Teledyne Technologies Inc

NYSE:TDY

Earnings Call Analysis

Teledyne's Record Performance and Positive Outlook

Teledyne Technologies achieved record free cash flow in the second quarter of 2024, deploying $852 million for debt repayment, acquisitions, and stock repurchases. Sales and earnings showed sequential growth, with strong defense-related sales and marine instrumentation performance offsetting declines in industrial markets. The company expressed confidence in sequential sales increases and a return to year-over-year growth in the second half of 2024. GAAP earnings per share for Q3 2024 are projected between $4.02 to $4.16, and for the full year, between $15.87 and $16.13. Non-GAAP earnings are expected to be $19.25 to $19.45 for 2024.

Record Free Cash Flow and Capital Deployment

In the second quarter, Teledyne Technologies achieved record free cash flow of $301 million, almost doubling from $163.2 million the previous year. This allowed the company to deploy approximately $852 million through July for debt repayment, acquisitions, and stock repurchases. This superb cash flow performance was driven by stronger working capital management, leading to sequential increases in total sales and earnings that exceeded expectations.

Segment Performance and Sales Insights

The Digital Imaging segment, making up 54% of Teledyne's portfolio, saw a sales decline of 6.8% year-over-year, primarily owing to a 20% decrease in industrial machine vision markets. However, this was partially offset by robust defense-related sales and space-based infrared imaging detectors. Marine instrumentation sales thrived, increasing by 16% due to strong offshore energy and subsea defense demand. The Instrumentation segment as a whole saw sales climb 1.6%, with GAAP operating margins improving by 136 basis points to 26.1%.

Strong Aerospace and Defense Performance

Aerospace and Defense Electronics, accounting for 14% of company sales, posted a 4.5% increase in sales. This growth was fueled by both commercial aerospace and defense microwave products. Operating profit also grew with a 77 basis points margin expansion. Orders in Aerospace and Defense exceeded sales for the third consecutive quarter, resulting in a robust backlog.

Challenging Markets and Operational Resilience

Certain markets remain challenging, particularly industrial automation and electronic test and measurement. Test and Measurement sales fell 5.8% year-over-year. Nonetheless, improved operating efficiencies and active cost management have maintained healthy operating margins even in these tougher segments.

Positive Outlook and Revenue Guidance

Looking forward, Teledyne is optimistic about sequential sales increases and year-over-year growth in the second half of 2024. For Q3 2024, the company projects GAAP earnings per share (EPS) between $4.02 and $4.16, with non-GAAP EPS ranging from $4.90 to $5. For the full year 2024, expected GAAP EPS stands at $15.87 to $16.13 and non-GAAP EPS remains affirmed at $19.25 to $19.45.

Ongoing Stock Repurchases and Acquisitions

Despite substantial capital deployment, Teledyne maintains a strong balance sheet with $2.35 billion in net debt. The company plans to continue stock repurchases under its $1.25 billion authorization while remaining open to potential acquisitions, capitalizing on its robust cash flow and financial position.

Marine Business Success

Teledyne's Marine segment has seen significant success with two major growth drivers: offshore oil production and defense. The segment’s strong performance is driven by equipment used in underwater exploration and defense underwater vehicles, with nearly full capacity utilization in its connectors business.

Exciting Developments in Defense Technology

The defense segment, especially FLIR Defense, is performing exceptionally well with notable new developments, such as the ROC 1 loitering unmanned aerial vehicle and the Black Hornet 4 mini drones, both of which have secured initial production orders. These innovations position Teledyne as a vital player in the defense and aerospace markets.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Teledyne's second quarter earnings call. [Operator Instructions] And as a reminder, this conference call is being recorded.

At this time, I'd like to turn the conference call over to your host, Jason VanWees. Please go ahead, sir.

[Jason VanWees, executive]

Good morning, everyone. This is Jason VanWees, Vice Chairman. I'd like to welcome everyone to Teledyne's Second Quarter 2024 Earnings Release Conference Call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Executive Chairman, Robert Mehrabian; CEO, Edwin Roks; Senior Vice President and CFO, Steve Blackwood, and Melanie Cibik, EVP, General Counsel, Chief Compliance Officer and Secretary, President and COO, George Bobb, would have joined us, but after getting stuck in airports late last week and the weekend. George came back with COVID and is being isolated.

