Teledyne Technologies Inc
NYSE:TDY
| US |
|
Fubotv Inc
NYSE:FUBO
|
Media
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
C
|
C3.ai Inc
NYSE:AI
|
Technology
|
| US |
|
Uber Technologies Inc
NYSE:UBER
|
Road & Rail
|
| CN |
|
NIO Inc
NYSE:NIO
|
Automobiles
|
| US |
|
Fluor Corp
NYSE:FLR
|
Construction
|
| US |
|
Jacobs Engineering Group Inc
NYSE:J
|
Professional Services
|
| US |
|
TopBuild Corp
NYSE:BLD
|
Consumer products
|
| US |
|
Abbott Laboratories
NYSE:ABT
|
Health Care
|
| US |
|
Chevron Corp
NYSE:CVX
|
Energy
|
| US |
|
Occidental Petroleum Corp
NYSE:OXY
|
Energy
|
| US |
|
Matrix Service Co
NASDAQ:MTRX
|
Construction
|
| US |
|
Automatic Data Processing Inc
NASDAQ:ADP
|
Technology
|
| US |
|
Qualcomm Inc
NASDAQ:QCOM
|
Semiconductors
|
| US |
|
Ambarella Inc
NASDAQ:AMBA
|
Semiconductors
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
362.5
489.24
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Fubotv Inc
NYSE:FUBO
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
C
|
C3.ai Inc
NYSE:AI
|
US |
|
|
Uber Technologies Inc
NYSE:UBER
|
US |
|
|
NIO Inc
NYSE:NIO
|
CN |
|
|
Fluor Corp
NYSE:FLR
|
US |
|
|
Jacobs Engineering Group Inc
NYSE:J
|
US |
|
|
TopBuild Corp
NYSE:BLD
|
US |
|
|
Abbott Laboratories
NYSE:ABT
|
US |
|
|
Chevron Corp
NYSE:CVX
|
US |
|
|
Occidental Petroleum Corp
NYSE:OXY
|
US |
|
|
Matrix Service Co
NASDAQ:MTRX
|
US |
|
|
Automatic Data Processing Inc
NASDAQ:ADP
|
US |
|
|
Qualcomm Inc
NASDAQ:QCOM
|
US |
|
|
Ambarella Inc
NASDAQ:AMBA
|
US |
This alert will be permanently deleted.
Teledyne Technologies Inc
You don't have any saved screeners yet
Ladies and gentlemen, thank you standing by. Welcome to the Teledyne Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later on, we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions].
I would now like to turn the call over to our host, Jason VanWees. Please go ahead.
Good morning and thanks everyone. This is Jason VanWees, Executive Vice President and I would like to welcome everyone to Teledyne's third quarter 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; President and CEO, Al Pichelli; Senior Vice President and CFO, Sue Main; and Senior Vice President, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibik. After remarks by Robert, Al and Sue, we will ask for your questions.
But of course, before we get started, our 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 want to open with the following comments. First, all of our 70 worldwide manufacturing sites as well as our corporate office and research laboratory remain operational and only 16% of total employees are working from home.
Second, our short cycle environmental and test and measurement instrumentation businesses rebounded from the trough in the second quarter growing approximately 6 % and 5% respectively quarter-over-quarter. Third, we believe our longer cycle commercial markets such as marine instrumentation and medical imaging bottomed in the third quarter. Fourth, our government businesses continue to grow and generally remain in attractive niches such as space-based imaging, manned and autonomous subsidy systems and electronic warfare.
Despite the market turmoil and lower sales in 2020 we have successfully demonstrated GAAP margin improvement. For example, the second quarter GAAP operating margin increased sequentially over 150 basis points specifically operating margin of 16.4% was the second highest in the company's history.
In addition, we achieved greater margins compared to last year in nearly every major business category except commercial aerospace where sales have declined nearly 50%. We also achieved record third quarter free cash flow and all-time record free cash flow for any first nine months period.
Finally, our balance sheet has never been stronger and our acquisition pipeline is healthy. As the overall demand environment continues to improve our substantially lower cost structure, for example we're operating with 9.2% fewer employees, our lower cost structure should provide significant operating leverage in future quarters. Coupled with acquisitions, we expect earnings and cash flow to continue compounding for years to come.
