Teledyne Technologies Q4 2022 Earnings Call Transcript

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January 25, 2023

Key Takeaways

  • Teledyne delivered record quarterly and full‐year 2022 sales and earnings per share, with a GAAP operating margin of 19.3% and non‐GAAP margin reaching all‐time highs.
  • Despite strong results, Q4 free cash flow fell to $203.6 M (vs. $261.6 M in 2021) due to $30 M of interest payments, increased inventory purchases, and timing of bond interest.
  • Leverage declined from 3.8× in May 2021 to 2.4× at year‐end 2022, and Teledyne’s acquisition pipeline remains healthy, highlighted by the addition of Chartwell to bridge marine and Raymarine capabilities.
  • For 2023, management projects approximately 5% revenue growth (including recent bolt‐on acquisitions) and about 50 bp of margin expansion, with long‐cycle businesses expected to outperform.
  • Q1 2023 GAAP EPS is guided to $3.57–$3.69 (non‐GAAP $4.37–$4.47) and full‐year GAAP EPS to $15.80–$16.10 (non‐GAAP $19.00–$19.20), with an effective tax rate of ~23%.
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Earnings Conference Call
Teledyne Technologies Q4 2022
00:00 / 00:00

There are 8 speakers on the call.

Operator

Ladies and gentlemen, good morning. Thank you for standing by, and welcome to the Teledyne Fourth Quarter Earnings Call. At this time, all lines are in a listen only mode. Later, there will be an opportunity for your questions and instructions will be given at that time. And as a reminder, today's conference is being recorded.

Operator

At this time, it's my pleasure to turn the conference over to our host, Mr. Jason Van Wees. Please go ahead.

Speaker 1

Thank you, Tom, and good morning, everyone. This is Jason Van Wees, Vice Chairman of Teledyne, and I'd like to welcome everyone to Teledyne's 4th quarter and full year 2022 Earnings Release Conference Call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Chairman, President CEO, Robert Mehrabian Senior Vice President and CFO, Soumain Senior Vice President, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibic. Also joining today is Edwin Rox, EVP of Teledyne.

Speaker 1

After remarks by Robert and Sue, we will ask for your questions. Of course, but before we get started, attorneys have reminded me to tell you that all forward looking statements made this morning are subject to various risks, assumptions 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 web

Speaker 2

Good morning and thank you for joining our earnings call. 2022 ended up being an excellent year. We concluded it with all time record quarterly and full year sales and earnings per share. During 2022, Teledyne as with many other companies found itself Faced with external forces beyond our control is where inflation, strong dollar and parts shortages. Nevertheless, we continued our long history of navigating difficult market environments and we ultimately delivered earnings in excess of our own expectations.

Speaker 2

Excluding foreign currency headwind, which negatively impacted 4th quarter sales growth by approximately 2.6 Growth in local currency would have been 5.7%. Excluding ATM acquisition, core growth in local currency would have been approximately 5%. GAAP operating margin of 19.3% was an all time record and non GAAP operating margin GAAP and non GAAP earnings of $4.74 $4.94 respectively We're also records for Teledyne. 4th quarter free cash flow was reasonably healthy, but included interest payments of approximately $30,000,000 which last year were made in the Q3 of 2021. While we completed the acquisition of ETM, Our leverage ratio continued to decline from 3.8 times In May of 2021, when we acquired FLIR to 2.4 times at the end of 2022.

Speaker 2

Finally, our acquisition pipeline remains healthy as evidenced by the recent addition of Chartwell, Maritime navigation software and hardware tools bridge a product and technology gap between our Teledyne Marine and Raymarine businesses. Turning to our 2023 full year outlook. While still very early in 2023 and with many unknowns including projections of a recession, We're inclined to offer an initial revenue and earnings outlook in line with consensus expectations. On revenue, we see total 2023 sales growth of approximately 5%, including incremental sales from recent bolt on acquisitions. For our backlog driven long cycle businesses, We expect growth to be higher than average.

