And next we can go to Joe Giordano with Cowen. Please go ahead.

Speaker 5

Hey, guys. Good morning.

Speaker 2

Good morning, Joe.

Speaker 5

So last quarter, very modest cut, I think Took some people by surprise. Now a bit of a raise here. We're kind of in the same zone, at the end of the day despite all that. So Kind of like what are the big changes? Did some kind of key risks that you were thinking about next last quarter maybe not materialize to the same extent?

Speaker 5

Because it was kind of like a lot of movement to get to the same place, I guess, at the end

Speaker 6

of the day.

Speaker 2

Yes. Well, When we started last quarter, we weren't sure how much prices we could Of our price increases would stick. And obviously, we were also concerned whether we could Manage our margins that take cost out to improve our margins. All of those coupled with the fact that our commercial orders held up pretty well, like in the imaging Businesses helped us along the way. So in a way, yes, We were looking at we were in trouble in any ways.

Speaker 2

We're just kind of very cautious because the headwinds were Unpredictable, but as we took some cost out and increased prices And we have good cash flow by the way. It's given us a lot more confidence, so we raised our outlook And derisk Q4 at the same time.

Speaker 5

Yes. No, that's fair. I think when we spoke last quarter, Your view for digital imaging margins was something like 22 ish percent for this quarter and then maybe 23% for next quarter. It looks like you're 3 months ahead of that. So you're at 23 now.

Speaker 5

Should we expect Digital Imaging margins to increase further in the 4th quarter?

Speaker 2

A little bit, yes. I think overall in the 4th quarter Well, let me go talk to the year, which is easier for me to do. For the year, we think we will be at 22.2%, which would be about 20 bps better than last year. So I think Q4 is going to be better, about 20 2.9, 22.7 of that range. Again, I'm a little cautious here because There's some softness in the commercial market, but again, our defense businesses are picking up.

Speaker 5

Yes. That makes sense. And then just last for me. I mean, I know it's early and we don't want to talk about 2023, but I know that there was this bogey out there for a while now about the potential for you guys to do give or take around $1,000,000,000 of free cash flow in 2023, is that still in this world like a reasonable Target to shoot for or is it is that kind of not achievable given FX and all these other things we've talked about for the last 6 months?

Speaker 2

Let me say, I think $1,000,000,000 for 20 $3,000,000 is a little too high Because we have capitalized R and D that we have to worry about. But having said that, if you look at the big picture, which is the way I approach this, We started the year we started after the fair acquisition With a net debt to EBITDA of 3.7 We're down to about 2.5 now. By the end of the year, everything else going along will be down to 2 point If all goes well by the end of next year and then by the End of 24, we'll be down to 0.9. That gives us a lot of cash to do acquisitions. And that includes making maybe $500,000,000 of acquisitions in the So the way I look at cash flow is longer term view, we probably won't make the $4,000,000,000 We'll come close, but most importantly, we'll be levered and be able to make acquisitions at the same time and put us in a position where we can do Something bigger if we want to later on.

Speaker 5

Thanks guys.

Operator

And next we'll go to Elizabeth Renfel with Bank of America. Please go ahead.

Speaker 7

Hi, good morning. Could you give us a few details around the acquisition that you announced this morning?

Speaker 2

Yes. Be happy to. It's really it's a while we didn't disclose the terms, it's got about 112 Employees, it's in Northern California. What it does is really it Gives us 2 very important components to our adds to our products 1st, in the microwave area, we make traveling wave tubes. But in order to drive these tubes, you need a power supply.

Speaker 2

So far, we've had to go to other people to buy the power We've been looking for that and there's a scarcity of suppliers in that domain. With this acquisition, now we can essentially supply a system of both tubes and power supplies. For example, in a given application, we were studying, we sell the tubes And they add up to about $300,000 for that application. When we put the power supply with the tubes together, we can Sell it over $2,000,000 So that's in the defense area. The second area is in our medical Field where we supply products that go into cancer therapy, radiotherapy, x-ray systems to Kill cancer.

