Ladies and gentlemen, thank you for standing by and welcome to the Teledyne first quarter earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, you can press star and then zero. As a reminder, this conference is being recorded. I'd now like to turn the call over to our host, Mr. Jason Van Wees. Please go ahead, sir.
Thanks, Brad, good morning, everyone. This is Jason Van Wees, Vice Chairman, and I'd like to welcome everyone to Teledyne's first quarter 2023 earnings release conference call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Chairman, President, and CEO, Robert Mehrabian, SVP and CFO, Sue Main, SVP, General Counsel, Chief Compliance Officer, and Secretary, Melanie Cibik, and also Edwin Roks, Executive VP of Teledyne. After remarks by Robert and Sue, we will ask your questions. Of course, though, before we get started, you know, please be aware 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 actual results may differ materially.
In order to avoid potential selective disclosure, this call is simultaneously being webcast, and a replay, both via webcast and dial-in, will be available for approximately one month. Here's Robert.
Thank you, Jason. Good morning, everyone. Thank you for joining our earnings call. We began 2023 with record first quarter sales, operating margin, non-GAAP earnings, and free cash flow. Overall, sales increased 4.7%, with revenue and operating profit growing in every segment. Excluding foreign currency headwind, which negatively impacted first quarter sales growth by approximately 1.4%, growth in local currency would have been 6.1%. Excluding acquisitions, core growth in local currency would have been approximately 4.2%. GAAP operating margin of 17.5% and non-GAAP operating margin of 21.1% were also first quarter records. First quarter GAAP earnings per share were $3.73, and non-GAAP earnings of $4.53 were also first quarter record.
Given record first quarter cash flow, our consolidated leverage ratio declined to 2.3 even after completing the ChartWorld acquisition at the beginning of the quarter. We also repaid $300 million of debt, which matured on April 3, on the first day of the second quarter. Turning to our 2023 full year outlook, we are reaffirming our prior sales and non-GAAP EPS outlook. As supply chain challenges improved modestly, we were able to exceed our original first quarter sales and earning outlook by pulling forward some revenue from the second quarter. By maintaining the full year guidance, we've also modestly derisked the quarterly sequential revenue and earnings slopes. While our short cycle businesses are more economically sensitive, they were resilient in the first quarter. We are now a little more cautious.
On the other hand, we are more positive in our longer cycle medical, aerospace, defense, and marine businesses. On revenue, specifically, we continue to see total 2023 growth of approximately 5% or sales of approximately $5.73 billion, with the second quarter being roughly $1.4 billion. Regarding margins, our earnings outlook now implies approximately 40 basis points of margin improvement for the full year 2023. Currently, we think the Instrumentation segment will be above average contributor to this, while margins in the other segments may increase more modestly. I will now further comment on the performance of our four business segments. Our Digital Imaging segment was founded on our first acquisition in 2006 of Teledyne Scientific, our research laboratories, and Imaging, which provides high-end infrared sensors for space and astronomy.
Since then, this segment has grown organically and through acquisitions such as DALSA, e2v scientific cameras, FLIR, and most recently, ETM and ChartWorld, to contribute almost 56% of Teledyne's revenue today. First quarter sales in this segment increased 4.7% on a constant currency basis, with foreign currency translation contributing negative 1.8%. Sales increased year-over-year for industrial and scientific vision systems, as well as for our low-dose, high-resolution digital X-ray detectors. Were offset by lower sales of unmanned ground systems for defense applications. Our product families increased or decreased more modestly with higher sales of surveillance, unmanned air systems, and specialty semiconductor devices, offset by some lower sales of certain commercial infrared imaging and marine product sales.