Speaker 2

For the majority of our short cycle commercial businesses, Foreign currency headwind will impact the Q1 of 2023, where comparisons are tough and Economic uncertainty and export regulations remain fluid. We continue to see overall growth, Not contraction in these businesses, but expect that growth will be less than the total company average. On the other hand, supply chain constraints are improving, albeit modestly. There are a few minor other known puts and takes, such as increased scope On our NASA contract at Engineered Systems, equally offset by the 2022 completion of our OneWeb contract in the Aerospace and Electronics segment, but no other significant items to highlight this early in the year. Our earnings outlook, approximately 50 basis points of margin improvement in 2023.

Speaker 2

And we currently think instrumentation and digital imaging We'll be above average contributors to this, while margins at Aerospace and Defense Electronics may be flat or declined slightly given specialty tough comps as a greater mix in 2023 of Defense Electronics relative to commercial aerospace aftermarket sales. I will now further comment on the performance of our 4 segments. Sales were relatively flat despite currency translation headwind of approximately 3.5 Sales increased year over year for our industrial and scientific vision systems as well as our low dose high resolution digital X-ray detectors. Sales of commercial infrared imaging cameras and components also increased and were at record levels Since closing the FLIR acquisition in May of 2021. While total FLIR related Sales increased sequentially from the 3rd quarter.

Speaker 2

Sales of some surveillance and unmanned ground systems Declined from last year on especially tough comparison. On the other hand, sales of unmanned air systems Increased considerably year over year. GAAP segment upgrading margin was 18.8% And adjusted for intangible asset amortization only, segment margin was 23.8%, approximately 50 basis points greater than the 4th quarter of last year. In our Instrumentation segment, overall 4th quarter sales increased 7 point 9% versus last year despite approximately 2.4% of FX Sales of electronic test and measurement systems, which include oscilloscopes, digitizers And protocol analyzers increased 3.8% year over year despite a tough comparison with the Q4 of last year. Sales of both oscilloscopes and protocol analyzers remained healthy with continued strength In products for industry standards such as peripheral component, interconnect express or PCI Express And universal serial bus or USB.

Speaker 2

Sales of environmental instruments increased 9% compared with last year with greater sales of both drug discovery and laboratory Sales of Marine Instrumentation increased 9.8% in the quarter, primarily due to strong Marine Defense Sales and the Ongoing Recovery in Offshore Energy Markets. Overall, Instrumentation segment operating profit increased 18.4% in the 4th quarter With GAAP operating margin increasing 215 basis points to 24.2 and 163 basis points on a non GAAP basis, Excluding intangible asset amortization, which brought the non GAAP margins to 25.3 In Aerospace and Defense Electronics segment, 4th quarter sales increased 8.9% driven by broad based growth of both Defense and Commercial Aerospace Products. GAAP and non GAAP segment, our operating profit increased approximately 30% with margins over 480 basis points greater than last year. In the Engineered Systems segment, 4th quarter revenue increased 6.7%, But operating profit declined given lower margins for some of our electronic manufacturing service products. Before I turn the call over to Sue, I want to make a couple of concluding remarks.

Speaker 2

First, I was very pleased that Teledyne was able to overcome issues faced by most companies in 2022. Despite the macroeconomic and supply chain challenges noted earlier, our results exceeded the top end While difficult to predict outcomes in 2023, we are reasonably confident That a number of our long cycle businesses serving defense, medical, energy and aerospace markets will grow. While demand is more difficult to predict in our short cycle instrumentation and imaging businesses, Supply chain constraints and the previous premiums for gray market electronic components Have begun to ease modestly. Given the strength of our balanced business portfolio And our management's long history of navigating challenging markets, I'm optimistic Teledyne will continue on its successful path in 2023. I will now turn the call over to Sue.