Anyway, after remarks by Robert, Edwin and Steve, we will ask your questions. However, before we get started, our attorneys have reminded me to tell you that all forward-looking statements made this morning are subject to various sections, 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 about one month.

Here's Robert.

[Robert Mehrabian, executive]

Thank you, Jason, and good morning, and thank you for joining our earnings call. In the second quarter, Teledyne achieved all-time record free cash flow allowing us to deploy approximately $852 million through July on debt repayment, acquisitions and stock repurchases. Non-GAAP operating margin increased from last year and increased in each of our 3 largest segments.

Total sales and earnings increased sequentially and and exceeded our most recent expectations. Although year-over-year comparisons remain especially difficult in certain commercial markets, such as industrial automation, and electronic test and measurement.

Nevertheless, strong defense-related sales at Teledyne flared and our own legacy space-based infrared imaging business partially offset the expected declines in industrial imaging systems. Furthermore, despite the anticipated year-over-year decline in certain instrumentation product lines, total instrumentation sales were a second quarter record due to exceptional performance of our marine instrumentation businesses. Primarily driven by our aerospace and defense businesses, orders were greater than sales for the third consecutive quarter, and we ended the period with record backlog.

Therefore, we're reasonably confident that quarterly sales will again increase sequentially, and we return to year-over-year sales growth in the second half of 2024.

Finally, even with the significant capital deployment in the second quarter, our quarter end leverage remained at $1.7 million. We plan to continue stock repurchases in the balance of 2024 as well as pursue acquisitions.

I will now turn the call to Edwin who will further comment on the performance of our 4 segments.

[Edwin Roks, executive]

Thank you, Robert. This is Edwin, and I will report on the first report on the digital meeting segment, which represents 54% of of Teledyne's portfolio. And like Teledyne as a whole, this segment is a mix of longer-cycle businesses such as defense, space and health care, 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.

Second quarter 2024 sales declined 6.8% compared with last year. As expected, sales to industrial machine vision markets declined approximately 20% year-over-year. However, this was partially offset by increased sales from fair defense and from Teledyne's space-based infrared imaging detectors.

Furthermore, for the fourth consecutive quarter, healthy margins across the entire FLIR business portfolio helped us protect overall operating margin, even given the significant year-over-year reduction in sales of our typically highest contribution margin product lines.

I will now report on the other 3 segments, which represent the remaining 46% of Teledyne. The instrumentation segment consists of Marine Environmental and Test & Measurement businesses, which contributed a little over 24% of sales. For the total segment, overall second quarter sales increased 1.6% versus last year. Sales of marine instruments increased 16% in the quarter, primarily due to strong offshore energy and subsea defense sales.

Sales of environmental instruments decreased 1.6% with greater sales of drugs recovery and laboratory instruments, offset by lower sales of processed gas, emission monitoring systems and gasoline safety analyses. Sales of heavy COVID test and measurement systems, which include oscilloscopes, digitizers and product analysis, decreased 5.8% year-over-year on a tough quarterly comparison versus 2023. Overall, Instrumentation segment operating profit increased in the second quarter with GAAP operating margins increasing 136 basis points to 26.1% and another 34 basis points on a non-GAAP basis to 27.2%.

In the Aerospace and Defense Electronics segment, which represents 14% of Teledyne sales, second quarter sales increased 4.5% and driven by the growth of commercial aerospace and defense microwave products. GAAP and non-GAAP segment operating profit increased year-over-year with segment margin increasing approximately 77 basis points. For the Engineered Systems segment, which contributed 8% to overall sales, second quarter revenue decreased 8.7% and operating profit was impacted by lower sales and unfavorable program mix.

I will now pass the call back to Robert.

[Robert Mehrabian, executive]

Thank you, Edwin. In conclusion, our second quarter performance was a testament to the strength of our balanced business portfolio. We also continued our proven strategy of increasing margin in those businesses, which are growing. While reasonably protecting margins in businesses with more challenging markets.