Before turning to Al to report on the third quarter performance by segment, I want to comment briefly on two important items. First, the OneWeb satellite program and second, the potential acquisition of Plotinus. Over the last few weeks the OneWeb situation has improved considerably. First OneWeb parent of our customer Airbus OneWeb satellite secures $235 million of interim financing in late September. Second we received a substantial advance payment in the month of October and third we recently signed a new more favorable contract for which we have resumed limited production. While some risk remains including a successful exit by OneWeb from bankruptcy. We currently expect a modest charge of approximately $3 million in the fourth quarter versus the potential $40 million noted earlier during the work stoppage.
Now regarding Photonis, on September 28 we paused our efforts to acquire the business and voluntarily withdrew our application for authorization by the government of France. In summary, we determined at that time that an acquisition under the proposed conditions of the French government was not visible at the seller's valuation expectation communicated to Teledyne.
However, in recent days the seller's valuation expectations have significantly moderated and we have renewed our acquisition efforts. At this time we are hopeful to conclude the negotiations and announce the acquisition before the end of the year.
Al will now comment on the performance of our core segments.
Thank you Robert. In our instrumentation segment overall third quarter sales decreased 6.9% versus last year. Sales of environmental instruments decreased 2.1% from last year. However, sales increased 6.5% sequentially from the trough in the second quarter. Compared with last year sales of certain products such as laboratory instrumentation for life science applications increased. However, this was more than offset by year-over-year declines in sales of selected industrial products such as ambient air monitoring instrumentation.
Sales of electronic test and measurement system decreased 6.5% year-over-year again however, sales increased 4.6% sequentially. Sales of protocol test instrumentation in particular for PCI Express and USB test solutions increased from last year but sales of general purpose oscilloscopes declined.
Sales of marine instrumentation decreased 11.3% in the quarter. However, operating margin was stable due to head count management and business simplification initiatives. Overall instrumentation segment operating margin increased 86 basis points despite the lower year-over-year sales.
Turning to digital imaging segment. Third quarter sales decreased 1.8% and primarily reflected lower sales of X-ray detectors for dental and medical applications partially offset by greater sales of infrared detectors for the defense market and 3D geospatial imaging systems. Sales of industrial and scientific cameras and sensors were largely flat with last year. With continued strength in semi-conductor inspection and markets in Asia largely offsetting some weaknesses in Europe and North America. GAAP segment operating margin was 19%, an increase of 210 basis points year-over-year.
In the aerospace and defense electronics market third quarter sales declined 18.2% as greater defense sales were more than offset by a 49% decline in sales of commercial aerospace products as well as lower commercial space sales related to OneWeb. GAAP segment operating margin decreased due to lower sales but increased 621 basis points sequentially given a significant lower cost structure.
In the engineered system segment third quarter revenue increased to 2.9% primarily due to greater sales from space, nuclear and other manufacturing programs as well as electronic manufacturing services. Segment operating profits increased 17.9% with margin 158 basis points higher than last year.
I will now turn to call to Sue who will offer some additional commentary regarding the third quarter and our 2020 outlook.
Thank you Al. Good morning everyone. I will first discuss some additional financials for the quarter not covered by Robert and Al and then I will discuss our fourth quarter and full year 2020 outlook.
In the third quarter cash flow from operating activities was $150.3 million compared with cash flow of $150.9 million for the same period of 2019. Record third quarter free cash flow that is cash from operating activities less capital expenditures was $135.1 million in the third quarter of 2020 compared with $125.8 million in 2019. Capital expenditures were $15.2 million in the third quarter compared to $25.1 million for the same period of 2019.
Depreciation and amortization expense was $29.2 million in the third quarter compared to $27.9 million for the same period of 2019. We ended the quarter with $332.2 million of net debt that is $786.7 million of debt less cash of $454.5 million for a net debt to capital ratio of 9.9%. Stock option compensation expense was $5.7 million for both the third quarter of 2020 and 2019.
