Ladies and gentlemen, thank you for standing by and welcome to the Teledyne Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. And as a reminder, this call is being recorded. I'd now like to turn the conference over to our host Mr. Jason VanWees. Please go ahead sir.

Thanks, Brad and good morning, everyone. This is Jason VanWees, Vice Chairman of Teledyne, and I'd like to welcome everyone to our third quarter earnings release conference call. And of course we released our earnings earlier this 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 Cibik. After remarks by Robert and Sue, we will ask for your questions. However, before we get started attorneys have reminded me to tell you that all forward-looking statements made this morning are subject to various assumptions, risks and caveats as noted in the earnings release and our periodic SEC filings. And of course actual results may differ materially. In order to avoid potential selective disclosures this call is simultaneously being webcast and a replay both via webcast and dial-in will be available for approximately one month. Here is Robert.

Thank you, Jason. Good morning and thank you for joining our earnings call. I'm very pleased with both our operational execution and our financial performance in the third quarter. We achieved record revenue 75.2% greater than last year driven by organic growth of 11.9% and the remaining 63.3% of sales increase contributed by Teledyne FLIR. Revenue increased organically in every major business group, but was especially strong in our Commercial Imaging and Electronic Test and Measurement Instrumentation businesses where organic growth for each was greater than 20% in the quarter. Furthermore, orders exceeded sales for the fourth consecutive quarter with a third quarter book-to-bill of 1.1. GAAP earnings per share of $2.81 increased 13.3% compared to last year and was $0.03 less than our record GAAP third quarter earnings achieved in 2019. However, excluding acquisition-related charges earnings were $4.34 per share in the third quarter an increase of 61.9% on a comparable basis from 2020. Cash flow was a third quarter record allowing repayment of $300 million of debt while our leverage ratio declined to 3.3% from 3.7% at the end of the second quarter. Teledyne FLIR performed strongly in its first full quarter. Integration efforts have been swift and we are increasingly excited about the long-term future with Teledyne. We continue to accelerate the pace of planned synergies and currently expect to achieve our annualized cost saving target of $80 million before the middle of 2022 as opposed to the end of 2022 as we described in our July earnings call and compared with 2024 as noted when we announced the transaction in January of 2021. Regarding our execution in the quarter, Teledyne is not immune to supply chain issues inflation and other operational challenges. However, to-date we've been successfully navigating and managing these issues. And today we are…

Thank you, Robert and good morning, everyone. I will first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our fourth quarter and full-year 2021 outlook. In the third quarter cash flow from operating activities was $192.8 million, including all acquisition-related costs. Excluding acquisition-related cash costs, net of tax cash from operations was $194.9 million compared with cash flow of $150.3 million for the same period of 2020. Free cash flow, that is cash from operating activities less capital expenditures, excluding acquisition-related costs was $165.7 million in the third quarter of 2021 compared with $135.1 million in 2020. Capital expenditures were $29.2 million in the third quarter compared to $15.2 million for the same period of 2020. Depreciation and amortization expense was $90.2 million for the third quarter of 2021 compared with $29.2 million in 2020. In addition, non-cash inventory step-up expense for the third quarter of 2021 was $35.2 million. We ended the quarter with approximately $3.89 billion of net debt. That is approximately $4.44 billion of debt less cash of $561.8 million. Stock option compensation expense was $5.8 million for the third quarter of 2021 compared to $5.7 million for the same period of 2020. Resulting from the FLIR acquisition, restricted stock unit expense for FLIR employees was $1.8 million in the third quarter of 2021. Turning to our outlook. Management currently believes that GAAP earnings per share in the fourth quarter of 2021, will be in the range of $2.53 to $2.69 per share with non-GAAP earnings in the range of $4.07 to $4.17. And for the full-year 2021 our GAAP earnings per share outlook is $9.13 to $9.29; and on a non-GAAP basis $16.35 and to $16.45 compared with our prior outlook of $15.25 to $15.50. The 2021 full-year estimated tax rate excluding discrete items. is expected to be 23.9%. In addition, we currently expect less discrete tax items in 2021 compared with 2020. I'll now pass the call back to Robert.

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

And we can go right now to Greg Konrad with Jefferies. Please go ahead.

Good morning and great quarter.

Thank you, Greg.

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

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

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

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

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

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

Thank you.

Thank you, Greg.

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

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

Yes, Mike. I think -- first let me start by saying our government businesses are about 26%, 27% of our total. The two opportunities that we are keeping an eye on are underwater vehicles and there is a medium underwater UUV that the government is soliciting proposals on. And we're bidding on that across the Engineered Systems and our Marine businesses together, just like we do with gliders and other things. And then there's the large underwater vehicle that we expect to bid on. Some of the other -- in Digital Imaging, we have the wide field of view or what's called WFOV early warning satellite. That's an opportunity for us. Our next-generation overhead persistent infrared, OPIR, is another one. And the downside, if there is a downside, is we have to rebid at our NASA program, what we call MASI, which is the Mission Systems program later this year. We bid on it yet, but the decision would be later. And there's always a risk when you're doing that. But overall, there's a whole range of new programs that are available to us even under the continuing resolution.