Our current full year earnings outlook is identical to the last quarter with some markets such as industrial automation and electronic test and measurement remaining difficult, although year-over-year comparisons are easier in the second half. While the outlook for our global defense, energy and aerospace businesses remains strong and is supported by our record backlog.

Finally, we continue to review acquisition opportunities. But given the strength of our balance sheet and cash flow, we also plan to continue purchasing our own stock under our current $1.25 billion authorization.

I will now turn the call over to Steve.

[Stephen Blackwood, executive]

Thank you, Robert, and good morning. I will first discuss some additional financials for the quarter, not covered by Robert, and then I will discuss our third quarter and full year 2024 outlook.

In the second quarter, cash flow from operating activities was $318.7 million compared with $190.5 million in 2023. Free cash flow, that is cash from operating activities less capital expenditures, was $301 million in the second quarter of 2024 compared with $163.2 million in 2023. Cash flow increased in the second quarter due to stronger working capital performance. Capital expenditures were $17.7 million in the second quarter of 2024, compared with $27.3 million in 2023.

Depreciation and amortization expense was $77.8 million for the second quarter of 2024 compared with $80 million in 2023. We ended the quarter with approximately $2.35 billion of net debt. That is approximately $2.8 billion of debt less cash of $443.2 million.

Now turning to our outlook. Management currently believes that GAAP earnings per share in the third quarter of 2024 will be in the range of $4.02 to $4.16 with non-GAAP earnings in the range of $4.90 to $5. And for the full year 2024, our GAAP earnings per share outlook is $15.87 to $16.13 and we are affirming our prior non-GAAP outlook of $19.25 to $9.45.

I will now pass the call back to Robert.

[Robert Mehrabian, executive]

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

[Operator]

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

[James Ricchiuti, analyst]

I was hoping to get a little bit more color on the bookings, the book-to-bill. It sounds like the positive book-to-bill was largely driven by the Aerospace and Defense business, but I wonder if you could just elaborate on what you saw from an order standpoint in the quarter.

[Robert Mehrabian, executive]

Thank you, Jim. First, you're correct in generally, overall, but I think our overall book-to-bill was 1.07. It was Digital Imaging was close to 1, like 0.98. Instrumentation was just over 1 at 1.04. -- million -- but as you said, Aerospace and Defense was very strong at 1.41, and Engineered Systems also strong at 1.25, resulting in combined book-to-bill of 1.07 for the complete company.

[James Ricchiuti, analyst]

Got it. That's helpful, Robert. If we think about the backlog of longer-cycle backlog and as it converts into the second half to revenue, is that mainly defense converting. I'm wondering what other areas of the the longer-cycle business might drive growth in the second half and maybe related, what kind of expectations do you have for the short-cycle business in the back half?

[Robert Mehrabian, executive]

Let me start with the first part. It's Defense is, obviously, as you said, very important and is the long-cycle business that's doing pretty well. The second area is Energy. And that's our Marine instruments businesses. They've done exceptionally well for the year, and we'll continue to do so. And then the third area is Aerospace, both Aerospace from the computers that we have on commercial aircraft to aerospace, and the aerospace from our imaging sensor businesses.

Now going back to the commercial shorter cycle businesses, what we're seeing is we think that Digital Imaging as a whole, total Digital Imaging should be relatively flat in the second half of the year that's year-over-year flat, which is good because it declined in the first half of the year. Some of the recovery that we're seeing is early slides that come from our MEMS, microelectronic mechanical systems, which are kind of like the canaries in the mine, we are seeing some uptick in orders there, which is encouraging, especially from the semiconductor industry.

And then, we also have some indications that our machine vision systems, as an example, have stabilized and book-to-bill has reached 1 or a little better. which is encouraging. We're hoping that these trends will continue with semiconductor coming back and inspection businesses that we have picking up and some of our high-end thermal cameras also doing better than they have. So I think overall, we're positively inclined towards the second half of the year.

[Operator]

Our next question comes from Andrew Buscaglia with BNP.