Turning to our outlook. Management currently believes that GAAP earnings per share in the fourth quarter of 2020 will be in the range of $2.56 to $2.86 per share and for the full year 2020 our GAAP earnings per share outlook is $9.70 to $10 compared with the prior outlook of $9.45 to $10. The 2020 full year estimated tax rate excluding discrete items is expected to be 22.7%; a 210 basis point increase compared to full year 2019 due in part to less R&D tax credits. In addition, we currently expect less discrete tax items in 2020 compared with 2019.
I will now pass a call back to Robert.
Thank you Sue. We would now like to take your question. Alicia if you're ready to proceed with the questions and answers please go ahead.
Thank you. [Operator Instructions] Our first question comes from the line of Joe Giordano. Please go ahead.
Hi, everyone. Good morning.
Good morning, Joe.
So some interesting stuff you said there Robert on OneWeb and Photonis that I wanted to touch on. On OneWeb, I was going to ask kind of before you knew about that development what's kind of your broader outlook for commercial space? There is obviously been a lot of kind of buzz around the sector recently with some other big companies like Microsoft the other day talking about it like what are your future ambitions there in terms of growth and is there new applications that you might like want to be involved in that sector going forward?
Yes Joe. Thank you for the question. Let me note that for us we have space programs both in the commercial and the defense sector. In the commercial sector, a lot of our instruments are used both for studying the universe as well as looking down at Earth for environmental measurements. On the defense side, on the other hand we do have a large number of programs that address the needs for looking at weapons through satellites.
While there are of course as you said there is a lot of interest in communications in space like the programs that you mentioned, our involvement right now is OneWeb. The more interesting part to us is the defense imaging sector where we've been winning contracts recently and where our programs are very healthy. For example we're involved with the wide field of view program in the defense sector and the Opier program which is a persistent overhead infrared classified program.
I think going forward let's see what the outcome is on the OneWeb program. They have ambitions of course to increase the number of satellites in the future but right now we're more focused on making sure that we make the products, we promise to make and we get paid for them promptly. I don't know if that answered your question Joe.
It did. Thank you. On Photonis do these new, do the discussions with the French government like what kind of scope changes does that entail like how is the size of the business that you would potentially be acquiring kind of different now than what we initially thought given those discussions?
Yes. initially obviously we were to acquire 100% of the business. The French government is asking that we let a French government state-sponsored investment bank invest 10% in the company. In and of itself we find that okay we're going to work with the French government and especially the investment bank to make sure that we have all of our procedures in place.
The more important thing that has happened recently Joe is that there was a significant change in price that we asked for and receive about 15% on U.S. dollars basis and frankly you can appreciate that owning a 100% of an entity is very different than owning 90% of an entity and that's why the price reduction. I think we have an agreement in principle right now and we need to now finalize our detailed paperwork with the government and then see if we can proceed from there.
Well, that's definitely good to hear. Just two more quick ones for me. Can you guys give maybe your current views if I know it's been shifting in the market, so your current views on the defense sector under a Biden administration and what are your thinking early stage of like your biggest margin opportunities into next year across the portfolio. Thanks.
I think in the short term we're looking at which I mean the really short term and let's say midterm next year, we're looking at growth in the defense sector for our programs in the mid single digit range. If there is a change in administration as you indicated then I think in the future years in the out years we think things will remain relatively flat.
Our job is really very simple; regardless of which administration is in and which programs are supported, our job is to be able to get our share of the market and gain market against the competition. So I feel very good about our defense programs because of the breadth of offerings we have from space imaging to electronic warfare to communication, etc.
Having said all of that defense today is about 20% of our sales, our portfolio and I would say a little less than that 20% of our operating income. Consequently really my attention going forward, our attention going forward is to expand our commercial businesses where we enjoy much higher margins.
That's it Joe.
Our next question comes from the line of Blake Gendron with Wolfe Research. Please go ahead.
Yes. Thanks. Good morning. So I want to dig into the margin improvement in the next year. You've quantified some of the cost out in the past things that you're doing internally with the target goal of 20% GAAP EBIT margins or better. I'm wondering if you could update us on both the cost capture to date and then additional opportunities moving forward and what the timeline of that would be? Thanks.
Sure Blake. I'll try to answer that the best I can at this time. First, there are two primary changes in our cost structure. The first and the most important one is the lower number of employees. In general, we're down about 9.3% that is after adding about 30-40 people in our OneWeb program in the UK. So we are down about 9.3% which is about 1,100 a little less than 1,100 employees that the effect of that maintaining that cost structure is that it will help our margins approximately 130 basis points or so.