GAAP segment operating margin increased 40 basis points to 15.8%, and adjusted for a reduced intangible asset amortization, non-GAAP margin decreased 13 basis points, and it was lower at 21.75%. Turning to our Instrumentation segment, it is comprised of marine, test and measurement, and environmental instruments and contributes about 24% to Teledyne's revenue. Overall, first quarter sales increased 8% versus last year's, with sales growing in all fields noted above. Sales of marine instruments increased a healthy 14.6% in the quarter, primarily due to strong marine defense sales, especially autonomous underwater vehicles, as well as ongoing recovery in offshore energy markets. Sales of electronic test and measurement systems, which include oscilloscopes, digitizers, and protocol analyzers, collectively increased 5.3% year-over-year despite a tough comparison with the first quarter of last year.
Some softness in sales of analyzers and electronic storage and high-speed networking applications was more than offset by devices for wireless and video protocols, as well as very strong sales of oscilloscopes and related accessories. Sales of environmental instruments increased 3.4% compared with last year, with greater sales of air quality, process gas, and safety analyzers, partially offset by drug discovery and laboratory instruments. The other two segments of Teledyne are Aerospace and Defense Electronics and Engineered Systems that together contribute 20% of Teledyne's revenue. In the Aerospace and Defense Electronics segment, first quarter sales increased 4.2%, driven by growth of both defense and commercial aerospace products. GAAP and non-GAAP segment operating profit have increased approximately 9.6%, with margins 132 basis points greater than last year.
In the Engineered Systems segment, first quarter revenue increased 9.1%, and operating profit increased 6.4%, resulting in a modest 25 basis points decline in margin from last year. Finally, first, because of our unwavering focus on improving on all aspects of Teledyne's operations, and second, prudent capital allocation, and third, the broad geographic and end markets that we serve, from short cycle to long cycle, commercial to defense, I'm optimistic that Teledyne will successfully navigate through today's uncertain economic times, as we have consistently done so in the past. Our record also shows that we have successfully dealt with multiple economic turmoils, and during the ensuing recoveries, have been able to acquire complementary enterprises for compounded growth. I will now turn the call over to Sue.
Thank you, Robert. Good morning, everyone. I will first discuss some additional financials for the quarter not covered by Robert. Then I will discuss our second quarter and full year 2023 outlook. In the first quarter, cash flow from operating activities was $203 million primarily reflected higher accounts receivable collections compared with the first quarter of 2022. Free cash flow, that is cash from operating activities, less capital expenditures, was $178.6 million in the first quarter of 2023, compared with adjusted free cash flow of $58.7 million in 2022. The 2022 adjusted value excluded a $296.4 million payment to the Swedish Tax Agency related to a FLIR pre-acquisition tax reassessment.
Capital expenditures were $24.4 million in the first quarter of 2023, compared with $21 million in 2022. Depreciation and amortization expense was $82.1 million for the first quarter of 2023, compared with $86.9 million. We ended the quarter with approximately $3.16 billion of net debt. That is approximately $3.82 billion of debt, less cash of $665.2 million. Stock-based compensation expense was $7.9 million in the first quarter of 2023, compared with $9 million in 2022. Turning to our outlook.
Management currently believes that GAAP earnings per share in the second quarter of 2023 will be in the range of $3.76-$3.88 per share, with non-GAAP earnings in the range of $4.56-$4.66. For the full year 2023, our GAAP earnings per share outlook is $15.80-$16.05. On a non-GAAP basis, we are maintaining our prior outlook of $19.00-$19.20. The 2023 full year estimated tax rate, excluding discrete items, is expected to be 23%. I will now pass the call back to Robert.
Thank you, Sue. We would now like to take your questions. Brad, if you're ready to proceed with the question and answers, please go ahead.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press one and then zero on your telephone keypad. You can withdraw your question at any time by repeating the one zero command. If using a speakerphone, please pick up the handset before pressing those numbers. Once again, if you have a question, you may press one and then zero at this time. One moment here. We can first go to Jim Ricchiuti with Needham & Company. Please go ahead.
Hi. Thank you. Good morning. Robert, I'm wondering if you could talk a little bit about the shorter cycle areas of the Instrumentation business. I think you gave some color about the Digital Imaging short cycle business. If you look at Instrumentation, any changes that you're seeing in that shorter cycle business?