[Andrew Buscaglia, analyst]

So long that line of questioning. Can you talk a little bit about your test and measurement has been a tough market. A little bit weaker in Q2, but in line, I think, with what you guys were suggesting. How do you see that playing out? Do you still feel like your expectations for down 10% for the year are valid?

[Robert Mehrabian, executive]

Yes. About -- yes, about that. Not to be picky, but it's -- we have 9.9%, which is very close to our 10%. But -- that's also a tale of 2 cities there. We -- in our test and measurement, as you know, Andrew, we have 2 businesses. One is the [ ciloscope ] business; and the other one is our protocol business. which are basically rules for communication within devices and devices and the cloud. That business, the protocol business is coming back fast and it's doing better, a little bit better. It's the [ aceloscope ] business, which is lagging.

Having said that, we took cost out in that business. And fortunately, for us, we took the cost out very early, and the margins of instruments have remained pretty well. We anticipate, for example, about almost 94 basis points improvement in our total instrument portfolio, even with part of T&M being weak, partially because our Marine is very strong, and our environmental businesses are doing okay. So I don't know whether that answers your question fully or not.

[Andrew Buscaglia, analyst]

Yes. No, that's helpful. And maybe sticking with instrumentation, yes, Marine has been really strong presumably, you have good visibility there. What -- can you parse out what's driving that exactly and the confidence that, that continues into the second half? How should we think about that for the full year?

[Robert Mehrabian, executive]

Two areas. First is the offshore oil production and discovery. We have -- as you know, we have instruments that are deployed in streamers to look down at acoustic signals that bounce from the ocean floor and determine whether there is oil and gas there. That's a strong business and continues to be. The other part is, of course, our connector businesses. They are doing really well. Actually, we're almost at capacity in that business.

And then the second part of the Marine business is the different part of the business. As you know, we have defense unmanned vehicles underwater vehicles. We also provide Connectus for submarines. That business is doing really well, and our underwater vehicle businesses are doing really well. So it's a combination of offshore oil production and discovery and Defense & Security.

[Operator]

Next is [ Connor Walters ] with Jefferies.

[Unknown Analyst]

Just to start off. Any update to the free cash flow guidance for the year despite somewhat constrained top line in the first half, free cash flow is tracking well ahead of your $1 billion target. What do you expect for the year? And what are some of the drivers just given such a strong start in the first half?

[Robert Mehrabian, executive]

That's a good question, Connor. I don't want to be permeant about that because in the first 2 quarters, we've generated $576 million of free cash flow. I think in the second half, we have some bond payments coming due. We have some taxes coming due. So I think it's going to be less. We are hoping that our free cash flow would be above $900 million. That's where we're sitting right now, with the front end being heavily loaded. But having said that, we're confident enough in our cash, cash position. to continue our purchases of our own stock.

[Unknown Analyst]

Okay. Got it. That's very clear. And maybe just jumping over into defense a little bit more -- we've seen a lot of technology announcements for Teledyne, some new wins in areas such as loitering munitions, -- just given this, how are you thinking about the funds going forward? And any divergence within the exposure in A&D electronics and Engineered versus where you are in Digital Imaging?

[Robert Mehrabian, executive]

No. I think let's just look at the major programs that the announcements that keep coming up. There's a whole slew of them. The most important one, I would say that's new is our loitering unmanned aerial vehicle, which now is recognized what we call ROC 1. And we already have our first order for over 100 systems for that, and it competes very well against the competition both in terms of precision, but also with the fact that you can send these vehicles to target.

And if you decide to bring them back, you can do that easily. That's a distinguishing feature. And of course, the other part is accuracy. The next example, as you may know, is again, staying with vehicles are very small mini drones. We sold a whole bunch of them over the years, what we call Black Hornet 3s, which are about 6 inches in size. Black Hornet 4 was introduced this year and we got the first production order for about almost 1,000 systems recently. We expect that, that program will continue and be a very strong contributor to our defense businesses. And these orders are from the U.S. government right now.