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

Right now, I would say that opportunities would be in our Marine businesses primarily, because the oil prices, as you're well aware Mike, have moved up significantly. And we had a book-to-bill of 1.13 this quarter. We also think that we will have more opportunities in Aerospace and Defense businesses, especially on the aerospace side as people start traveling more. We think that Marine may have an upside next year of maybe $25 million and controls, which is our computers that go on various aircraft. That can have a similar number $20 million to $25 million. Those are longer-cycle businesses, and so far they look all right. On the shorter cycle which the other side of the Instrument, we enjoyed a 9% increase overall. And T&M, our test and measurement is doing well. And we hope that with our new products that we keep developing that will have some bump next year too.

Got it. Thank you.

Thank you, Mike.

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

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

Elizabeth, let me start with, I hope I didn't misquote myself. Our top side savings for which we moved forward from 2024 to 2022 is $80 million. Having said that, there are other opportunities, but there would be more opportunities in developing products between FLIR's offerings and Teledyne's offerings. And as we move the revenue up and keep our cost down, we think that will help improve our margins. But we haven't factored that in the revenue synergies yet, because right now we're still integrating. We've integrated some of the businesses very quickly. Like, they make midrange vision systems and make high-end vision systems and those we've coupled right away and that's worked out really well. But we're still working on the rest of the stuff. Like in the Marine, Raymarine and our Marine businesses, there are opportunities. There are opportunities between their Raymarine businesses and our software businesses and underwater software businesses at Karas. We're working on all of those. As we do that I think those would create more savings as we go forward.

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

Yes. Elizabeth, first on the delivering, we're not sitting at 3.3x net debt to EBITDA. We hope to take that down to about 2.7 by the end of 2022. That would be our marker. As we look at that when you're, kind of, start getting confident that you're going to go there you start looking at larger acquisition potentials because those things take a little time to get eight, nine months. But in the interim, we will look at and we are looking at smaller acquisitions. As we did back in 2017 when we acquired e2v, our debt to EBITDA ratio was pretty high. We very quickly delevered over the next three years. But in the interim we also bought about $500 million of smaller assets. So we'll do the shorter term. We'll do small acquisitions. In the longer term, we've promised the rating agencies that we won't do anything very big but then we are sure we can hit our targets.

Okay. Thank you.

Thank you Elizabeth.

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

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

Actually Jim if I may their EST business, which was out of their components, which they make the sensors and the solutions businesses, the commercial solution businesses was -- generated about $40 million in revenue last year in Q3 let's say $35 million to $40 million, and their Q3 last year including that was about $466 million. This year's third quarter the revenue is $474 million. So if you -- with no EST revenue. So if you were to look at it, apples-to-apples and take the $40 million out of the $466 million, you're looking more like a $426 million, $427 million last year versus the $474 million. So there's significant growth there. Second, they've had -- we've had reasonably good growth in our Defense segment, the FLIR Defense segment of about 3.5% this year versus last year, primarily coming from the unmanned systems. So there's been growth in the commercial as well as in the defense businesses. If you were to moderate things if you were to subtract the EST sales last year third quarter.

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

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

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

Yeah. Jim, that's a great question. Yeah, I can answer that because we track that one very closely. First, in the quarter, I'd say we probably didn't enjoy about $40 million of revenue that we could have not because of shortages. Now we were fortunate because the way our portfolio of business is laid out as you're very familiar with we can make some of that up in other places. We have a balanced portfolio and these shortages are not hitting everything we do. And by the way those are not lost sales. They just moved to Q4. We expect to have a similar number in Q4. We're looking at Q1 of next year and see similar issues. So we -- it's kind of a shifting game, but we make it up by pulling in from other parts of our portfolio. Having said that, we have an extremely active program from our -- the procurement side where we have a major initiative in procurement automation, but we also have procurement working with our -- interestingly with our suppliers in the Far East who provide us PCBAs. They have access to components that go into those PCBAs and they're helping us get some of the computer chips and other components that we need. And we also have some dedicated people in the Far East doing the same thing. So it's a combination. Take the $40 million, push it forward. Then take $40 million from next -- this current quarter, push it forward, pull in some stuff where we can and kind of as I said before we're navigating it. I think so far, we've done okay.

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

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

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

Thank you, Jim.

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

Good morning, guys.

Good morning.

