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. [Operator Instructions]. And as a reminder, today's conference is being recorded. At this time, it's my pleasure to turn the conference over to our host, Mr. Jason VanWees. Please go ahead.

Thank you, Tom, and good morning, everyone. This is Jason VanWees, Vice Chairman of Teledyne, and I'd like to welcome everyone to Teledyne's Fourth 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 and CEO, Robert Mehrabian; Senior Vice President and CFO, Sue Main; Senior Vice President, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibik. Also joining today is Edwin Roks, EVP of Teledyne. After remarks by Robert and Sue, we will ask for your questions. 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, 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 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. 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. These were inflation, strong dollar and part shortages. Nevertheless, with continued -- we continued our long history of navigating difficult market environment and we ultimately delivered earnings in excess of our own expectations. Excluding foreign currency headwinds, which negatively impacted fourth quarter sales growth by approximately 2.6%, growth in local currency would have been 5.7%. Excluding ETM 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 of 22.4% increased 95 basis points from last year. GAAP and non-GAAP earnings of $4.74 and $4.94, respectively, were also records for Teledyne. Fourth quarter free cash flow was reasonably healthy, but included interest payments of approximately $30 million, which last year were made in the third quarter 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. Finally, our acquisition pipeline remains healthy as evidenced by the recent addition of ChartWorld, whose 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…

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 first quarter and full year 2023 outlook. In the fourth quarter, cash flow from operating activities was $237.7 million, compared with cash flow of $295.6 million for the same period of 2021. The fourth quarter of 2022 reflected greater interest payments due to the timing of fixed rate bond interest and increased inventory purchases, compared with the fourth quarter of 2021. Free cash flow, that is cash from operating activities less capital expenditures was $203.6 million in the fourth quarter of 2022, compared with $261.6 million in 2021. Capital expenditures were $34.1 million in the fourth quarter of 2022, compared with $34 million in 2021. Depreciation and amortization expense was $81.8 million for the fourth quarter of 2022, compared with $86.2 million. In addition, non-cash inventory step-up expense for the fourth quarter of 2021 was $47.8 million with no comparable amount recorded in the fourth quarter of 2022. We ended the quarter with approximately $3.28 billion of net debt, that is approximately $3.92 billion of debt less cash of $638.1 million. Our stock option compensation expense was $6.2 million in the fourth quarter of 2022, compared with $6.4 million in 2021. Turning to our outlook. Management currently believes that GAAP earnings per share in the first quarter 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, $19 to $19.20. The 2023 full year estimated tax rate, excluding discrete items is expected to be 23%. I will now pass the call to Robert.

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

[Operator Instructions] We'll begin today with a question from Greg Konrad representing Jefferies. Please go ahead.

Good morning.

Good morning, 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?

Frankly, we think defense, while the growth was relatively modest in 2022 was 2% to 3%, that's our generally our U.S. government businesses. We think in 2023, it'll be about 5% organic growth. So we are relatively optimistic. And then…

And then, I mean, I was pleasantly surprised with just margins in the commentary. I mean, some of them seem very outside across the segment. Just in terms of your margin commentary for this year, what are some of the assumptions around price and inflation, add backs and just looking at that Q4 outperformance, anything unusual in that just let me think about the opportunities for 2023.

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 that we stand out very favorably. Of 2023, we think Q1 is going to be softer just like we had in 2022. Mostly, we have some headwinds from FX in the first quarter. We think there will be a decline in our revenue, maybe as much as 10%, but we don't know. 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, Q3, Q4, just like we did this year. Right now, early in the year, the first two weeks, we had some slower orders in some of our short-cycle businesses, but the last two weeks they seem to be picking up. So overall, Greg, I am optimistic about 2023 altogether.

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?

Yes, I think just pausing for a second because this would be asked. In 2022, we were a little short on cash. Well, a little $200 million, to be exact, and we think that's not going to happen in 2023. We think our cash in 2023 is going to be higher, approximately $900 million in cash, whereas in 2022, we really have to be very careful. We build a little more inventory than we wanted to primarily because of the shortages. We fell about $30 million short on revenue in the fourth quarter because of shortages. Also in 2022, there was that lack of R&D deductibility, which everybody has referred to, that costs us about $40 million. And we had about $60 million of more cash taxes, which brings us to just $400 million [ph]. We don't think that's going to repeat itself in 2023. So, we're optimistic.

Thank you.

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

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

I think it’s a little too early to do both, but I’ll tell you that’s about 3.5% 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 am one of those people that doesn’t really believe in these projections at this point. But the projections are that pre-GDP in the U.S. will only grow 1.4% in 2023 and inflation will drop to about 2.7%, overall developed markets probably GDP will grow 1.1%. That's where the projections are maybe a little higher in inflation. But Elizabeth, it's a little too early for me. I don't think the economies 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.

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?

Sure. First, I think in the instrumentation, which includes marine, environmental and test and measurement, we expect growth to be about 5% or average of the company. Of course, that doesn't have acquisitions in it. In the Digital Imaging segment as a whole, we again expect a 5% growth, maybe 5.1%; aerospace and defense, maybe 4%; and Engineered Systems, maybe a little over 5%. Part of the reason for aerospace and defense being a little less than the average, last year, we had that OneWeb program that we ended successfully, which contributed about $20 million in revenue. On the other hand, in Engineered Systems, we think we'll be a little above the average, because we won that very successfully won the NASA MOSSI contract, which adds about $20 million. So, that's - at this point, that's all I can say about that.