Speaker 3

Thank you, Robert, and good morning, everyone. I will first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our Q1 and Full year 2023 outlook. In the 4th quarter, cash flow from operating activities was $237,700,000 compared with cash flow of $295,600,000 for the same period of 2021. The Q4 of 2022 reflected greater interest payments due to the timing of fixed rate bond interest and increased inventory purchases compared with the Q4 of 2021. Free cash flow, that is cash from operating activities less capital expenditures, was 203 $6,000,000 in the Q4 of 2022 compared with $261,600,000 in 2021.

Speaker 3

Capital expenditures were $34,100,000 in the Q4 of 2022 compared with $34,000,000 in 2021. Depreciation and amortization expense was $81,800,000 for the Q4 of 2022 compared with 86 $200,000 In addition, non cash inventory step up expense for the Q4 of 2021 was $47,800,000 with no comparable amount recorded in the Q4 of 2022. We ended the quarter with approximately $3,280,000,000 of net debt, that is approximately $3,920,000,000 of debt Less cash of $638,100,000 Our stock option compensation expense was $6,200,000 in the Q4 of 2022 compared with $6,400,000 in 2021. Turning to our outlook. Management currently believes that GAAP earnings per share in the Q1 of 2023 will be in the range of $3.57 to $3.69 per share with non GAAP earnings in the range of $4.37 to $4.47 And for the full year 2023, our GAAP earnings per share outlook is $15.80 to $16.10 and on a non GAAP basis, dollars 19 to $19.20 The 2023 full year estimated tax rate, Excluding discrete items is expected to be 23%.

Speaker 3

I will now pass the call to Robert.

Speaker 2

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

Operator

Thanks so much. Ladies and gentlemen, the phone lines, if you wish to ask a question today, please press 1 followed by the 0. Now you'll hear an acknowledgment that you've been placed in queue. You can take yourself out of the queue by simply pressing the 10 command again. We'll begin today with a question from Greg Konrad, representing Jefferies.

Operator

Please go ahead.

Speaker 4

Good morning.

Speaker 2

Good morning,

Speaker 4

Greg. Good quarter. And then, I mean, maybe just to start, given your commentary around supply chain and long cycle outperforming In 2023, can you maybe just update us on your expectations for defense across the businesses? I mean, it seems like peers have called out somewhat underperformance on Supply chain this year, what are you seeing just in terms of the supply side and also in terms of demand?

Speaker 2

Frankly, we think, defense, while The growth was relatively modest in 2022, was 2% to 3%. That's generally our U. S. Government Businesses. We think in 2023, it'd be about 5% organic Rod, so we're relatively optimistic.

Speaker 2

And then

Speaker 4

I mean, I was Pleasantly surprised with just margins in the commentary. I mean, some of them seem very outsized across the segments. Just in terms of your margin commentary for this year, what are some of the assumptions around price and inflation, FX and just looking at that Q4 outperformance, anything unusual in that just when we think about the opportunities for 2023?

Speaker 2

Well, I think basically in 2022, We hit just about every cylinder at the end of the quarter, especially the last month, month and a half. Things turned out very favorably. On 2023, we think Q1 It's going to be softer, just like we had in 2022. Mostly, we have some headwinds from FX in Q1. We think there'd be a decline in our revenue, Maybe as much as 10%, but we don't know.

Speaker 2

It's too early. Maybe 1% of headwind, Maybe 1% of revenue decline, I would say that. On the other hand, I think we will pick up in Q2 to Q3, Q4, Just like we did this year. Right now, early in the year, the 1st 2 weeks, we had some slower orders In some of our short cycle businesses, but the last 2 weeks they seem to be picking up. So overall, Greg, I'm optimistic about 2023 altogether.

Speaker 4

And then maybe just sneaking one last one in. I mean, how are you thinking about free Cash flow in 2023, just given top line growth, margin expansion and any working capital needs. I mean, in the past, you talked about A target, how are you thinking about 2023 in terms of free cash flow?

Speaker 2

Yes. I think just Pausing for a second because this will be us. In 2022, we were a little short on cash. Well, a little $200,000,000 to be exact. And we think that's not going to happen in 2023.

