Ladies and gentlemen, thank you for standing by, and welcome to the Teledyne Q1 2024 Earnings Call. [Operator Instructions] And as a reminder, this conference call is being recorded. At this time, I'd like to turn the conference over to your host, Jason VanWees. Please go ahead, sir.

All right. Thank you, and good morning, everyone. This is Jason VanWees, Vice Chairman. I'd like to welcome everyone to Teledyne's First Quarter 2024 Earnings Release Conference Call. We released our earnings earlier this morning before the market opening. Joining me today are Teledyne's Executive Chairman, Robert Mehrabian; CEO, Edwin Roks; President and COO, George Bobb; SVP and CFO, Stephen Blackwood; and Melanie Cibik, EVP General Counsel, Chief Compliance Officer and Secretary. After remarks by Robert, Edwin, George, and Steve, will ask for your questions. However, before we get started, turning to ever mind to 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, everyone, and thank you for joining our earnings call. Today, we reported record first quarter non-GAAP operating margin, record adjusted earnings per share and record free cash flow. While overall orders remained strong, sales were impacted by deterioration in some of our short cycle imaging and instrumentation market. We have previously assumed no full year sales growth in industrial automation as well as test and measurement market. However, those markets weakened more than planned in the first quarter, and we now forecast full year sales in those product families to decline meaningfully in 2024. Nevertheless, we believe such sales declines with the offset by our marine, aviation and certain defense businesses, resulting in full year flat sales compared to 2023. Despite those anticipated sales reductions, in what are among our highest margin businesses, we believe overall operating margin will remain flat in '24 versus '23. Within the Digital Imaging segment, year-over-year sales declined due to significantly lower sales of machine vision sensors and cameras related to industrial automation. However, this was partially offset by organic growth and significant margin improvement at Teledyne FLIR. Given our unmanned system businesses, growth and the resiliency of our core infrared imaging business. Similarly, in instrumentation, we were relatively flat where significant reduction in sales of test and measurement, instrumentation were almost entirely offset by Marine Electronics and unmanned underwater system. And despite the overall flat sales, segment margin increased considerably. In our smallest segment, Engineered Systems, which is largely a U.S. government prime contractor, sales were impacted by the very late approval of the U.S. 2024 budget. We also revised estimated progress and cost to complete on certain contracts, resulting in some revenue and profit reversal. Finally, given our even stronger balance sheet with quarter end leverage just at 1.7x, combined with record free cash flow, we believe it's an appropriate time for us to add stock repurchases to our capital deployment plan. I will now turn the call over to Edwin and George, who will further comment on the performance of our core business segments.

Thank you, Robert. This is Edwin, and I will report on the Digital Imaging segment, which represents 55% of Teledyne's portfolio. And like Teledyne as a whole, this segment is a mix of local cycle businesses, such as defense, space and healthcare, combined with shorter cycle markets, including industrial automation, semiconductor inspection and infrared components and cameras for applications ranging from factory condition monitoring to maritime navigation. First quarter 2024 sales declined 4.1% compared to last year as certain products declined considerably, but were largely offset by those with meaningful increases. For example, sales to industrial machine vision markets declined approximately 30% year-over-year. On the other hand, unmanned air systems, unmanned ground systems and integrated counter-drone systems collectively increased nearly plus 30%. Although year-over-year changes were less significant, but included continued growth in our space-based imaging business Brazilian sales in healthcare and [indiscernible] infrared and maritime businesses and declining sales of semiconductor related micro-electrical mechanical systems or MEMS. As Robert mentioned, the FLIR businesses grew organically and for the third consecutive quarter, were positive contributors to overall segment margin. Finally, segment orders were healthy with the first quarter book-to-bill of 1.6x. George will now report on the other 3 segments, which represent the remaining 45% of [indiscernible].