The other thing is that we also have a procurement initiatives which are helping us reduce our cost across the board as we procure. We buy about $1.2 billion worth of goods and services and our procurement initiatives are aimed at reducing that. So we expect to get a little bit help from that domain as well but by and large I'd say the 130 basis points for next year is a good number that I gave you. I'm hoping that will be higher than that.
Understood. That's really helpful. Circling back on digital imaging, I'm hoping to better understand kind of roughly the end market waiting across things like machine vision semis, life sciences [indiscernible] etc. it seems like life science demand could carry the segment into 4Q what specific and market considerations are baked into the segment outlook through year end and what are some of the longer arc trends that you're focused on? We see a lot of product announcements and expansions but it's tough to contextualize exactly where those fit across your end markets. So I guess just high level how do you expect this market level to evolve?
Okay I'll try and answer that. Let us start with our digital imaging sales for this year. They're about $985 million, $983 million -- $985 million. Last year they were about 990. So it's flat year-over-year. Now the big chunk of that is our cameras and vision systems and sensors. They're used both for flat panel displaces about any phone or any television that you look at has to be inspected and a lot of those are done by our cameras and also our cameras are used in semiconductor industry for inspection.
Overall, with both sensors and cameras now of course three-dimensional views of things and all that sales in that business is about 340 million and it's a fairly stable business with all the problems, with the pandemic that business has remained healthy. It's flat year-over-year but having said that the margins have improved.
The area that has hit us a little bit harder is in the healthcare area. That sales that are about the $220 million. We make X-ray detectors both for dental as well as or looking at human anatomy and we also make some X-ray sources but let's stay with the detectors.
As you know the detectors that we make for the dentist for the dental industry they're both inter-oral and extra-oral that's outside the mouth and inside the mouth. That has been very slow because dentists have not been very active up until very recently. Our inter-oral detectors are picking up. Our extra-oral detectors will probably be a little while before they pick up. We think that business would start picking up at the end of the fourth quarter. The one area that surprised us frankly in healthcare is that we make sources, we make magnetrons that go into radiotherapy instruments that are instruments that are used for cancer treatment.
A lot of those instruments are also used for looking for cancer and because of the pandemic that area has significantly slowed down and so until that area comes back we don't think our healthcare businesses would be as robust as they used to be and we think that's going to happen by the way next year.
The aerospace and defense that includes both our imaging for classified programs here as well as studying space both here and in Europe. That's been an increase for us this year. Year-over-year I think we've got an 8% increase. We're about $270 million. That's pretty healthy. The last two items are the MEMs business.
MEMs micro electronic systems, micro mechanical systems, the revenue there is about 95 million. It's up about 12% from last year primarily because we bought a small MEMs business. We are probably the largest independent MEMs foundry in the world today and we're very positive about that business. The issue there is it's a fab, very capital intensive. So we're always balancing our capital investments against what kind of market share we want to have. The last area of course is our geospatial where we make LIDARS and other devices and that's a healthy business but it's relatively small. It's of the order of $58 million. So I don't know if that answered your question directionally. I think we expect digital imaging business to grow next year.
That's extremely helpful. I appreciate the detailed response. I'll get back in queue.
Thank you.
Our next question comes from Greg Konrad with Jefferies. Please go ahead.
Good morning.
Good morning Greg.
How you doing? I just wanted to follow up on two of the previous questions. I mean first on healthcare and you kind of talked about it and in the release you talked about kind of a recovery in late Q4. I mean pre-COVID that business seems to have just been straight up. You've picked up share and a lot of the new technologies. I mean when we think about into next year does that business kind of get back to the normalized level and continue its growth trajectory? I mean what type of opportunities do you see going forward?
Well, I think there is no question that business has a very healthy future and the reason is very simple. We make detectors, X-ray detectors that have higher resolution than normal detectors and therefore you use much less X-ray to be able to project an image. Having said that that's a no-brainer that is going to take off. The issue is at what time are hospitals going to be allowing patients in for other than serious surgery or cancer treatments or other things.