Not much. There's a little bit of in one of our businesses where, which is our test and measurement, we make protocol solutions, provide protocol solutions to the electronics industry. There, we have some new product protocols coming out, so people are a little waiting for the new ones and maybe not buying the old ones. Other than that, we're, the book-to-bill is almost one. Oscilloscopes are doing well, and in the TNMs we feel all right. On the environmental, the only thing that there's a little softness that we're experiencing in the pharmaceutical market, where we supply a whole range of products, there, but we're making that up by some of our air quality and other products that are doing well in this, in this environment.
Overall, I think we're doing all right, okay.
Got it. Since you were good enough to give us a book-to-bill, I, which I think it was for the entire Instrumentation business, I'm wondering if you could provide some book-to-bill color on Digital Imaging and the Aerospace & Defense and maybe the company as a whole. Thank you.
Yeah. Jim, on the Instrumentation, if you put marine in, which we didn't talk about, marine has got a book-to-bill of 1.12, so it's very healthy. Because of that, it pulls Instrumentation as a whole above one- 1.04. Going to Digital Imaging, book-to-bill is less than one, not substantially, but less than one. Primarily, I think, because of some of the ground-based defense systems that we have, which is about a little over 0.9. Having said that, we have some really large orders coming, and we've also, post quarter, had a large order for our Black Hornet, small air UAVs. When we had, right after the quarter, as an example, we had a $94 million award for those.
By the way, those are also in high demand in the Ukraine conflict. Overall, I'm encouraged with what's happening in Digital Imaging. There's been a little lag in the defense part, but that's coming up as the backlog is filling in and we have better orders this quarter, first quarter, than we did last year. On the AD&E side, I think book-to-bill is 1.05. Engineered Systems is close to one, but that's lumpy, so I think we're gonna be fine there. Overall for the company, I'd say when you add all those numbers up, it's slightly less than one, maybe 0.96, 0.97, but that's not of very great concern at this time. We're just being cautious, as we always are, because of the uncertain times that everybody's facing.
Other than that, I feel pretty good about our portfolio and its resilience.
Got it. Just final question, if I may. Just in light of that, some of the uncertainty that's out there. I think you know, you've talked about M&A. Should we still think mainly about M&A this year as more tuck-in related, and then potentially as we come out of this, there might be some opportunities for larger deals in 2024? Is that the better way to think about M&A? Again, without being specific, which I know you can't be.
No, I understand, Jim. I think that's a good analysis. There might We're obviously chasing some, what we call the string of pearls M&As. It's possible that we might end up with something more mid-size near the end of the year. Definitely with our balance sheet, we have right now, we have drawn down on our line of credit, which is about $1.15 billion. We've only drawn down $25 million, and it's sitting there. We've paid all of our debt that's coming due, and we don't have any debt payments until 2024. We have a lot of capacity for to do larger deals as the opportunity comes and, of course, we're looking at things. You're right.
Larger de-deals take time and it would probably be more like early 2024 or sometime in 2024.
Got it. Thanks very much.
Thanks, Jim.
Next, we can go to Greg Konrad with Jefferies. Please go ahead.
Good morning.
Good morning, Greg.
Maybe just, you know, to revisit Digital Imaging. Is there any way to kind of decompose the organic growth, just given your short cycle commentary, you know, when you think about healthcare, machine vision, space and maybe the legacy FLIR business, just kind of what trends you're seeing and, you know, you mentioned being more cautious on short cycle? Like, how are you thinking about Digital Imaging for the year?
Well, first, let's start with Q1. let's also do what you suggested, which is stay with first, what we would call our historical Digital Imaging, which is DALSA, e2v and associated companies. There, we had a healthy organic growth in Q1 of 6.2%. healthcare grew 9.2%, and MEMS grew 8.8%. Overall, we're very happy with that. you know, some of those like smaller cycle vision systems had a healthy growth rate there. On the FLIR side of the equation, which would be the newer Digital Imaging, we had both positives and negatives. Overall, we had a contraction of about 4.8%, but that was primarily driven by our unmanned systems and primarily in the unmanned ground vehicle systems.