Then we have -- as I mentioned, we have the inserts for the Virginia or connectors for the Virginia and Columbia class submarines. Those businesses have really good backlogs and are doing well. We also have drones that come out of our Canadian operations, the R70 and R80 and we have orders for those. And we also have counter UAV systems that are being deployed in Europe. And finally -- that's just an example. We have a very lightweight uncooled target recognition system, what we call the FWS, family of weapon systems. That's -- we have the development order for it and we have the first production order for it. Those 2 combined over $70 million and expect about $500 million in [ IDIQ ] contracts. So they are just examples. I think our defense businesses especially FLIR Defense has picked up the pace very well and is -- we're very excited about that.

[Operator]

Next question is from Joe Giordano with TD Cowen.

[Joseph Giordano, analyst]

Robert, you said you're seeing some stability in the machine vision business, to hear. I think you mentioned it was down 30% year-on-year. What was that compared to 2Q? And what's the expectation for like 3Q and 4Q? What was that versus 1Q? And what's the expectation in 3Q, 4Q versus the second quarter?

[Robert Mehrabian, executive]

Well, I think basically, they were done 30% in Q1 and Q2, as Edwin indicated, I think that's not going to be about [ $10 million ] and 10% in Q3 and 4 so for the year would be about 20%. So it's going to improve. Partially, it's improving -- partially is because cuts are getting easier to be frank and very straightforward about it. That market began softening last year in Q3. So the comps are going to get this year. But also we're seeing, as I indicated before, we're seeing some uptick in certain areas. And as you know, semiconductor industry is coming back and coming back strong and our products are used in the inspection systems all over the world.

[Joseph Giordano, analyst]

And just to be clear, like are the dollars for that business in 2Q higher than 1Q? And will they be higher in like the second half dollars versus $1.5.

[Robert Mehrabian, executive]

I think our expectations right now are that be relatively flat, maybe a little better in the second half. I don't want to be -- certainly in Q4, we expect it to be stronger. But right now, we have to be very careful not to drink our own bathwater because while things are looking well, good. We have both division systems, which are visual systems as well as our infrared systems. So we have -- we're looking at the combo there. And I think flat would be a good word with Q4 picking up.

[Joseph Giordano, analyst]

Okay. We're also hearing some people talk about like Boeing finally telling suppliers to cool off a little bit. I know that their production has gone down, but they've been still receiving components from suppliers at the same pace and are you seeing any of that? Were they pushing back a little bit?

[Robert Mehrabian, executive]

Well, we're not seeing that as much -- there's some rotation going on there in our OEM products. But we're not only supplying OEMs. We're also the aftermarket business there is very important to us, and we're doing okay there. I think overall, our Aerospace business is pretty healthy.

[Operator]

Next question is from Guy Hardwick with Freedom Capital Markets.

[Unknown Analyst]

Going back to the free cash flow issue, I mean, what's your sense for when you look back on this year, where you would have deployed the free cash flow in terms of acquisitions, share repurchases and debt repayment?

[Robert Mehrabian, executive]

Well, Guy, we think because our free cash flow was so strong in the first 2 quarters. And you have to also keep in mind our liabilities, which is our debt. Our debt is set up pretty well. It's fixed -- it's only we will pay -- have to pay like $150 million in October time frame. Other than that, our payments start in 2026, and if you roll everything that we owe over the years, our interest payments are about 2.35%.

Now for the year, we think that we will continue buying our stock. Maybe it depends on the stock price, right? We bought back quite a bit in the first half of the year. We expect to continue to do that. But we're also looking at acquisitions at the same time. So we're balancing the 2, as we go forward. Right now, because of our very serious efforts in [indiscernible] and ability to generate cash, we think that we're in a really good situation. We just renewed our line of credit for another 5 years. We haven't touched it. We have about $1.2 billion on touch. So -- with no debt payments, big ones coming to our interest rates being 2.35% over the many years. We feel good that we can do whatever we want. Right now, focused on buying back stock and looking at acquisitions as well.

[Unknown Analyst]

Okay. And just so, as a follow-up, would you mind updating us on your margin expectations by segment? Or has nothing changed since the last quarter?

[Robert Mehrabian, executive]

No. I can do it if you wish, I can do it for the full year. We think that for the full year in instruments, as an example, it should be up about 90 to 100 basis points was pretty healthy for us.