Thanks, Edwin. The instrumentation segment consists of our marine, environmental and test and measurement businesses, which contributed a little over 24% of sales. So the total segment, overall first quarter sales decreased 0.9% versus last year. Sales of marine instruments increased 15.3% in the quarter, primarily due to both strong offshore energy and subsea defense sales. Sales of environmental instruments decreased 5.8% with greater sales of processed gas emission monitoring systems. In gas and flame safety analyzers, more than offset by lower sales of drug discovery and laboratory [indiscernible]. Sales of electronic test and measurement systems, which include oscilloscopes, digitizers and protocol analyzers, decreased 18.2% year-over-year on the toughest quarterly comparison of 2024 versus 2023. Overall, Instrumentation segment operating profit increased in the first quarter. With GAAP operating margin increasing 183 basis points to 26% and 175 basis points on a non-GAAP basis to 27.1%. In the Aerospace and Defense Electronics segment, which represents 14% of Teledyne sales, first quarter sales increased 7.2%, driven by growth of commercial aerospace and defense microwave products. GAAP and non-GAAP segment operating profit increased year-over-year with segment margin increasing approximately 80 basis points. For the Engineered Systems segment, which contributes 7% to overall sales, first quarter revenue decreased 10.5% and operating profit was impacted by lower sales and the cost complete estimate revision Robert mentioned earlier. I will now pass the call back to Rob.

Thanks, George. In conclusion, orders have been strong for two consecutive quarters with the increase almost entirely due to our longer cycle businesses such as defense and energy. However, given the nature of these businesses, converting much of the greater backlog to sales will not begin until the second half of 2024. At the same time, the pace of orders in our short-cycle instrumentation and imaging businesses did have a near-term sales impact in the first quarter and likely will continue to impact total sales in the second quarter of 2024. So while our current outlook for full year sales is flat with 2023, we expect second quarter sales to be sequentially flat with the first quarter and then increase in the second half of the year. The current market environment is premonition of the 2014 to 2016 period. That is when total Teledyne sales at earnings were flattish except market dynamics where the opposite of what we are experiencing today. Specifically, growth in certain short-cycle markets were partially offsetting declines in our longer cycle depends on energy businesses. Hopefully, at this time, the recovery in the short cycle businesses would be shortage. In any event, during the 2014 through 2016, we executed approximately $400 million of opportunistic share repurchases, completed 10 acquisitions and subsequently experienced significant sales and earnings growth when market normalize. Today, we're pleased to renew our stock repurchase authorization and plan to begin repurchasing shares this quarter. At the same time, because of our strong balance sheet, we're continuing to evaluate a number of acquisition opportunities. I will now turn the call over to Steve.

Robert, and good morning. I'll first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our second quarter and full year 2024 outlook. In the first quarter, cash flow from operating activities was $291 million compared with $203 million in 2023. Free cash flow, that is cash from operating activities less capital expenditures was $275.1 million in the first quarter 2024 compared with $178.6 million in 2023. Cash flow increased in the first quarter due to stronger working capital performance. Capital expenditures were $15.9 million in the first quarter of 2024 compared with $24.4 million in 2023. Depreciation and amortization expense was $78 million for the first quarter of 2024 compared with $82.1 million in 2023. We ended the quarter with approximately $2.33 billion of net debt. That is approximately $3.25 billion of debt less cash of $912.4 million. Now turning to our outlook. Management currently believes that GAAP earnings per share in the second quarter of 2024 will be in the range of $3.57 to $3.70 per share, with non-GAAP earnings in the range of $4.40 to $4.50 per share. And for the full year 2024, our GAAP earnings per share outlook is $16.02 to $16.27. And on a non-GAAP basis, $19.25 to $19.45 per share. The 2024 full year estimated tax rate, excluding discrete items, is expected to be 22.5%. I will now pass the call back to Robert.

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

[Operator Instructions] Our first question is going to come from Jim Ricchiuti with Needham & Company.

First question, just given the weakness that you're seeing in some of the higher-margin areas of the short-cycle business. I wonder how you're thinking about gross margins over the next couple of quarters.

In terms of the gross margin, we're looking at relatively flat gross margins of somewhere around 43%. Yes.

All right. Robert, with the shift in and capital allocation. I'm wondering what does this really imply just in terms of the M&A pipeline? Are you still seeing more opportunities for the smaller deals as opposed to the larger M&A. Is that a fair way to characterize the environment right now?