As I said, after the quarter, we've had some very healthy awards in our UAVs, which are unmanned air vehicles. Surveillance declined. It was +5%. Tomography was down a little bit, a little under 4%. Uncooled and cooled cores, which are our infrared cores, they were up 3%. Industrial vision system was up almost 19, over 19%. It was a mixed bag. The drag down for that business was primarily in the defense and primarily on ground unmanned ground systems. Now, we had a little softness in tomography and maritime, which is our marine Raymarine businesses. Overall, I think we were okay. We just have to fill out the backlog for our unmanned vehicles, ground vehicles, and we'll be fine.
This might just be modeling on my part, I mean, margin seemed a little light in Digital Imaging in the quarter. Can you maybe talk about price mix going forward and how you're expecting, you know, margins to trend for the year, given your commentary? I think you still expect them to be up just to a lesser degree than the total 40 for the company.
Well, right now, what I said, I expect the margins to be up about 30 basis points for the year. Let's start with the year. This is the overall Digital Imaging margin. So that we put that on one side. I think in Q2, we'll improve sequentially on our margins, and we should be fine. We're also gonna take some price actions to make sure that we get there. On the overall for the company, we think the margins now would increase, 40 basis points for the year. If we can have better price increases going forward, we should improve on that. You know, when I look at it, I say, 'Look, if we're not instruments businesses, we're gonna have margin improvement for the year of almost 80 basis points.' Digital Imaging about 30 basis points.
Aerospace and Defense is so healthy that I'll be happy to just keep our 27.1% operating margin. Engineered Systems, we'll probably increase it 50 basis points and overall the segments 40 basis points and the company about 40 basis points. I hope that helps you.
that was perfect. I'll leave it at two. Thank you.
Thank you.
Next we have Elizabeth Grenfell with Bank of America. Please go ahead.
Hi, good morning.
Morning again.
Could you give us some color on defense on a consolidated basis for the quarter? What your expectations are for defense growth, on a consolidated basis for the year? Thank you.
Yeah. Sure. I think, overall, in Q1, defense was flat year-over-year. We think for the year it'll be probably low to mid-single-digit growth in our defense businesses. The primary reason, again, I'm saying the U.S. government, programs were flat, primarily driven, as I said, but the ground vehicles, unmanned ground vehicles. We think for the year, we're probably growing the mid-single-digits into all defense.
Great. Thank you very much.
For sure. Absolutely.
Next we can go to Joe Giordano with TD Cowen. Please go ahead.
Hey, good morning, guys.
Good morning, Joe.
You talked about pulling forward some revenue from 2Q into 1Q. Can you give some detail there as to like where it was and what that means for that business from here?
I think, basically we pulled in about $10 million. Most of that was in instruments, and most of that was in our marine businesses. We ship more underwater vehicles in Q1 than we'd anticipated. We had some really good orders. We actually have good orders for Q2 also. That was just to ensure that, you know, we hit what we expected to. Also, as I said, that was affected by the fact that we're having improvements in our supply chain. We're seeing improvement, significant improvement, and expect that to continue the rest of the year based on what we're seeing and based on what the chief of our procurement is doing with various companies. That's why we pulled it forward. We felt we could and did.
No, that, that makes sense. Now, when I think about the full year guide, I mean, you come in, you know, basically at the high end of your guide here, you're guiding the second quarter high end is basically in line with consensus. You guys tend to beat, you're holding the full year understanding that the macro is uncertain. Like, are you trying to give the impression that the second half is weaker than you thought three months ago? Are you kinda like de-risking that full year guide? Like, how should we think about the, you know, what the read between the lines there?