We'll go from what was last year at $26.6 million to $27.5 million. In Digital Imaging, we think that margins for the year may go down a little bit, even though I mentioned the headwind that we have there. But if you look at the whole portfolio, while margins went down in our DALSA 2B businesses, they went up significantly in our FLIR businesses. So we think they might go down modestly, maybe 30 basis points for the year, maybe 20.

Aerospace and defense, I think we're doing really well, maybe over 100 basis points. And Engineered Systems, which is our smallest segment, I think margins are going to be going down, primarily because of the first half. And overall, we think the segment margins should be about 14, 15 basis points up from last year, considering all the headwinds that we have, that's pretty good.

[Operator]

Next question is from Rob Jamieson with Vertical Research Partners.

[Robert Jamieson, analyst]

I guess just real quick 1 clarification just with digital imaging. Should we, in the next 2 quarters, 3Q, 4Q, is there much differential between the quarters on margin to kind of get to that down 20, 30 basis points?

[Robert Mehrabian, executive]

Well, let me see if I can answer that. Well, I think in the first half, if you look at Q1, the margins were about 21.8% overall in Digital Imaging. You look at Q2, they dropped about 20 basis points to 21.6%. We think in Q3, it will pick up to over 22%, 22.2%, may be and then go as far as 23% in Q4. So we should end the year at 22.2%, even with a weak first half.

So I think margins are going to keep improving both because of the cost action that Edwin and these people have taken, but also because some of the markets are coming back.

[Robert Jamieson, analyst]

Perfect. That's helpful. I was actually going to ask about that next. And look, I know this is a pretty small part of your business, but I just wanted to ask a little bit more on the oscilloscopes within instrumentation and test and measurement. Just one of your competitors this morning cutting their outlook on delayed R&D spend and government and China-related spend, just curious if there's anything in the end markets that you're seeing within test and measurement on the acelloscope side that's maybe weaker or starting to improve more? Or is it just all kind of a little bit soft in lagging the protocols business? Any additional color there would be great.

[Robert Mehrabian, executive]

Yes. I think you've explained it very well. I think people are hesitant to spend discretionary CapEx. So in the high end of oscilloscope where you make really good money has slowed down. We expect the whole business to be down about 10% year-over-year. But having said that, as with many other years, we were probably the first one out of the box early in the year in April to won and subsequently, you see everybody else, of course, having to do the same. The advantage that we had in doing that was that in knowing that the market was going to soften, we took cost out late in Q4 and early in Q1. And as a consequence, the margins in that business have been exceptionally healthy.

[Operator]

And we have one more in queue. [Operator Instructions] We are going now to Jordan [indiscernible] from Bank of America.

[Unknown Analyst]

How should we think about if the U.S. puts more restrictions on to ASML and Tokyo Electron what would that impact be for the Digital Imaging segment?

[Robert Mehrabian, executive]

I don't see that impacting as much. We supply product to their customers. I don't want to mention the name, but this is a large customer. And we -- they use -- this is a U.S. customer and they use us ASML equipment, which uses a critical part that we make in our MEMS factories.

We don't expect to see a change in that because we're frankly supplying the customers of ASML. And it's not a huge business, maybe $20 million, $25 million business, we're very profitable.

[Operator]

At this time, we have no additional callers in queue.

[Robert Mehrabian, executive]

Thank you very much, John. I'll now ask Jason to conclude the conference call.

[Jason VanWees, executive]

Thanks, Robert, and thanks, everyone, for joining us this morning. If you have follow-up questions, of course, feel free to email me or call me the number on the earnings release. All our earnings releases are available on our website, as is this webcast. And John, if you could conclude the call and give the replay information, do much appreciate it. Thank you.

[Operator]

Absolutely, ladies and gentlemen, a recorded replay of this conference call will be available from today at 10 a.m. Pacific, through August 24 of this year, 2024 at midnight to access the replay from domestic areas call [phone], enter the access code 5623764 International callers used [phone] and the same access code 5623764, once again replay available from 10:00 a.m. Pacific today through August 24. Domestic callers use [phone]. International callers use [phone]. The access code for either is 5623764. 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.