Jim, kind of, but let me just start with some numbers that are significant. Our debt-to-EBITDA is at 1.7x now. We have one acquisition in the pipeline. Once we make that, we would spend up over $300 million since we bought FLIR in acquisitions. If we don't do anything else, by the end of the year, our debt-to-EBITDA ratio would be closer to 1.3x where it is at 1.7x today. So we think that it's an appropriate time, first, to look at our stock and repurchase some shares because since we bought FLIR, our shares have increased by almost 700,000 shares because of option exercises and restricted stock awards. We like to get that off the table first. But at the same time, we have a lot of capacity for acquisitions. We can spend up to $1.5 billion, $2 billion because we haven't touched our line of credit at all and we have cash on hand. So we are looking at acquisitions. The issue is that smaller acquisitions, we may be able to complete this year, larger acquisitions, even if we find it with all the various regulatory hurdles that you have to go through what happen until next year. But the answer is we're going to do both. We're going to do exactly what we did in 2014 to '16. We bought our shares back. We bought 10 companies. And then some of our competitors didn't do as well in that constricted period. We were able to acquire it to be right after that because we had financial where we don't. So I don't know if that answers your question.

It helps. I mean, in the past, it was more recently, you've talked about valuations still being a bit on the risk side, do you see -- as you look at the pipeline for some of the larger M&A, have you seen any change in terms of the prices out there that it's going to take to do some of these larger deals?

Not yet. On the other hand, I have to tell you, Jim, they haven't done come out with their earnings. And in this market, kind of a bifurcated market, I expect that some of those will come down, and there will be -- just like it did before. Interestingly, enough history does repeat itself. It doesn't repeat itself on the time scale that we always expect, but repeat it.

Our next question is going to come from Greg Konrad with Jefferies.

This is a bit of an unusual question, but one I've been getting from investors and in light of the uncharacteristic guidance cut, which there hasn't really been many over the past 20 years. Is Teledyne different today than what has made it so successful thinking back over the past 20 years? Or what's really changed just given some of these uncharacteristic items? Or is this just you think about it as part of the normal cycle?

Well, two things. First, in the 25 years or so -- we've only had this occasion in 4 earnings call -- So almost 100 earnings calls and releases. We've experienced this 4x, 4%. So it's not something that happens very frequently. The flip side of it is that the economy and the markets are not quite predictable. Some parts of the economy are doing well. Like our marine businesses are devising the ball out of the park. And defense, of course, is doing well with our recent passage, et cetera, we intently expect that to continue. What is unusual is that the prediction of the slowdown in industrial automation took us by surprise. We thought in January that we would be relatively flat for the year in our machine vision businesses. And now we certainly faced with in projecting 20% decline. Now that seems like a lot, but it's only $120 million. What is different today from the past is that Teledyne can absorb those kinds of shock much more easily than it could before. In 2015, '16, when oil went from over $100 down to $30, that was a shocker to Teledyne because our revenue was only $2.5 billion, $2.6 billion. And we had increased our marine businesses by almost 1/3 over a very short period of time. So what is different is that the shock absorber in Teledyne is a lot different and can absorb shocks like that. And we did this quarter, everything else being equal. When I look at it, I said, look, we have two hits that we took in long forth. So one of them was this significant decline in industrial automation. And some semiconductor, but semiconductor conductor seems to be recovering slowly. So we see signs of that. And I think the machine vision will come back. We took another hit in our Engineered Systems business, which was unexpected. But we had to go in and look at everything and do some estimates and change our estimates to complete. That was a onetime event. So I'm not going to worry about that too much. What I am saying is that, look, yes, we took a hit, and we're taking our revenue down by $220 million part of [indiscernible]. In the old days, at those days, we've taken a $220 million hit, that would have been just devastating. We recovered those kinds of shocks, I think we'll recover this time as well if not better because we have the muscle and the ability and credit to buy companies when necessary buyback our stocks.

And then -- I appreciate that. And maybe just kind of a follow-up to that. I mean, just thinking back to what Teledyne did out of the oil and gas downturn and there was the sequester before that and impacted Defense. I mean if I remember back, I mean you took pretty aggressive actions, and we saw with margins and growth out of those two downturns. I mean is there similar actions that you're undertaking on the short cycle side, does that offer opportunity maybe to examine the margins where you have an even better kind of trajectory coming out of market recovery?