Speaker 2

We think our cash in 'twenty three is going to be higher, approximately $900,000,000 in cash. Whereas in 2022, we really have to be very careful. We built a little more inventory than we wanted to, primarily because of the We fell about $30,000,000 short on revenue in the 4th quarter because of shortages. Also in 2022, there was that lack of R and D deductibility, which everybody That cost is about $40,000,000 and we had about $60,000,000 of more cash taxes, which brings us to 200. We don't think that's going to repeat itself in 'twenty three.

Speaker 2

So we're optimistic.

Speaker 4

Thank you.

Operator

And next we're going to go to the line of Elizabeth Grenfell, representing Bank of America. Your line is open.

Speaker 3

Just a couple of questions. 1, in the 5% revenue growth guidance, can you break out what is price and what is volume in that?

Speaker 2

I think it's a little too early to do both, but I'll tell you that's about 3.5 percent of organic growth and then 1.5% from our acquisitions That we made, including the most recent one that we announced. If you look at projections from GDP and inflation at the current time, I'm one of those people that doesn't really believe in these Projections at this point, but the projections are that real GDP in the U. S. Will only grow 1.4 percent in 2023 and inflation will drop to about 2.7%. Overall developed markets, Probably GDP will draw 1.1%.

Speaker 2

That's what the projections are, maybe a little higher in inflation. But Elizabeth, it's a little too early For me, I don't think the economists know either. So I'll just say that we expect to have an organic growth of 3.5 at this time. If things move like they did in 2022, hopefully, we'll increase that and of course, we'll make more acquisitions too.

Speaker 3

Okay. And then can you give us a little more detail on your outlook by segment and where you see the most opportunity for upside?

Speaker 2

Sure. First, I think in the instrumentation, which includes marine, environmental and We expect growth to be about 5%, where we're average of the company. Of course, that doesn't have acquisitions in it. In the Digital Imaging Segment as a whole, we are going to expect a 5% growth, maybe 5.1%. Aerospace and Defense, maybe 4% and Engineered Systems, Maybe a little over 5%.

Speaker 2

Part of the reason for Aerospace and Defense being a little less than the average, Last year, we had that one web program that we ended successfully, which contributed about $20,000,000 in revenue. On the other hand, in Engineered Systems, we think we'd be a little above the average because we won that very successfully On the NASDAQ MOSI contract, which adds about $20,000,000 So that's At this point, that's all I can say about that.

Speaker 3

Thank you very much.

Speaker 2

Sure, Elizabeth.

Operator

And we'll go to the line of Jim Ricchiuti with Needham and Company. Please go ahead.

Speaker 5

Hi, thank you. So is it the short cycle commercial business Where if you looked at 2023, Robert, where there might be some upside or are there some parts of the long cycle That could drive the upside versus the 5% that you're talking about for the company as a whole.

Speaker 2

Well, I think if I broke it down, the marine businesses have Any longer look, Adam, we think marine as a whole also because the energy offshore energy So, improving and our projections for that are Over 7%, maybe as much as 7.5% in marine. Then the short cycle businesses, which is Environmental, Tantestan and measurement, we think that'd be about 3.5% together. We think that I've already talked about some of the others. In digital imaging, Where we do did have a really good year and a really good Q4, which was in DALSA and E2V, We think we're going to be relatively flat organically, but we made some acquisitions. So That should give us about with acquisitions maybe 3.8%.

Speaker 2

We think FLIR would do better last next year, maybe a little over 5%, 6%. So And the split between defense and aerospace, defense is longer cycle than aerospace. If you discount the $20,000,000 that we don't have in web, we think defense will grow some, aerospace maybe flat, more short And I've already talked about the Engineered Systems and the MOSI, which we won, which is longer cycle businesses. We feel comfortable there.

Speaker 5

So Robert, it sounds like you're relatively positive on constructive on what you're seeing out in the market. If I look at your commercial businesses, you alluded to some variability in bookings trends in some parts of the business And maybe you can provide a little bit more color on that. But is there anything that you're seeing in the commercial areas, whether it's Test and measurement or machine vision that might be consistent with a slowing economy?