We think that's going to happen next year. We even think overall in digital imaging we should have a little increase from this quarter to next quarter. I would say as much as maybe $10 million and we think for next year we probably should see of the range of about 8% to 9% increase in revenue overall in digital imaging which would be pretty good for us since it's one of our higher margin businesses.
And then just to follow up on the defense question I mean you mentioned space and unmanned and I think shallow water submersible but we're also seeing a lot of new opportunities the Navy is talking about growing it's unmanned portion. I mean what is your content or opportunity with that whether it's larger systems or smaller ones and kind of just the outlook for opportunities within unmanned.
First you mentioned the shallow water submersible of course that's for our Navy Seals and we're the sole provider of that. That program is going really well. As you move to the unmanned vehicles from a defense perspective we really have two sets of vehicles that are being used today. One of them is really a vehicle that is a glider that glides in the ocean and in front of a battleship formation they can use as many as a hundred gliders in order to sample the salinity, density of the water which of course affects sonar transmission and reception.
In that area we've had the probably the largest programs from the Navy. Another area of course is that we make medium-sized autonomous vehicles and we have an opportunity, we have sold some of those both to our military as well as overseas and we're looking at more opportunities in that area especially as a prime.
Going back to the large displacement AUVs we are going to bid on that program probably as a subcontractor to someone else but frankly if you were to come and look at the, if you were to look at the submarine and say okay what kind of vehicles are available today in the world to be able to exit be housed in a submarine and exit a submarine. The only new vehicle is ours and that's the shallow water submersible vehicle and of course coupled with our unmanned vehicles that I just mentioned and the technologies that go with it are we fairly bullish for that area.
And then just one more quick one. I think last quarter you talked about well in excess of a billion dollars in capacity to do M&A. I mean on the Photonis deal that seems to be well less than half. I mean what are you seeing in the broader M&A market whether just valuations, volume of potential opportunities, just given that you tend to be fairly conservative and prudent around M&A?
Yes. We've demonstrated both the characteristics both being very prudent but also when opportunities are afforded to us to be able to be more aggressive. I'll just mention to you that when we went through the downturn in 2008 to 2010 the financial crisis right after we came out of that we acquired two very strong companies one was [indiscernible] and the second one was DALSA. Fast forward to the crisis in 2014 to 2016 which was oil crisis for us we lost about $200 million in revenue. We improved our cash flow just like we're doing now as soon. As we came out of there we acquired e2v which was our last largest acquisition to date. It's about $780 million and that's done really well, we started with margins that of 7%-8% they're almost reaching 20% today. Now going back now to your observation and question I said before our ability we had a billion dollars or a little more than that because of our cash flow that has significantly increased today. So I think it's closer to one and a half. I think it could go as far as 2 billion depending on whether how much of an EBITDA we acquire or debt to EBITDA ratio limit is about 3.5. Today we're sitting around 1.4 and with more cash generation in the fourth quarter we should be a little better than that. So I would say 1.5 to 2 billion, 1.9 billion is the range that we're capable of doing.
Now if you take Photonis which is going to cost this at least for our best estimates closing costs, etc. is going to be about $450 million - $460 million. You subtract that out that leaves us with 1 billion to 1.4 billion - 1.5 billion additional capability. So we're looking very hard as we come out of this year.
I think people are having a difficult time and some of the boards obviously boardroom management as I said before they're always looking in the rear view mirror saying how well their stock used to be whereas shareholders are always looking at least my view of it is they're always looking forward through the front window saying where things are and what kind of an offer would be attractive. So having said all of that I think we think this is a good environment for us to make acquisitions.
Thank you.
Our next question comes from the line of Andrew Buscaglia with Berenberg Bank, please go ahead.
Good morning Andrew. Operator I don't think Andrew is on.
Okay. We will move on to the next one. Our next question comes from the line of Jim Ricchiuti with Needham and Company. Please go ahead.
Good morning Jim. For some reason operator we're not getting the people. There is something wrong at your end because I can hear you but the questions are not coming through.
Robert I think that one was on me. Robert I had my phone on mute. That's my apology. If I may Roberts you sound a lot more confident about closing on the Photonis acquisition and I wonder if maybe you could talk a little bit about what you find so attractive about this business. I think in some respects it looks a little bit reminiscent of the acquisition that you did of e2v but I wonder if you could talk a little bit about it to the extent you can.