On that book-to-bill comment, can you -- within Digital Imaging, can you indicate how bookings are for FLIR?

They're modest, but they're in the 1.1 in the Digital Imaging side.

Okay. Okay. So still above 1 though?

Yes.

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

No I said in the Digital Imaging side. The total -- yes.

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

Yes. I got to tell you that we're holding our own there. Things have moved a little to the right. Probably we got some nice orders especially for example in the US border control where we delivered light vehicle surveillance systems. We have some DARPA program on -- that could lead to other activities in the personal protected biosystems. Overall, I think we're holding our own there and I expect we'd do okay. But again, Andrew what is -- to me what's important is, even if you look at our government businesses with FLIR, we have a balanced portfolio. And unfortunately, they may have suffered a little bit because too focused the portfolio. We have a balanced portfolio between our Engineered Systems, the FLIR unmanned both ground and air systems and integrated systems. And then we have of course our Defense programs in our Aerospace and Defense. So we gained about 3.5% in those programs -- in our government programs in Q3. That may sound modest when you look at the overall growth of 11.9% organic, but I'm happy with that. If we can keep that pace in this time going forward, we should be okay.

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

Yes. I think the first is because of the oil prices, we expect that we get about a 3% increase from 2021 to 2022 in total sales from let's say, $150 million up maybe to $175 million. That's a little more than 3%, as I think about it but -- that's more like 2.1%. But having said that, again, I'll fall back on what we've constructed our portfolio. We get 3% here 4% there. We get Defense. We get Energy. We get our short-cycle businesses. And then of course Digital Imaging, we're hitting on all cylinders there. We think we're going to be okay. So, there's upside in Energy, but I'm not counting on it to move the whole company. The whole company would move because of all the pieces that we have put together that protect us by the way on the downside as you well know Andrew.

Okay. Thanks Robert.

Thank you. Do we have any other questions coming up.

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

Okay. Joe?

Guys can you hear me?

Yes. Yes.

So you kind of hinted at this already, but if you were to kind of think about FLIR ex the EST, what do you think is like the true growth rate that you're exiting 2021 into '22? And is that kind of a sustainable rate into '22?

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

Yes. And then, if you were to contemplate -- yes, go ahead.

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

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

Well, I think, I mentioned earlier, we anticipate to improve our margins 50 to 60 basis points across the company year-over-year. And whether it's non-GAAP or EBITDA -- by the way, our EBITDA now is about -- this quarter was 24.2%. I think that will help improve our non-GAAP margins up. For FLIR today, it's about 24%, which is significantly higher than we've enjoyed historically. And for 2021 our overall margin, we expect the non-GAAP margin, which excludes of course the intangibles and cost stuff associated with the purchase accounting. If you go to 21% and if we can enjoy 50 basis points on top of that, some of the contribution -- FLIR's contribution coming from FLIR, we'd be very happy with that. Again, bear with me on this Joe. I'm giving you what I'm seeing in January happening throughout next year. As we get to January, if nothing terrible happens in the world, hopefully we'll do better. But right now, I'll stay with the 50 basis points.

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

Yes. We have two examples that I can give you. One of them is, in our Engineered Systems segment. We have a contract, where we're developing a wind tunnel for vehicles that are of the nature that you just mentioned. And that's very important because to test hypersonic vehicles, you want to have a wind tunnel to be able to do that -- a hot wind tunnel. We have a small program, $50 million, which we think will be followed by another bigger program that is specifically for hypersonic vehicles. On the other side, we do have sensors in the A&D segment of FLIR and also especially that -- I meant Digital Imaging in general. But we have sensors that are being developed and used computers -- edge computers that are located on various vehicles for detection of high-speed missiles. And if that market starts growing then we do have a series of products. And then we have one that, I cannot describe too much. We do have a very strong program – programs I say, multiple programs in our imaging businesses here in Thousand Oaks that's the one that locates infrared and other sensors on satellites and space vehicles. And those are classified programs and we're enjoying some really good opportunities. That actually led to growth of our imaging programs.

Thanks, guys.

Thank you very much.

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

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

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

Thank you.

For sure.

And currently, no further questions in queue.

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

Thanks, Robert. And again, if anyone has follow-up questions my number is on the earnings release. Please feel free to call and e-mail me. And Brad, if you could give the replay information and conclude the call we'd be appreciative. Thanks everyone.

Certainly. Thank you. And ladies and gentlemen, the conference will be available for replay after 10:00 a.m. Pacific today and running through November 27 at midnight. You can access the AT&T replay system at any time by dialing 1866-207-1041 and entering the access code 7478140. International parties may dial 402-970-0847. Those numbers again are 1866-207-1041 and international 402-970-0847 with the access code 7478140. That does conclude our call for today. Thanks for your participation and for using AT&T teleconference. You may now disconnect.