Between the lines, I don't think it's gonna be weaker except if something terrible happens. It's, I feel good about, l ook, as you know, we're always more conservative. I can go out and say we're gonna make a lot more in our earnings per share, and we probably could. On the other hand, with the uncertain environment that we're facing with semiconductors being down, everybody's projecting semiconductors will recover in 2024, not this year, both equipment and supply. With obviously we serve those markets. I'm being cautious, as we always are. But I don't think the second, right now I don't think the second half is gonna be weaker. I think it's gonna be actually stronger.
If you look at earnings per share, they have to improve in the second half of the year for us to make the $19.10 that we projected, or $19.20, if you wanna take the high end.
Yeah. Okay. two more quick ones for me. You started off the year, free cash flow is pretty high. Like, what are your expectations for the year now? Does that go up, higher than what you thought before? Just curious on the supply chain improvement and the lack of having to pay as much gray market, like, how much benefit is that? Of that 40 basis points, like, how much are you getting from there? And where is it getting offset from in other elements of cost? Thank you.
Let me start with the free cash flow. We're gonna beat last year's free cash flow by a couple of hundred million dollars. Let's just say $850 is our current estimate. I hope we can do better than that. We have just continued deleveraging the company, gets ready for the, when all of this is, uncertainty is behind us and use our capability and ability to buy things that have not perhaps done as well in this environment. Coming back to the supply chain, we've seen improvement in Q1. Last year in Q1, our brokerage, we bought about $23 million of goods from brokerage. Those we pay 70% premium, let's say.
This year, first quarter, the same type of thing cost us about half as much as that. That's a savings, obviously. More importantly, if you look at revenue that's being affected by the shortages, that is improving, which is much more comforting to me because it makes our revenue projections a little more predictable because we're not missing a lot of revenue because we don't have parts. There's improvements in the supply chain. We're seeing that. There's improvements in the premium that we're paying, and also the fact that we're not gonna miss as much revenue because we can't ship products because they're sitting on the shelf waiting for one or two parts. That's it.
Thanks very much.
For sure.
Next, we've got Guy Hardwick with Credit Suisse. Please go ahead.
hi, good morning.
Good morning, Guy.
Good morning, all. I think the previous guidance for, at group level, was a 50 basis points improvement in the adjusted margin. You're now guiding to 40. What are the kind of the main parts of the change, and is it biased towards Digital Imaging?
Actually, what we have is a mixture. January, you're perfectly correct. We guided 50 basis points, and now we're guiding 40 basis points. We're taking some guidance down in Instrumentation from January to today. We had over 100 basis points. We're closer to 80. Digital Imaging, we're taking down about 10 basis points all in. Aerospace and Defense, we're actually guiding flat, and we had it going down. That's good. In Engineered Systems, we have a moderate up. It's a smaller business, but we still have a moderate 45 basis points or so up. Overall, I think we'll be at 40.
Again, we hope to do better than that, and the way to do better than that is if we can stick some more price increases in our portfolio because inflation is moderating. Nevertheless, our wages are going up 4.5%- 5%. Our purchasing of direct and indirect goods is going up with inflation. So we have to catch up a little more with price increases to make up for those in order to keep our, be able to increase our margins. That, that's the kinda uncertain part. How much can we gain from price increases? First quarter, we were okay. We made up what we paid out. We're a little positive actually.
The rest of the year, can we keep that pace of reasonable price increases to make up for inflation in both goods as well as wages?
Is the intention to be price cost neutral or do a little bit better than that?
I'd like to do better than that.
Okay.
I'd like to do better than that.
And in terms of-
For sure.
Okay.
Last year, we.
Great
N egative by 60 basis points. This year, I hope to be positive.
Just to follow up on the broker purchase, I believe that you said that it was $70 million incremental last year. What does your guidance imply in terms of lowering that $70 million in 2023?
It's hard to tell at this point, but if I were to take the first quarter and project it out, I'd say half.
potentially
if you take the
$30 million-$40 million lower.
Yeah, 35.
$35 million lower broker purchases?
Yeah, yeah.
Broker, okay.
Approximately.
Got it.
