Teledyne Technologies Incorporated (NYSE:TDY) Q4 2023 Earnings Call Transcript

Teledyne Technologies Incorporated (NYSE:TDY) Q4 2023 Earnings Call Transcript January 24, 2024

Teledyne Technologies Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, good morning, thank you for standing by. Welcome to the Teledyne Fourth Quarter Earnings Call. [Operator Instructions]. As a reminder, today’s conference is being recorded. At this time, it’s my pleasure to turn the conference over to our host, Mr. Jason VanWees. Please go ahead.

Jason VanWees : Thanks, Tom, and thanks, everyone. This is Jason VanWees, Vice Chairman. I would like to welcome everyone to Teledyne’s Fourth Quarter and full year 2013 (sic) [2023] earnings release conference call. We released our earnings earlier this morning. Joining me today are Teledyne’s Executive Chairman, Robert Mehrabian and our new but familiar management team, CEO, Edwin Roks, President and COO, George Bobb, Senior Vice President and CFO, Steve Blackwood, and also Melanie Cibik, EVP and General Counsel, Chief Compliance Officer and Secretary. After remarks by Robert, Edwin, George and Steve, we will ask for your questions. Of course, so before we get started, Tony’s 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 1 month. Here is Robert.

Robert Mehrabian : Thank you, Jason, and good morning, and thank you for joining our earnings call. In the fourth quarter, we achieved all-time record sales and GAAP and non-GAAP earnings per share. Sales increased primarily due to the performance of our Marine medical and aerospace businesses, which were more than able to compensate for the previously announced headwind in the industrial automation and laboratory instrumentation market. Furthermore, Overall, record orders exceeded sales in every business segment but were particularly strong in our Marine and Defense businesses. Leverage declined further to 1.9% and our balance sheet remains healthy. Finally, we continue to acquire complementary businesses, as shown by the acquisition of Zeno Networks in the fourth quarter.

Compared with last year, fourth quarter and full year non-GAAP operating margin increased 27 and 57 basis points, respectively. Our broad-based strength in orders was encouraging, especially in the uncertain global macro environment today. Nevertheless, it’s worth noting that most of the increase in orders was in our backlog-driven longer-cycle businesses. So converting the orders to sales will take a little time. In terms of 2024 outlook, we, therefore, think the quarterly sales and earnings ramp will be a bit greater than in recent years. So while we see annual 2024 sales growth of about 4%, we believe that typically seasonally low first quarter will be slightly under $1.4 billion or roughly flat with last year. I will now turn the call over to Edwin and George, who will further comment on the performance of our 4 business segments.

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Q&A Session

Edwin Roks : Thank you, Robert. This is Edwin and I will report on the Digital Imaging segment, which is 56% 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 application ranging from factory condition monitoring and maritime navigation. Fourth quarter 2023 sales was slightly lower compared to last year. Double-digit sales growth in each of X-ray products, FLIR surveillance systems and space-based infrared imaging detectors offset a significant year-over-year decline in sales of industrial imaging systems and Micro Electro Mechanical Systems, or MEMS.

Fourth quarter sales of unmanned systems were at the greatest level in 2023 and but declined year-over-year due to a tough comparison. For the second quarter in a row, the FLIR business collective fleet were positive contributors to overall segment margin. In addition, FLIR quarterly sales increased year-over-year and were at the highest level in the last 2 years. George will now report on the other 3 segments, which will represent the remaining 44% of Teledyne.

George Bobb : Thanks, Evan. The instrumentation segment consists of our Marine, test and measurement and environmental businesses, which contributed a little over 23% of sales. For the total segment, overall fourth quarter sales increased 2.8% versus last year. Sales of marine instruments increased 14.7% in the quarter, primarily due to strong offshore energy sales, but also continued growth in global defense and ocean science markets. Sales of electronic test and measurement systems, which include oscilloscopes, digitizers and protocol analyzers were flat year-over-year. We continue to see some softness in sales of analyzers for electronic storage and data center applications. But this was largely offset by continued strong sales of oscilloscopes and a small amount of incremental sales from the Zeno acquisition.

Sales of environmental instruments decreased 7.3% and with greater sales of air quality and gas and flame safety analyzers more than offset by lower sales of drug discovery and laboratory instruments. Overall, Instrumentation segment operating profit increased over 14% in the fourth quarter, with GAAP operating margin increasing 284 basis points to 27.1%, and 278 basis points on a non-GAAP basis to 28.1%, both all-time records for the segments. In the Aerospace and Defense Electronics segment, which represents 13% of Teledyne sales, Fourth quarter sales increased 3.4%, primarily driven by growth of commercial aerospace products. GAAP and non-GAAP segment operating profit decreased approximately 5% year-over-year primarily due to a tough comparison with last year’s all-time record segment margin.

For the Engineered Systems segment, which contributes 8% to overall sales, fourth quarter revenue decreased 3.8%. But operating profit increased with margin up 325 basis points. I will now pass the call back to Robert.

Robert Mehrabian : Thank you, George. In conclusion, we were pleased with our record performance in 2023. In the near term, we will continue to focus on growth in those businesses with favorable markets while cutting costs and protecting margins in businesses which are more challenged. And at the same time, we’ll be acquiring and integrating complementary businesses. When certain markets like laboratory instrumentation, industrial automation or electronic test measurement recover, we will keep our cost structure in check and benefit handsomely. But if there are global or macroeconomic shocks in 2024, we will do what we’ve done in the past, execute well, generate record cash flow and complete some of our base and potentially larger acquisitions. I will now turn the call over to Steve.

Steve Blackwood : 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 first quarter and full year 2024 outlook. In the fourth quarter, cash flow from operating activities was $164.4 million compared with $237.7 million in 2022. Free cash flow, that is cash from operating activities less capital expenditures was $124.2 million in the fourth quarter of 2023 compared with $203.6 million in 2022. Cash flow declined in the fourth quarter since we made $139 million of additional tax payments, which we were allowed to defer from the second and third quarter of 2023, due to IRS disaster relief. Without these catch-up tax payments, quarterly cash flow have been at an all-time record.

Capital expenditures were $40.2 million in the fourth quarter of 2023 and compared with $34.1 million in 2022. Depreciation and amortization expense was $77.4 million for the fourth quarter of 2023, compared with $81.8 million in 2022. We ended the quarter with approximately $2.60 billion of net debt. That is approximately $3.24 billion of debt less cash of $48.3 million. Now turning to our outlook. Management currently believes that GAAP earnings per share in the first quarter of 2024 and will be in the range of $3.73 to $3.86 with non-GAAP earnings in the range of $4.55 to $4.65 per share. And for the full year of 2024, our GAAP earnings per share outlook is $17.15 to $17.53. And on a non-GAAP basis, $20.35 to $20.68. The 2024 full year estimated tax rate, excluding discrete items, is expected to be 22.5%.

I will now pass the call back to Robert.

Robert Mehrabian : Thank you, Steve. We would now like to take your questions. Tom, if you’re ready to proceed with the questions and answers, please go ahead.

Operator: [Operator Instructions] We’ll begin today with a question from Jim Ricchiuti representing Needham & Company.