Yes. First, if you look at the FLIR businesses, year-over-year, the margins are up almost 200 basis points year-over-year. And the reason that happened is very simple. We took about $52 million worth of cost out last year, and we're taking additional $10 million to $15 million cost of this year early on. So that is affecting the margin. If you look at the DALSA e2v, which is our traditional businesses, our estimates are that by the end of second quarter, we have taken another $40 million out of that, altogether, we're talking about almost $100 million in cost. And we anticipate the DALSA e2v margins were the lowest have been for a long time. They were at 19.5% in Q1. We expect that to recover. And frankly, we expect the overall margins for Digital Imaging to be flat with last year on much lower revenues. So it basically says that -- we have taken the cost of and if need be, we'll take more. But I think right now, we're doing okay. We're just not very aggressive in our hiring.

Our next question comes from Joe Giordano with TD Cowen.

Maybe I'll start on [indiscernible] as well. Just curious on the timing of this, right? Because if you look at some of the pure players within vision they had huge declines last year and you guys did okay relative to them last year. And now this year, it seems like we may yet to report largely, but it sounds like they're going to be sequentially improving offload levels starting right now. And it seems like now is when you guys are starting to see declines. So I'm just curious your thoughts on that timing mismatch is because it's pretty short cycle stuff.

It is. We know a couple of businesses that took a pretty good hit, but their quarters are kind of a little different and the yields are a little different from ours. They took a pretty big hit and lower their numbers significantly. So now they're coming up from the bottom, slightly better. We didn't take a hit because we didn't have short-cycle declines of the magnitude. So we anticipated it would happen, but it happened fast. And we took the cost off. The flip side of it is that in even digital imaging, we have, of course, the short-cycle businesses, but we also have long-cycle business like space and defense. And those markets are doing really well. So I got to be a little careful when we designate what is digital imaging. The -- basically, the average we think in the second half, we will recover because of the space in this business.

And then just a follow-up on the question earlier about is Teledyne different today. I think what you guys have been known for so long is being very good estimators of your own businesses with high precision. And when you think about all the M&A companies you've done, does that become just inherently more challenging today versus a decade ago just because you have so many more businesses. And is there maybe -- does there need to be a tinkering of the process with how you communicate upwards from the businesses towards management to fine-tune the budgeting process in light of some of these being caught off guard here?

Well, I mean you're right in one respect. And I'll kind of paraphrase, but it is that the estimating the short cycle businesses actually always been inherently challenging. The flip side is the part that you mentioned, we have a lot of businesses, et cetera. That part is actually a help to us rather than a hindrance because it opens up the platform from which you can make acquisitions. And that is true and it will remain true. So we will accelerate that. The only we don't want to do is make stupid acquisitions with very high prices that are not going to be accretive. But the acquisitions we will do -- we had a larger platform to do that with. And like we just bought something in our Marine business, the [indiscernible] in the U.K. And we have [indiscernible], which is a digital imaging business. In the Netherlands, that we are going -- we're in the process of buying. The only difference between that business and our short cycle business is that they do a lot of custom imaging designs, and they have a significant market in imaging in the defense domain. So I think that this is an opportune time for us. Let's see what happens to the rest of the earnings and costs that come out. We didn't lower our numbers significantly. If we're lower, we'd be up now, right? So all we're saying is we're going to be flat with last year. Our margins are going to be the same by the end of the year. Our revenue is going to be about the same with that without making any acquisitions. Have enough muscles to buy our shares. And that's a good place to be with a -- even after those purchases, I think we'll end the year -- let's say, we bought $200 million of our stock. We still end the year below 1.5x debt-to-EBITDA ratio with -- which is below our target of 1.5x to 2.5x. So I think we're doing fine. I'm not worried.

Our next question comes from Andrew Buscaglia with BNP.

So I wanted to get a sense of how much this guidance is really derisked. Maybe number one, are you assuming buybacks in the guidance. And then secondly, why should we have confidence given the low visibility that there's not another step down here in some of the shorter-cycle areas?