Speaker 2

Yes, a little bit. I think you hit it on the head. Just a sliver, I'd say, And if you look at Marine, our book to bill in the 4th quarter Was 1.15, that's why I said it's longer cycle, we feel good about it. But just going to specifically what you said, Environmental and Test and Measurement, while for the whole year our book to bill is about 1, in the 4th quarter, it dropped down to 0.96. Now, to me, that's a sliver lower.

Speaker 2

So we are a little cautious about that. So DASA E2V dropped even further a little bit. And I think FLIR would be okay, but some of our Vision Systems and Scientific Cameras, we just hit it out of the park in the Q4 and we think we're a little Cautious about predicting. And the other side, I mean, just to cut to the chase, the other side is that It's very early. Everybody is predicting one thing or another.

Speaker 2

All we're doing is We're going to hunker down and we're going to do what we always do. If we have to cut, we'll cut and if we have to Hire, we'll hire and we'll do what we have to do to make our numbers.

Speaker 5

Was the book to bill last question, was the book to bill around 1 for the company as a whole?

Speaker 2

Yes. Just under 1, about 0.96, 0.97, but that has engineered systems in it, Which was 0.9, but that's very lumpy. For the year, Engineered Systems was 1.12, which is long cycle business. For the year, the company was closer to 1.

Speaker 5

Got it. Thanks very much.

Speaker 2

For sure.

Operator

And our next question will come from the line of Joe Giordano with Cowen. Please go ahead.

Speaker 6

Hey, guys. How are you?

Speaker 2

Good morning, Joe. There you go.

Speaker 6

I've been hearing more people talk about risks, like maybe in the second half of the year from prices actually going down, Just given some of the deflationary characteristics you're seeing in prices paid and things like that, is that something that you're seeing? Like how do you think about price and your ability to continue to raise or is it more about supporting where they are now?

Speaker 2

Well, In 2022, we added Joe, we added about 4% And then if you hold against that what we ended up spending, We had wages go up 4.5 percent overall, buying stuff About $2,500,000,000 of direct and indirect materials, that went up overall About 6.7 percent, of course, that's on the cost of goods sold. I'm only saying this because I want to put this in perspective. So we increased prices across the board 4%. Our materials inflation was 3.7% negative. Our wages were 1% negative to sales.

Speaker 2

So when you add those 2, Sales, materials inflation was and wage inflation was 4.7% negative. We increased prices 4%. So net net, we suffered about 60 basis points of decrement Between the 2. Now going forward, we expect to increase prices. How much?

Speaker 2

It's difficult to predict because as you said, some people are talking about decreasing prices In the second half, but we have to increase prices somewhat because we're going to have more Inflation that we inherited, we're going to have to we're giving our Employees have a 4% raises across the board. So to make up for that, we have to increase prices somewhat. Depends on how the market behave itself, but we're right now saying our overall margins are going to improve 50 basis points versus last year. That's pretty good. So We'll have less broker premiums.

Speaker 2

Last year, we paid $90,000,000 Excess fees to our brokers for parts. We think in 2023 that will maybe be half. So, I mean, it's a long answer to a short question. There's a lot of unknowns, but I feel we'll maintain our prices and maybe increase them a little.

Speaker 6

If I think about your the bottom end of your guide, I mean, it's a pretty narrow guide, but if I think about the bottom end of that guide, How protected do you think you are if there is like what kind of recessionary outlook does that have? If we do Some of these macro indicators are pretty bad. If we do go into a recession, do you feel like you have coverage there at the bottom end of the guide? And like which Businesses like do you are you anticipating declines at certain businesses at the bottom end?

Speaker 2

Well, the longer cycle businesses are less cyclical, which would be our government defense, about 25%, Medical, Scientific, Energy, Aerospace, overall, which constitutes about 40% of our portfolio, I don't think those are going to be affected. On the flip side, the short cycle businesses will constitute 60% of our overall portfolio. If the world macroeconomic really suffers, Obviously, we're going to have to take some hits. As you said, we have a very narrow range that we came out with, Primarily because we're not sure what's going to happen. We could have probably had a larger range, But coming out of 2022 as strongly as we did, we feel okay about that.