That's a moving target too. So far, we've been successful. As the semiconductor industry's gone down, as you can expect, the parts that were in shortage, some of them have become available. Some of them are the harder parts to get, the FPGAs, et cetera, are still harder to get. It's a mixture. Things are improving, which makes me feel positive.
Okay, just one final one for me. Is there any sort of mix effect, either positive or negative, in Digital Imaging in terms of the margin?
Oh, no, I don't believe so.
Okay. Thank you.
For sure.
If you have any further questions, please press one zero at this time. We'll go now to Kristine Liwag with Morgan Stanley.
Hey, good morning, everyone.
Morning, Kristine.
Robert, on the supply chain, just wanna follow up on the premiums paid to brokers for component sourcing. You've talked about how that's declined. Is that because traditional sources have reopened and therefore you're now sourcing less parts from these brokers? Are you seeing more availability of parts and there's not as much of a scarcity and therefore their premiums have declined? Can you provide more color on what's driving the dynamic there?
Yeah. The big picture is that we're able to buy more from the OEMs than from brokers. We'd obviously prefer to buy from OEMs because the prices are stable. There might be price increases versus last year. Brokers, you end up paying premiums of 70% to them. That's the big picture. The availability is improving. It's very interesting, just anecdotally, there have been a few brokers that have called us, asking us if we want some of their parts. Last year, we were out there begging for parts. Obviously if that were to happen, I look at that as they have some obsolete or some excess supply, and we'll buy them, but we'll buy them at a discount to what we pay to the OEM. The market's improving. I like that.
Great. You mentioned that you anticipate that you can pass on, you know, whatever inflation costs that you have into pricing, so that should be a net positive for you. Can you talk about the demand environment? What's been the customer sensitivity to pricing? Right now, if you look at the financial markets, we've had two regional bank failures, last month, and there's more uncertainty today. Is that macro environment affecting your customers', decision for capital purchases or to have some sort of a pricing sensitivity?
Yes. The answer to it is yes. On the other hand, because we're in such a diverse market, if you look at some of our longer cycle businesses, as I mentioned, like marine, we're energy dependent, some of our defense businesses, others, they're not as price sensitive, to what's happening in the financial market. Some of our shorter cycle businesses, yes. We have to be careful that we don't increase prices and lose to the competition, lose market share to the competition. In some areas like healthcare, where we make X-ray panels that are very high resolution or very low dosage, there we have pricing power. It's a mixture. Overall, when I say uncertainty about the economic uncertainty, I'm speaking exactly to what you pointed out.
Some of the uncertainty in the financial market that's seeping out into other markets as well.
Great. Thank you for the color. If I could sneak a last one in. When you look at your overall portfolio, what % of it would you say, you have more pricing power versus what % would have more pricing sensitivity?
I think about 40% of our portfolio, we have more pricing power, and 60% is more sensitive. Because the 60%, in some ways, it depends on the global macro environment. As you may know, the way our portfolio's evolved today, we sell about 22% to the government, 28% U.S. commercial, and 50% commercial and defense outside the U.S. The macro, global macro environment is what we're more sensitive to, and 40% not so.
Great. Thank you very much.
For sure.
Currently, we have no further questions in queue.
Thank you, Brad. I appreciate that. I'll now ask Jason to conclude our conference call.
Thanks, Robert, thanks everyone for joining us this morning. Of course, if you have follow-up questions, please feel free to call me at the number on the earnings release or email me for those who have my contact information. Brad, if you could give the replay information, we would greatly appreciate it. Thank you.
Certainly. Thank you. Ladies and gentlemen, the conference will be available for replay after 10 o'clock today and running through May 26th at midnight. You can access the AT&T replay system at any time by dialing 1-866-207-1041 and entering the access code 898-9973. International parties may dial 402-970-0847. Those numbers again 1-866-207-1041. International parties, 402-970-0847 with the access code 898-9973. That does conclude our call for the day. Thanks for your participation and for using AT&T Teleconference. You may now disconnect.