Sure. First I'm a little more positive about it because we've had some discussions with the French investment bank and we find them to be much more business oriented than government oriented. Of course they're going to have a say in making sure that the technology doesn't move out of France but we think I feel better about it because I think we can live with that enterprise as a minority shareholder for a number of years. The second part is that that business seems to we have to get your final due diligence check that business seems to have held up pretty well during this difficult period just like our defense businesses because primarily it provides the non- [indiscernible] image intensifiers for night vision systems. Now what we bring to it is all of our digital imaging capabilities which are all complementary and not duplicative of that. That field is moving more towards digitization which we are experts in. So we think we bring substantial synergistic value to the enterprise which has been missing in the recent past because it's been owned by a private equity firm.
Therefore it didn't have sister companies to interact with. There is a small part of the business also that is has to do with commercial laboratory instrumentation and for very low light using photon multiplier; same technology used for the night vision. That's attractive to us also because we bought this scientific camera businesses which serve laboratories instruments and academic instrument across the world and we think that is really attractive to us because they bring the best mass spectrometry detectors to the field and it'd be a very nice overlap with our existing businesses that we acquired last year in that area. So those are some of the specifics about that acquisition Jim.
That's helpful Robert. I wonder if you might also may have missed it but did you give any information on orders, the book to build and maybe a little color and book to build per segments. You also I think gave a little bit of color about what you're anticipating for the digital imaging business in Q4. I wonder if there is any color you could provide on some of the other business units.
Let me start with the book to build. The book to build in Q3 is about 0.95 maybe a little more than that because our engineer systems is a very lumpy business that we get a big book to build but excluding that it's a little over 0.95. We expect next quarter to exceed one in book to build based on everything that we see so far in the quarter and we expect to end the year just below one maybe 0.98- 0.97. Now Q4 revenue which I talked about digital imaging being up somewhat, Q4 revenue should increase over to Q3 by about 4% or so or $40 million, let's say that's a little higher than 4%. That would be very attractive for us because in Q2 where we had I think about 743 in revenue I said I expected Q3 to be equal and very similar to that. It end up the revenue was about 7 million, 6 million higher and the income was about the same, the EPS even though we didn't have many one-time benefits in the third quarter.
Just to digress for a second if you take the third quarter of this year versus the third quarter of last year there is $0.29 income difference from taxes, one-time tax items and against one-time charges to benefit last year's third quarter. So if you kind of do an apples to apples which we never really do non-GAAP measures but if you do that we're only down about $0.07 -- $0.08 from last year's third quarter. So going into the fourth quarter I think if we can increase the revenue in various groups and achieve about $40 million of increasing overall revenue coupled to what is now our better margin that we're achieving our margin this quarter was 16.4% and so we think what will happen is that we will have a better earnings as well which is what Sue alluded to as we raise the midpoint of our earnings early as today.
Got it. Thank you. That's very helpful.
Our next question comes from the line of Noah Poponak with Goldman Sachs. Please go ahead.
Hi, good morning everybody.
Good morning Noah.
Robert, sort of following up there and in your prepared remarks you mentioned that you think you've seen a bottom in your cyclical businesses. Can you just elaborate on that comment? I mean, is that an exit rate versus entry rate into the quarter or order action or any more detail to help us get comfortable that's happened would be helpful.
As Al Pichelli mentioned earlier, we've seen five and six and I said it also we've seen 5% to 6% improvement in revenue in the environmental and test and measurement businesses. Our book to build in those two areas are over one about [1.02 to 1.04]. So 2% to 4% above what we sold and we think as a consequence, we think that those businesses are going to do okay going forward. We expect some marginal [sale] improvements in our total instrumentation business maybe as much as $15 million or so but more importantly I think we're seeing some act. Of course China is coming out of their downturn and doing well but we also see some new products that we're offering in the pharmaceutical area as well as water sampling area that are encouraging for us.