Speaker 2

We basically have a product that Makes microwave, high energy pulsedmicrowave that are used in that system. We've added to that, we used to sell that for about $10,000 We've added to that more components and we've gotten to where we sell about $40,000 $50,000 of products in a system. But again, what we didn't have is the power supply cooling system, the whole system that you can use In developing the high energy x rays and that again is something that ATM brings to us. So what happens is a content that used to be 10,000, We have grown into maybe $40,000 now can grow over $100,000 per radiotherapy system. And they have really good customer contacts and they've been accepted by the customers as have we with our own products.

Speaker 2

So That's why we're making this acquisition. It's complementary to both our defense as well as our radiotherapy businesses.

Speaker 7

Okay, great. Thank you. And then the impact of the portfolio shaping you did within Teledyne FLIR this quarter, How much of an impact did that have on margins?

Speaker 2

It improved margins Slightly, but more importantly, what we're doing is we took the costs out by reducing the workforce. It was a product line, for example, that they bought just before our acquisition in December of 20 2020, we bought them in May of 2021. It was a product where they were trying to For those in basically commercial, industrial, commercial UAVs, unsuccessful, difficult Business to be in. We have in FLIR, we have really good products in the defense domain That we sell substantial amounts of, but to compete in the industrial domain, that was a product that we had to kill.

Speaker 7

Okay. And then if I could shift speak one more in, please. How are you thinking about The supply chain headwinds now and when if you think they'll abate? And then the sales that are being lost Because of challenges, are those continuing to shift to the right or are they starting to disappear? Any way to think about that?

Speaker 2

Elizabeth, let me answer the second part of the question. First, what's happening to us is that we have about a $60,000,000 short All in sales that rose over quarter over quarter. So it's not cumulative. It's not like you have 4 Quarter is up $60,000,000 loss in sales that has to $240,000,000 just $60,000,000 what happens, it gets delayed, we get parts. The next quarter we ship what we couldn't ship, then we get delayed again.

Speaker 2

So we may start the Quarter looking same, it's going to hurt us by $100,000,000 but we recovered from that. So it's a $60,000,000 problem for us Right now. The flip side, the first part of your question, we're seeing some improvement, Especially in the more simpler printed circuit board assemblies. For example, To sell our cameras from Teledyne, Dalsaw and E2V, We need about 1,000 circuit boards a day on occasion. And That was drying up for various reasons.

Speaker 2

We've managed to address that problem. So that's good. We also have some improvement in components. Having said that, We still have really tight market for more complex systems like field programmable Gatorades, which we are which Gatorades, which are FPGAs. And there what's happening is the Supply shortages are such that people are allocating certain number to each We have a very effective effort underway to combine all of our needs across Teledyne, Prioritize them and give our priority numbers to our suppliers.

Speaker 2

Having said that, that is not improving. Some of our suppliers are asking for non cancelable orders that go out a year from now. So you have to make choices there obviously, and we're also doing that. So part of it is relaxing The PCBAs, a part of it with the field programmable grid arrays, that's not. So it's a mixture, but I'd say overall there's improvement.

Speaker 7

Great. Thank you very much.

Speaker 2

For sure.

Operator

And next we can go to Jim Ricchiuti with Needham and Company. Please go ahead.

Speaker 8

Thank you. Good morning. Good morning. Robert, you alluded to the short cycle business Holding up reasonably well. And I'm just wondering, as you think about that area of your business in A mild recessionary environment, which areas do you see the business beginning to And are you seeing any signs of that in your bookings in any of that short cycle business?

Speaker 2

Yes. In some of the products that we make, I'll start with digital imaging. In some of the products that we make, for example, that go into warehouses, as the demand If softening in that domain, then obviously they don't need as much of our products for automation and improvement of delivery of their products. On the other hand, Because we have such a broad portfolio of products That range from security to traffic to firefighting. Not all of them are kind of Getting impacted simultaneously.

Speaker 2

That's why we think it's the downward pressure is not as great for us because of Diversity of our products. Now if you went outside digital imaging, for example, in our instruments domain, Where we have environmental instruments, we have oscilloscopes, protocols, We have marine instruments, we have marine vehicles. There things are a lot better. We think it might soften, but it hasn't softened much yet. We are getting in the instruments, Our book to bill is still 1.05.