Thank you very much.

Sure, Elizabeth.

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

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 business that could drive the upside versus the 5% that you are talking about for the company as a whole?

I think if I broke it down, the marine businesses have a little longer look at them. We think marine as a whole also because the energy -- offshore energy markets are improving and our projections for that are over 7%, maybe as much as 7.5% in marine. And in the short-cycle businesses, which is environmental and test and measurement, we think that will be about 3.5% together. We think that I have already talked about some of the others. In digital imaging, where we did have a really good year and a really good fourth quarter which was in DALSA and e2v. We think we are going to be relatively flat organically, but we made some acquisitions, so that should give us about with the acquisitions maybe 3.8%. We think FLIR would do better last next year, maybe a little over 5%, 6%. So -- and the -- it's built between defense and aerospace, defense is longer cycle than aerospace. If you discount the $20 million that we don't have in web, we think defense will grow some, Aerospace may be flat, more short cycle and I've already talked about Engineered Systems and the MOSSO, which we won which are longer-cycle businesses. We feel comfortable there.

So, Robert, it sounds like you are relatively positive on constructive on what you are 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 are seeing in the commercial areas, whether it's test and measurement or machine vision that might be consistent with a slowing economy?

Yes, a little bit. I think you hit it on the head. Just a sliver, I'd say in -- if you look at Marine, our book-to-bill in the fourth quarter was 1.15. That's why I said it's longer cycle, we feel good about it. We're 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 fourth quarter, it dropped down to 0.96. To me, that's a sliver lower. So we are a little cautious about that. So DALSA, 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 fourth quarter and we think we're a little cautious about predicting. On 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. All we're doing is we are kind of hunker down and we are going to do what we always do. If we have to cut, we have cut and if we have to hire, we’ll hire and we’ll do what we have to do to make our numbers.

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

Yes, just under 1, about 0.96, 0.97, but that has Engineered Systems in it, which was 0.9%, but that's but it's very lumpy. For the year, Engineered System was 1.12, which is a long-cycle business. For the year, the company was closer to 1.

Got it. Thanks very much.

For sure.

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

Hey guys. How are you?

Good morning, Joe. Very well.

I've been hearing more people talk about risks, what may be 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?

Well, in 2022, we added, Joe, we added about 4% in pricing. And then, if you hold against that, what we ended up spending, we had wages go up 4.5, overall buying stuff about $2.5 billion of direct and indirect materials, that went up overall, about 6.7%. Of course, that's on the cost of goods sold. I am 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. So when you add those two, 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 determent between the two. Now, going forward, we expect to increase prices. How much? 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 are going to have more inflation that we inherited and we are going to have to -- we are giving our employees about 4% raises across the board. So, to make up for that we have to increase prices somewhat. It depends on how the market behaves itself. We are right now saying our overall margins are going to improve 50 basis points versus last year and that's pretty good. So, we'll have less broker premiums. Last year, we paid $90 million 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 is a lot of unknowns, but I feel we'll maintain our crisis and maybe increase on that level.

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?

Well, the longer cycle businesses are less cyclical which would be our government defense about 25%, medical, scientific, energy, aerospace in 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 are 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 2020 as strongly as we did, we feel okay about that.

Just the 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?

Oh no, that's a mode of our operation. It's something we do day in and day out regardless of what the macroeconomics are. We control everything. We controlled expenses in travel, we eliminate square footage of our manufacturing facilities. Everything we do we're vigilant and that's the only way we made it through 2022 as well as we did and we're going to continue that.

Thanks, guys.

For sure.

[Operator Instructions] And we’ll go to the line of Guy Hardwick representing Credit Suisse. Please go ahead.

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 -- if we've seen some revenue benefits from combining the two technology platforms? I mean in the past, you've done the same with DALSA and e2v. I'm just wondering if there is any comparable success stories or potential success stories to come from that?

Thank you, Guy. Good question. The answer is yes. We have some new products. We are -- we have some new markets, especially in machine vision and for example, also mapping or 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 ChartWorld bridges the gap between those two. I don't know if we would have bought ChartWorld if we didn’t have FLIR, we were just hold geospatial. So, those are 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. So now, if you look at the combination of the two companies, we have about $450 million or so of revenue in unmanned vehicles, unmanned air vehicles, unmanned ground vehicles, unmanned underwater vehicles. And there is a lot of common technologies between those three in terms of control, because of software in terms of digitization and imaging. So, those are some examples, GUY, after 20 months. But that will, of course, grow as a function of time.

Okay. Thank you. And just a quick follow-up. I am 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?

It could be. As we think in the first half, certainly, first quarter, we think it's going to be a 1% headwind versus 2.1% to 2.5% last year. Having said that, I don't think anybody knows. I don't think the economies know, they might say, but they don't know. I don't think anybody knows what's going to happen. I certainly don't ever put it that way.

Okay. But can you just clarify what rates you perhaps think about dollar euro rate you have currently?

Well, currently, it's 1.09.

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

We're using about 1.06.

Okay. Thank you.

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

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

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

Absolutely. Thank you. Ladies and gentlemen, this conference will be available for replay starting at 10 AM Pacific and running through February 25 at midnight. You may access the AT&T playback service at any time by dialing 866-207-1041 and entering the access code of 347-2355. International participants, you can dial 402-970-0847. Those numbers again are 866-207-1041. International participants please dial 402-970-0847 and enter the access code of 347-2355. And that does conclude our conference for today. We thank you for your participation and using the AT&T Event Services. You may now disconnect.