Teledyne Technologies Incorporated — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
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.
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.
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.
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.
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].
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.
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.
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]
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.
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 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.
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.
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.
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.
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.
[Operator Instructions]
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.
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.
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.
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.
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.