Speaker 2

So what happens is that's The thing that Jason and I always talk about is the breadth of our products And both in terms of who we supply to and what people buy our products for, But also the diversity of our geographic diversity of our products, that's protecting us. So we might have softness in some areas, but overall, I think we're doing okay.

Speaker 8

Okay. And just on the comment that you made about M and A and certainly You can see the net leverage really coming down fairly meaningfully over the next 1 to 2 years. You alluded to 2024 potentially giving you the opportunity to do a big deal. Are you averse to doing a larger deal in 2023? Or is it a case Yes.

Speaker 8

There are a lot of there are smaller deals that you could do and you'll just maybe gauge how the Macro environment is and whether valuations potentially come down for certain larger assets.

Speaker 2

Good point. Right now, if you look at the market for public Companies, as Jason often says, people always look in the rearview mirror, right? So Everybody is looking in the rearview mirror, including us and you're seeing 52 week highs, right, in the back, might be 9 months ago, Nevertheless, it's there. So expectations are what you see in your view mirror. If we go forward and things Just the way they are and people see lower numbers looking backwards, then I think we'll have more opportunities.

Speaker 2

Right now, what our focus is to see if we can do more bolt ons as we've done historically. When we acquired E2B in 2017, our ratio, Net debt to EBITDA ratio went up almost to 3. What we did, it came down By the end of 2020, two and a half years later or so, it came down to essentially 0 And we in the meantime made another $500,000,000 of acquisitions during that period. So the number I quoted for 2024 end includes us being able to spend maybe $600,000,000 of smaller acquisitions. As to the bigger acquisitions, I think we ought to wait a little we obviously, we have some things in mind, but we ought to wait a little bit before People are not so effervescent about their valuations.

Speaker 8

And is your interest mainly in the commercial area or has anything changed with respect to how the defense environment looks?

Speaker 2

Right now, we still like our commercial businesses, but We're also seeing, as you saw, we also bought something at least a bolt on In the defense domain, partially defense in the bolt on. And we've had some bolt ons in the defense, especially if they Fit our portfolio. But on the larger stuff, it would be either commercial or a mixture of the 2 like FLIR was. FLIR was 60% commercial, 40% defense. And so we will look at that whether it's seventythirty or sixtyforty.

Speaker 2

We look at the combo.

Speaker 8

Got it. Thanks very much and congratulations on the quarter. Thank you.

Operator

Next, we'll go to Andrew Buscaglia with Berenberg. Please go ahead.

Speaker 6

Hey, good morning, guys.

Speaker 2

Good morning, Andrew.

Speaker 6

Along the lines of the short cycle discussion, Specifically, can you just comment on FLIR? FLIR is more industrial assets, which can be pretty volatile and can move pretty quickly, Especially to the downside in a downturn. I guess, what are you seeing with pace of orders or anything any indication, how that's And then generally, how are FLIR margins settling in? I know they've been kind of volatile during this integration process. So Can you update us on how you feel about that?

Speaker 2

Sure. Let me start with the product. Generally, I would say, because of the breadth of their product, Well, there are some softness in some areas just like our address of our digital imaging. FLIR's book to bill right now It's close to 1.98, which is in some ways better than the ALSA E2B. From because of the again, because of the breadth of the products That they have from tomography instruments to infrared detectors, to maritime Security traffic, I don't think we're going to get hit on all of those all at once and we're not.

Speaker 2

The only problem that we have at FLIR, if I may call it that, is that historically Their revenues have been more skewed to the end of the quarter rather than evenly paced during the quarter like The rest of our digital imaging is. So the only risk there is you get closer to the end of the quarter And something unforeseen happens and then it can hurt you. We're working very hard to flatten that out. It will take us We had the same problem in every acquisition. We've made large acquisition whether it was Dalsa or E2B or others.

Speaker 2

And so we are working very hard to flatten that curve, the shipment curve. Having said that, coming back to margins, I think margins are settling in. They are from a non GAAP perspective, Well, there's been some volatility as you appropriately noted. I think we'll settle by the end of the year. We'll settle to about Overall in digital imaging to 22.2%.