A very good question, Andrew. First, No. The buybacks are not built into the numbers primarily because we buy back, it's really going to affect next year's EPS not this year's. So that's fairly neutral for this year, depending on, of course, how much we bought. So I would put that aside. The second part of the question, we've struggled with that mildly over the last 10 days and with our Board in the last 2 days, trying to decide how conservative we should be or how aggressive we should be. We've ended up being somewhere in between the two. We think that we have derisked some of the downside. On the other hand, we haven't derisked it all. Flip side, our defense businesses have relatively good backlog and the overall backlog in the company is 1.06. So the defense space businesses are going to come back in the second half. So they're going to balance that. In a situation like this, you can do one or two things. You can really lower the numbers and just play it very safe. or you can do what is a reasonable judgment of what you see in the market and go forward. We've taken the latter approach.

Yes. Okay. Okay. Just -- I think some investors are also somewhat confused by the small portion of the sales, it seems like a small portion of digital imaging is driving sort of the profound declines. Can you kind of walk through within digital imaging. We know machine vision is weak, but that's probably only low double digits as a percentage of that segment. Can you walk through the other items beyond just machine vision and tell us how much that is as a percentage of that segment sales. So that we could [indiscernible] around what's affecting the overall decline?

Sure. First, let's start with the machine vision specifically. Approximately $600 million in 2023. We projecting a decline of about $120 million of debt. So -- the reason it's affecting other things is that the highest margin businesses that we have in digital imaging. And overall, there are -- when you put the two parts together, which is DALSA e2v, [indiscernible] and FLIR, our total revenue there is going to be down about by year-end, about 1.5%. So it's not a big number, right? 1.5% but that's 1.5% with something like over $2.1 billion. So It's meaningful only because the top line $2.1 billion is significant. And it's our highest margin business. By year-end, we're projecting that basically, the declines would be 1.5% overall. With FlIR up and DALSA e2v down because of that. I don't know if that answers your question. The numbers when you look at them look large, but in retrospect, it's not huge, it's 1.5% of the total.

Yes. Okay. And beyond machine vision or what other areas or short cycle that are out of favor?

Well, the only other one that I would say is out of favor. I wouldn't call it out of favor. I would say it's decline. It's test and measurement. Test and measurement is the oscilloscopes and protocol solutions that we have. Last year, we had $340 million of revenue there. We expect right now that in January, we thought it remained flat. Now we expecting it to go down about 10%. So that's $30 million in revenue. The good part of that is that its margins are remaining very healthy and at the very high end of all of our margins, and we can take that decline in revenue without having a big hit anywhere out because Marine is making up those sales decline. The last area, which is a little different is the engineered system. In 2023, we had $440 million in revenue. Right now, we're projecting about a 10% decline or about $35 million to $40 million decline. If there is a good part to it is that, that's only 7% of our portfolio, and it's our lowest margin business at 10% or less. So that's why while the surprise here is that yes, we do have declines. What we're saying we are going to keep our revenue the same as last year. And our operating margins are going to be the same as last year in an environment that's a little more constricted for our digital imaging short cycle business.

[Operator Instructions] Next, we will go to Kristine Liwag with Morgan Stanley.

This is Gaby on for Kristine. So I was just wondering if you can provide some -- a little bit of color if you've been seeing improvements in the supply chain and your expectations for the supply chain going forward and how that's going to impact throughout the year?

Thank you very much. Great question. The supply chain improved in 2023 significantly versus 2022. It has improved further this year. Just to give you exact number, we -- when we buy from brokers, we pay higher percentages of price. Last year in the first quarter, we bought about $10 billion for electronic buyers broker. This year, first quarter, we only bought a little over $2 million. So I think there's been significant improvement. Having said that, there are couple of suppliers that make very sophisticated board or device -- semiconductor devices that are still lagging and it's more of a delay problem rather that a price problem. So I think the supply chain is okay. We're experiencing some delays of some sophisticated part. Other than that, I think that's behind.

Our next question is going to come from Noah Poponak from Goldman Sachs.

Robert, you have the second quarter revenue to be about flat from the first the year-over-year rate of decline would need to accelerate. Is that right? Is that what you're anticipating?

Right now, we're anticipating that it will be flat only because -- the answer is yes, only because we don't think our -- where we have really good backlog, it's got to kick in until the third quarter. The decline about, 4.5% from last year year-over-year in second quarter, yes.