So in the instrumentation would be the one. In digital imaging, I think I've already spoken about it could be as high as $10 million to $15 million to maybe even $20 million in Q4 versus Q3. I think in aerospace and defense I think we're going to be fairly flat primarily because I don't think there's going to be any much movement in the aerospace domain and our defense is already pretty healthy. In the engineered system we may have some uptick in revenue but we'll have some pressure on our margins but generally we think if you add all of that up we could have about $40 million increase quarter-over-quarter because of the things that I mentioned.
Okay. That's helpful. Trying to piece together the margin commentary you've made today it kind of looks like the segment operating margin at the total company level full year 2020 is going to come in around 17% depending on exactly where the fourth quarter is and then, are the comments that you made earlier is sort of officially targeting 130 basis points of improvement in that next year and then I can't quite tell if you've provided a long-term 20% target or not but it certainly sounds like you expect more improvement beyond that. I mean are we kind of looking at something in the zone approximately of 100 basis points of segment operating margin improvement for a few years?
Yes. I hope so. Let me -- I'm going to get some looks around the table from my various segment operatives and others but let me go back for a second. If we do what we have just said we would in the fourth quarter, we should end the year with segment operating margins of about 17% which is what you noted because early in the year of course Q1 it was 15.2 and we've continuously improved. If we do that than the total company operating margin which was about 15% in the end of Q2 which is what I thought it would be should improve to about 15.2% to 15.3%.
Now going forward into next year because of the actions that we spoke about both people and procurement and a whole bunch of other 80/20 programs that we have, we expect to bump that up 130 basis points next year. Our operating margins and frankly if you put it on 17 and you put it on 15, it's the same thing because the percentage of corporate costs are fairly fixed.
Having said that and going forward I think that would moderate somewhat because we took a lot of cost out this year and we're going to enjoy the fruits of that next year but I would be disappointed if we can't continuously improve our margins somewhere between 80 to 100 basis points in the next few years.
Okay. That's helpful and then finally just wanted to ask about the cash flow statement. Is it possible to quantify or bracket the October advance payment related to OneWeb that you mentioned and then it certainly looks like you'll come in ahead of the full year $400 million of free cash flow that you had discussed previously if you're willing to provide an update to that and then the conversion to net income is pretty high for the year. CapEx is down, I guess maybe if you would just speak to -- I guess we're just assuming the conversion is 100% into perpetuity any reason not to expect that?
Let me start from the rear end of that question because that's the easier one to answer for me. Over 100% conversion yes and we anticipate that will continue because of all the programs that we have introducing managed working capital and reducing costs in general. Now going to the cash flow for the year, in Q2 I said it'd be a little over $400 million. In Q3 where we enjoyed the $135 million of free cash flow that also included $15.8 million dollars that we had to repay the government for the CARES Act.
So the 135 is a really very healthy cash flow for a company like ours. If we can continue that momentum I expect that by the end of the year we will be over 400. 425 I think that's within reach maybe a little higher than that and I expect if we can do all of that then our net debt should drop around $200 million a little north or south of $200 million which puts us in a really good position for the future in terms of acquisitions.
Very helpful. Thanks so much.
Sure.
Our next question comes from the line of Blake Gendron with Wolfe Research. Please go ahead.
Yes. Thanks for getting me back on here. Feel free to pump me from the call if there is not enough time here. I have just two quick follow-ups first on instrumentation it looks like the shorter cycle industrial recovery is starting to plane out a little bit. If environmental outperforms testing next year what would that do from a margin mix perspective and how do the three stack up really marine versus environmental versus testing?
Let me start. The marine businesses are fairly flat year-over-year and they're going to remain so for a long time primarily because we've moved more away from some of our oil and gas markets to defense markets and until the oil and gas markets even though they're okay now until they come back, we don't expect revenue increases. Having said that the marine businesses if you look at the total instrumentation business, the marine businesses however have lower margins in general even though the margins are improving significantly but they're still about 200 basis points lower than the others. Environmental is about 100 basis points above the average source a test and measurement those are very healthy businesses. So combined together it kind of flattens out but I think we'd encourage that our higher margin businesses are the ones that we're looking forward to growing.
Understood. And then one just quick one on M&A, you wouldn't rush a deal announcement obviously and Photonis is not withstanding because that's TBD but as you think about the election and maybe the tax regime in Biden administration does that maybe accelerate your M&A pipeline processes at all or do you expect valuations to kind of normalize with any change in tax? Thanks.