Speaker 6

Last one for me. Have you internally started Adding things like have you started to be a little bit more judicious on expenses and travel and things like that In anticipation of things weakening or is that you'll adjust as necessary?

Speaker 2

No, that's the mode of our operation. It's something we do day in, day out regardless of what the macroeconomics are. We control everything. We control Expenses in travel, we eliminate square footage of our manufacturing facilities. Everything we do, we're vigilant.

Speaker 2

That's the only way we made it through 2022 as well as we did, and we're going to continue that.

Speaker 6

Thanks, Doug.

Speaker 2

For sure.

Operator

And we'll go to the line of Guy Hardwick representing Credit Suisse. Please go ahead.

Speaker 7

Hi, good morning. So it's been about 20 months since Teledyne closed on FLIR. Can you give us a bit of insight as to how to combine the portfolios is progressing, whether there is any We've seen some revenue benefits from combining the 2 technology platforms. I mean, in the past, you've done the same with Dolce and ETV. I'm just wondering if there's any Comparable success stories or potential success stories to come from that?

Speaker 2

Thank you, Guy. Good question. The answer is yes. We have some new products. We have some new markets, Especially in machine vision and for example, also mapping.

Speaker 2

Well, FLIR has this Raymarine business and we've had this geospatial business where we do a lot of Hydrographic mapping and the most recent acquisition that we made, Charform, bridges the gap between those 2. I don't know if we would have bar chart or if we didn't have FLIR, We were just old geospatial. So those aren't really good. The other thing is that FLIR has really exceptional products in the unmanned air vehicle domain. And we have had historically good products at Teledyne Legacy in the underwater domain, FLIR also brings now ground based vehicles.

Speaker 2

So now you look at the combination of the 2 companies, we have about $450,000,000 or so of revenue In unmanned vehicle, unmanned ground vehicle, unmanned underwater vehicle. And there's a lot of common technologies between those 3 in terms of control, in terms of software, in So those are some examples, Guy, at least after 20 months, But that will, of course, grow as a function of time.

Speaker 7

Okay. Thank you. And just quick follow-up. I'm just trying to understand the FX guidance implied in your guidance because it looks like at current rates that FX actually could be a tailwind in the second half.

Speaker 2

It could be. As we think in the first half, Certainly, Q1, we think it's going to be a 1% headwind versus the 2.1% to 2.5% last year. Having said that, I don't think anybody knows. I don't think the economists know. They might say it, but they don't know.

Speaker 2

I don't think anybody knows what's going to happen. I certainly don't. Let me put it that way.

Speaker 7

But can you just clarify what rates what rates you perhaps what dollar euro rate you have currently?

Speaker 2

Currently, it's 1.09.

Speaker 7

That's not what you're using in guidance though, right?

Speaker 2

We're using about 1.06.

Speaker 7

Okay. Thank

Operator

you. And there are no other questions queued up at this time.

Speaker 2

Thank you very much. Operator, I will now ask Jason to conclude our conference

Speaker 1

Thanks, Tom, and thanks, everyone, for joining. Of course, if you have follow-up questions, certainly feel free to call me or e mail me. My phone number is on the earnings release. And Tom, if you could give the replay information on the call and conclude, we'd appreciate it. Thanks all.

Operator

Absolutely. Thank you. Ladies and gentlemen, this conference will be available for replay starting at 10 am Pacific this morning and running through February 25 at midnight. You may access the AT and T playback service at any time by dialing 866-207-1041 and entering the access code of 3,472,355. International participants, you can dial 402970 847.

Operator

Those numbers again are 866-207-1041. International participants, please dial 4029700847 and enter the access code of 3,472,003 55. And that does conclude our conference for today. We thank you for your participation in using the AT and T event services. You may now disconnect.

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