Okay. Yes. And then I guess that would imply kind of mid-single-digit organic revenue growth year-over-year in the back half. I was going to ask -- you just alluded to it, but I was going to ask how much of that is kind of purely visibility from longer cycle things in the backlog versus what's the assumption embedded in that on the short cycle side?

I think primarily, it's what we have in the long cycle, the majority of that recovery is in what we have in our back maybe 3.5% to 4% improvement in revenue in the second half. There is a little bit of positivity in some of our short type of businesses only because our larger customers or platforms on which we serve like semiconductors. The data shows that it's better than it was last year and improving its up. So we have a little of that in mind. That -- so I think that's there but we're not counting on industrial automation, other things to improve significantly because frankly, we have no visibility.

Okay. What are the pieces of the Engineered Systems margin in the quarter? Is there -- I assume there's some kind of cumulative catch-up adjustment mark-to-market write-down in that?

Yes. What happens in that business is that, as you well know, we're obligated to do [indiscernible] accounting. As you estimate your cost and completion timing. When went back and looked pretty hard, we saw that some of the costs were higher than we had anticipated. So we adjusted those. I think that took kick out of our sales. But when you do cost to cost, what you take the sales down, let's say, several million dollars, you have to take the profit down the same amount. So that's what took the hit. But I think we know exactly what happens. We'll fix it, we are fixing it, and we should get beyond that as we move forward.

Do you know the size of in front of you guys there on how much of a markdown you took in the quarter?

Well, we took in Q1, we took about a $7 million EBIT hit, which was basically $0.10 to $0.11. So if that happened, we would have made our earnings.

Okay.

Despite the downturn in a short cycle imaging. We'll fix that.

Got it. That's helpful. That's helpful. Last one, I guess, given how much you've now delevered balance sheet, net debt-to-EBITDA post FLIR integration. You're still going to have pretty healthy free cash flow despite tweaks you're making here today. If you're coming out with a share repurchase, I guess the number you're talking about is kind of small relative to your forward annual free cash flow generation, how much balance sheet firepower you have if you were to take leverage a little higher, a little bit of like if you're going to layup, layup type of thing. I guess I'm surprised that you -- maybe part of it is you formulated all of this before the moving stock today. Is there a scenario where you reevaluate something more aggressive in 2024? Do you need to keep room for the M&A pipeline? How would you respond to that?

Well, two ways. First, we'll put out the case about our authorization. And if you look at that, we have authorization to go from what we said was $200 million to $250 million to $300 million. We can go up to $1.25 billion in buybacks. It's -- as you know, Noah, that depends on the stock price and how the market reacts. But at the lower stock price, that we -- I'm just looking at this morning, I was looking at this morning, that would be a significant number of shares. We can do that if we choose. We still have enough powder to make acquisitions. Frankly, that part of our portfolio doesn't bother me. If you look at final data point you may want to know is we have only $150 million of fixed debt that we have to pay in the second half of 2024 in October, $150 million. We just paid for $50 million. The next payment doesn't have come due until 2026. And then if you look forward the next 3 or 4 payments, our average borrowing cost, and those are all fixed. Our average borrowing cost is more like 2.35%. So that's about as an idea that the as you want to have. And as we generate cash, we can buy the shares and we can make acquisitions. And we haven't even touched our line of credit yet. So from that perspective, I feel pretty comfortable.

And at this time, there are no additional questions in queue.

Thank you very much. We would like now to conclude the conference operator, I will now ask Jason to do so.

Thank you, John, and thanks, everyone, for joining the earnings call this morning. Again, all the earnings release are on our website. The reply is available. And for those on the call, please feel free to [indiscernible] talk further. So thank you, everyone.

As we mentioned, this conference has been recorded for replay, which will be available for one month starting at 10:00 a.m. Pacific Time today and ending May 24, 2024 midnight. To access and listen to the replay at any time, you can call (866) 207-1041 and use access code 832-7266 International callers, you can use the number (402) 970-0847 and again, for domestic, that is (866) 207-1041 and international (402) 970-0847 and the access code to use is 832-7266. And that does conclude your conference call for today. We do thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.