Boy that's a difficult one. I can only answer the following. We're not going to hurry up to do anything. Never have, never will regardless of which administration is occupying the White House. I think taxes will change up or down but I think we will buy the businesses that we're looking at the ones that we're looking at. We will buy them because they're good businesses in the long term and we can improve their margins and I wouldn't rush about it not because of the election or subsequent to the election. On the other hand I wouldn't be very slow about it either because things are going to improve next year and everybody's prices are going to go up. So this might be a good opportunity.
Understood. Thanks so much for the time.
Thank you Blake.
Our next question comes from the line of Andrew Buscaglia with Berenberg Bank. Please go ahead.
Hey guys. Can you hear me now? Had some technical difficulty.
Yes. For sure.
All right. Everything's pretty picked over but I'm curious high level within digital imaging you guys can see some pretty powerful growth in that segment. If you look back to 2017 or so you're able to grow over 20% organically there. I would think that kind of given the set up into 2021 you have, you've had a couple years of more muted growth and specifically machine vision seems to be there could be some optimism of some upside brewing there given the semis and tech cycle. I guess how are you thinking about that business? I guess in a [bull] case in order of magnitude where do you see that business going? Where the differences between this entering 2021 and 2017?
Well, I think in 2017 obviously that's the year that we also acquired e2v, so things got really bumped up that year because of the acquisition but let's say absence any acquisition. I think right now I expect us to grow our top line in the higher single digits in the overall digital imaging domain. I will only put the caveat on it that this healthcare situation has hit us pretty hard and we are expecting that we'll improve. If that were to happen I think high single digits growth in revenue for digital imaging overall should be expected and of course as you said if we make the Photonis acquisition without throwing another $150 or plus million worth of revenue and we so a business is going to grow that's for sure. The question is can we get over the healthcare hump that we're experiencing right now.
Okay. Okay and I know this piece is small but you're offshore oil and gas exposure. So it went from being very optimistic for that outlet there to pretty pessimistic I think based on what's going on in energy. Any change in your view on strategically that segment and if where you want to play in that business if it's still viable in your mind as a long-term growth opportunity for you guys?
Yes. I would say obviously there is two parts to our marine businesses. There is the offshore energy which is both production as well as exploration and then the second part is construction, science hydraulically but more importantly defense where we are a major player in making penetrators for our submarine fleet.
And then we have of course a lot of sensors program that are used whether in our autonomous vehicles or others. So I think the defense sector of that business is healthy and will remain so and probably grow in future years and if you're throwing science and construction, etc. that's really going to be almost 60% of our business going forward.
Now, the overall segment, the sub segment, the marine sub segment has revenues of about $420 million to $425 million so the rest of it is offshore oil production and exploration. Let's say about 150 million total. That is fairly stable for us primarily because there is still a 40 dollars a barrel of oil.
There is still developments going on and we are winning because we have the best products plus we have standardized products which people can buy and we think that's going to be very stable. The area that has not come back is the offshore exploration where we provide streamer cables and sensors. That used to be a pretty healthy business for us even after the downturn in the oil industry. That is kind of not been that high recently and if that comes back if they put more vessels in the water for exploration, I think that will help generally our marine business but looking forward I'd say growth in the marine business is going to be relatively benign where what we're going to do there and we've done this continuously is improve the margins. It's enjoying really good margins above the average margins of our segments right now. I hope that answers.
Yes. No, that's great detail. Thanks.
Sure.
And there are no further questions.
Alicia, I would now ask Jason and Wees to conclude our conference call. Thank you very much.
Thank you Robert and again thanks everyone for joining us this morning. Of course if you have follow-up questions please feel free to call me the number on the earnings release. Operator, Alicia if you could give the replay information on the call and then sign off for everyone. Thank you.
Thank you. Ladies and gentlemen this conference will be available for replay after 5 pm today through November 21, 2020. You may access the replay system at any time by dialing 1-866-207-1041 and entering access code 614-8591. International participants dial 402-970-0847. Those numbers again are 1-866-207-1041 and 402-970-0847 access code 614-8591. That does conclude our conference for today. Thank you for your participation and for using AT&T Conferencing service. You may now disconnect.