Speaker 2

Flare will be a little further down from that, but generally We should be okay. We're looking forward to really last year was an odd year because we bought FLIR In the middle of the second quarter, we essentially shipped 12 weeks of Product with 8 weeks of cost, again, because of that end of the quarter shipment that I mentioned. So that skewed the numbers. Things are fairly well stabilized now. And I think what we're looking for is make sure we get to our 22.2% By the end of the year for all of our digital imaging and then hunker down and improve that next year.

Speaker 2

Okay.

Speaker 6

That's helpful. And then you gave some nice color on the ETM deal. I might have missed this, but How big is this company? And maybe any information you can provide on their margin profile, where you expect those to go?

Speaker 2

All right. Amit, obviously, we've been hesitant to talk about it, but it's going to be probably in our queue anyways In a few days, maybe later on. But it's got about 112 people. The reason I'm a little hesitant about the sales, which are about $50,000,000 is that they also buy products from us. So They buy our traveling wave tubes including with their power supplies and they sell them.

Speaker 2

So The deal is going to be accretive. How many cents depends on how you look at The cost of borrowing could be accretive to $0.02 $0.03 $0.04 if we say the cost of borrowing is 4%, 5%. On the other hand, our cost of borrowing is not 4% or 5%, because our average cost of borrowing With our fixed borrowing and cash is more like 2%. So it's going to be accretive revenue a little Around 50 with some cash flow of our own products. I don't know if that's helpful.

Speaker 6

Okay. Yes, very helpful.

Operator

Next, we'll go to Kristine Liwag with Morgan Stanley. Please go ahead. Hey, good morning, everyone.

Speaker 9

Robert, on the supply chain, it really sounds like it's starting to ease for you and your mitigating actions have been paying off. But can you provide a quantitative update? Last quarter, you had mentioned that 800 of the 900 missing components were resolved. Where are we at this quarter? And how does that trend from here?

Speaker 2

It's getting better. Last, you're correct. But we started the year, This year, Kristine, by having about 36% of our missing components, of course, the Components were lower number when we started the year. They were more like 500 components and we're at 35% that we couldn't get at that Fine. We're now over 1,000 components, 1100 components, but the missing percentage has gone down to about 6%, 7 Percent.

Speaker 2

So you're absolutely right. There's the improvement. The flip side is that are the 11 100 components where we're missing maybe 65 or as I said 60 open parts. The delay in those Are kind of getting longer and the demand on us is, okay, we're going to allocate so many to you And you'll get it next April. The flip side is, it's a non cancelable order.

Speaker 2

I wish I had products like that. I would love to be in that business myself. So it's getting better, but still a challenge.

Speaker 9

I see. And then in terms of maybe back to digital imaging, you had mentioned a return to portfolio Now you've pruned a very small loss making product line. But as you assess that Portfolio having owned Fleur now for a few quarters, are you evaluating a potentially larger cost cutting initiative or a divestiture or is this kind of insulated and minimal?

Speaker 2

Yes, I think it's the latter. No, We're in all of our products, I know all of our businesses, we do eightytwenty, which means We take some products that are unique and they Don't make money. We take the product lines out and then increase our products that are making us a lot of We're doing that at FLIR like we do at Teledyne. But no, we're not going to divest any large part of FLIR. We're happy with what we have And we're actually probably going to add some to certain areas.

Speaker 9

Very helpful color. And if I could sneak in one more. Back to your comment on the supply chain, you mentioned that for some of the missing items, the lead times are getting longer. What's driving Those incremental headwinds, I mean, I would think with some of the demand in other parts of semiconductors, for example, we're seeing rolling consumer demand, Shouldn't that free up capacity for your orders? And I guess I'm just surprised that we're seeing some things Continue to lengthen instead of really get resolved sooner?

Speaker 2

Yes. In some of the Discrete components like using commercial domain, things are okay. They're improving. On the other hand, in some of the memory stuff, The length is getting longer. The lead times are longer, but depends on the complexity.

Speaker 2

Let me just kind of go through it. If you look at memory devices, lead times are getting Lower. On the other hand, if you look at more complex devices, like Microcontrollers, processors, the lead times are still 4 to 60 weeks. So it's kind of a mixture. It depends on what device we're looking for.

Speaker 2

For the simpler components and as I said, printed circuit boards, We're making some real improvements there and we feel very good about that. But some of those also require our people to go into The suppliers factory and schedule our products on a daily basis to get them out. So it's a mixture.

Speaker 9

Great. Thank you very much.

Operator

For sure. And next, we can go to Noah Poponak with Goldman Sachs. Please go ahead.

Speaker 10

Hey, good morning, everybody.

Speaker 2

Good morning,

Speaker 10

Robert, I just wanted to go back to your commentary around the bid ask spread in the M and A process. Some other companies that have a similar strategy to yours have pointed to that, but it pretty recently suggesting that, That hasn't really broken yet. You have a deal this morning. You're saying the pipeline looks good. You're quantifying what you could Potentially spend in the immediate term.

Speaker 10

So I guess maybe in some ways you've already answered this, but I'm just really curious to put a finer point. Has now that public markets peaked almost a year ago, has that bid ask spread Challenge cracked and that spread has narrowed? Or are you just saying that it hasn't yet, but it eventually has to?

Speaker 2

I think in the private deals, it's probably cracked a little bit. And the reason for that is Private entrepreneurs are looking at things. They're looking at the world, Noah, the way it is evolving, The uncertainties in the future is becoming much more pronounced at this time. So entrepreneurs that have Built a business like the one we just bought, those people have been in business since 1973. They're becoming more reasonable because they see things are not going to get better in the short term.

Speaker 2

So On the smaller deals like that, I think you're right. We're seeing some better pricing. Having said that, on the bigger deals and Public companies, they're still seeing 52 week highs in the background. Until we get beyond that, which is going to be another 6 months, 4 months, where people are not looking at my high was $500 and I'm not trading at $350,000 They look in the back mirror and say, well, my house was more like $400 and now we're at $350,000 then I think it's going to be more actionable.

Speaker 10

Okay. It's helpful. You've referenced reducing cost and also price increases. Can Can you just provide a little bit more detail on where in the business you've done that and how sizable are we talking on each side?

Speaker 2

Yes. It depends on the business. Some businesses, we have a hard time increasing prices because of the programs That we have long term programs. But let me just give you an example. In digital imaging Tulsa E-2B, for example, we've been able to increase prices about 4.7%.

Speaker 2

In Marine, where we supply unmanned vehicle, but also a lot of connectivity products For oil and gas, we've also been able to increase prices about 4.7%. On the other hand, in some of our Defense products, we have hardly cracked price or gotten about 1% or 2%. Having said that, on the average across the company, our price increases have been about 3.6% year to date. And against that, we have wage increases that are 4% and then products material that we buy That have been about 3.4%, that's excluding the extra 2% that we pay for Scarce materials. So that's been a wash between the price increases and The inflation, where we've heard is, of course, we're spending $50 plus 1,000,000 extra On getting our scarce products, I think over time that will go away too.

Speaker 2

Okay.

Speaker 10

And lastly, which products or segments did you allow to roll off of FLIR?

Speaker 2

Just really there was just an Altavian Product that they bought in December of 2020, about 4, 5 months before we bought them. We were already in discussions with them and they picked that up. And it was a I think it was basically an industrial commercial drone business and Not in a very difficult market. There are 20 companies that of that ilk that are competing with one another. Me on that domain, I'd rather buy the truck and put in our very really advanced imaging systems On somebody else's truck.

Speaker 2

I don't want to build those inexpensive trucks. So that's the one.

Speaker 10

Okay. Thank

Speaker 2

you. For sure, Noah.

Operator

And currently no further questions in queue.

Speaker 2

Thank you very much. We would if you would be kind enough, operator, I'm going to ask Jason to conclude our conference call and

Speaker 1

Thanks, Robert, and again, thanks everyone for joining us this morning. Brad, if you could give the replay information at the end of the call, that would be great. And if you have follow-up questions, certainly do feel free to call me as well. Bye bye.

Speaker 7

And thank you.

Operator

Ladies and gentlemen, the call will be available for replay after 10 o'clock Pacific Time today and running through November 6 at midnight. You can access the AT and T replay system at any time by dialing

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Earnings Conference Call
Teledyne Technologies Q3 2022
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