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 have a question and answer session. Instructions will be given at that time. As a reminder, today's call is being recorded.
Now to the conference from your host, Jason Van Wees. Please go ahead.
Good morning. Thank you, everyone. This is Jason Van Ruiz, Executive Vice President, and I'd like to welcome folks to our Q1 2021 Earnings Release Conference Call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Executive Chairman, Robert Marabian President and CEO, Al Pacielli Senior Vice President and CFO, Sumain And SVP, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibic.
After remarks by Robert, Al and Sue, Of course, so before we get started, our attorneys have reminded me to tell you that all forward looking statements made this morning are subject to various Here is Robert.
Thank you, Jason, and good morning, and thank you for joining our earnings call. We began 2021 with the best first quarter sales, earnings, operating margin and cash flow in the company's Furthermore, we achieved these GAAP results despite incurring $39,000,000 or $0.79 per share of expenses related to the pending acquisition of FLIR. Excluding these non recurring charges, Earnings increased 39.2% compared to last year. Operating margin Increased 4 26 basis points and free cash flow nearly doubled. In addition, I'm very pleased with the breadth of our financial performance across Teledyne.
Year over year sales increased in nearly every major business category, except commercial aerospace, which is now only 4% of our total sales. The recovery in our short cycle commercial business is unfolding nicely and our government businesses are also growing and performing well, in both cases, strongest within our Digital Imaging segment. Also in the Q1, we received all time record orders with a book to bill of 1.15x, resulting in quarter end backlog of approximately $1,800,000,000 Given our strong Q1, we now think a reasonable outlook for the total company organic Sales growth in 2021 is approximately 6%, led by forecasted growth of about 10% In digital imaging, excluding FLIR. And now with respect to the FLIR acquisition, Over the last few months, while transaction certainty progressively increased, Teledyne performed in person visits covering 90% of all FLIR owned sites, several on multiple occasions. Most importantly, we were also granted access to the operating management in all key functional areas.
To summarize, Clear's people, products, technology and manufacturing are outstanding. I am now even more excited about the prospect for Flare as part of the Teledyne family. Regarding timing, our respective stockholder votes are scheduled for Thursday, May 13. And pending approval, we expect to close early the following morning. Assuming closing occurs as planned, we expect to update our outlook in the July earnings release and include FLIR.
We remain confident of immediate pre tax annual synergies greater than $40,000,000 And we continue to expect EPS accretion even on a GAAP basis In 2022, with EPS accretion, excluding amortization being substantially greater. Al will now comment on the performance of our 4 business segments. Al?
Thank you, Robert. In our Instrumentation segment, overall, 1st quarter sales increased 0.5% versus last year. Sales of environmental instruments increased 5% from last year. Sales of most product categories increased with the Strongest year over year organic growth resulting from the gas and plane detection products acquired in 2019. Sales of our electronic test and measurement systems increased 4.8% year over year.
Sales of marine instrumentation decreased 6.7% in the quarter. However, operating profit increased due to aggressive cost management and business simplification and standardization initiatives. Overall, Instrument segment operating margin increased 291 basis points to 20.7%. Turning to Digital Imaging segment. 1st quarter sales increased 6.7%.
GAAP segment operating margin was 19.7%, an increase of 200 basis points year over year. Now turning to the Aerospace and Defense Electronics segment. 1st quarter sales declined 3.3% as greater defense sales were more than offset by a 28.5% decline in sales of commercial aerospace products. GAAP segment operating margin Increased over 1,000 basis points to 18.7% versus 8.6% in 2020. In the Engineered Systems segment, 1st quarter revenue increased 8.5%, primarily due to greater sales from defense and other manufacturing programs as well as electronic manufacturing services products.
Segment operating margin increased 242 basis points when compared with last year. I will now turn the call to Sue, who will offer some additional commentary regarding the Q2 and our full year 2021 outlook.
Thank you all, Alan. 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 Q2 and full year 2021 outlook. In the Q1, cash flow from Operating activities was $124,900,000 compared with cash flow of $76,400,000 for the same period of 2020. Record 1st quarter free cash flow, that is cash from operating activities less capital expenditures, was $107,300,000 in the Q1 of 2021 compared with $56,200,000 in 2020.
Excluding after tax cash payments related to the FLIR transaction, 1st quarter free cash flow was $110,100,000 Capital expenditures were $17,600,000 in the Q1 compared to $20,200,000 for the same period of 20 Depreciation and amortization expense was $29,300,000 for both the 1st quarters of 2021 2020. We ended the quarter with $9,100,000 of net debt. That is approximately $3,240,000,000 of debt less Cash of approximately $3,230,000,000 The prior cash and debt balances at April 4, 2021, including the proceeds of debt incurred to fund the cash portion of the consideration for the FLIR test acquisition. Stock option compensation expense was $4,200,000 for the Q1 of 2021 compared to $7,400,000 for the same period of 2020. Turning to our outlook, management currently believes that earnings per share in the Q2 of 2021 We'll be in the range of $2.85 to $2.95 per share and for the full year 2021, Our earnings per share outlook is $12 to $12.20 In each case, these do not reflect the The 2021 full year estimated tax rate excluding discrete items is expected to be 22.6%.
In addition, we currently expect less discrete tax items in 2021 compared with 2020. I will now pass the call back to Robert.
Thank you, Sue. We would now like to take your questions. Sean, if you're ready to proceed with the questions and answers, please go ahead.
Thank You may remove yourself from queue at any time by pressing 1,000,000 again. Our first question is going to come from the line of Ken sorry, Greg Konrad from Jefferies. Please go ahead.
Good morning.
Good morning, Greg.
Maybe just to start on margins before I get to FLIR. That you laid out last quarter. Can you maybe just update us on your thoughts on organic margins for the year?
Yes. Greg, the instrumentation, When we started the year, because it's primarily a short cycle business, we were not sure about commerce revenue and therefore margins we would have. So we projected margin improvement of about 10 basis points. We think the margins are now going to be closer to 140 basis points for the year, which is an increase of about 130 basis points. Moving to the second one, which is Engineered Systems that you mentioned.
We had a very strong Q1, primarily because we shipped all of our Turbine engines that were due to finish that production cycle In the Q1, so our margins were a healthy over 14.2%. We were initially projecting margins For the year of about 15 basis point improvement, currently because primarily of the first quarter, We think overall margins for this segment would increase to about 180 basis points With the rest of the year moderating closer to the 12% to 12.2% that this business has normally experienced, I think those were the two areas that you asked about.
That's helpful. And then you mentioned that You guys have visited over 90% of the FLIR sites. I mean, any update When we think about synergies or maybe some of the potential longer term revenue synergies, just anything surprising as You continue the diligence into the
close. Well, I think the most important thing that we found out in our visits Where the quality of the operations and the people, we really haven't focused yet on Revenue synergies, well, we've looked at synergies in the operating area, primarily By using some of the methodologies, Greg, that we've used in our own operations, such as procurement Savings, which have been substantial for us last year and are supposed to be same this year as well as Some of the cost reductions that we mentioned earlier, visavis The $40,000,000 of cost savings that we expect to enjoy in the 1st year and growing to $80,000,000 over time. So those would be the synergies that at this time. In terms of revenue synergies, We haven't really looked at that very closely. And frankly, we operate in different markets.
The things that we can obviously look at very quickly would be how do we jointly go to market in areas where we have complementary products.
And then just last one. I mean, I remember back to E2V, You gave us adjusted numbers because there were large expenses and you kind of did that this quarter and I'm assuming that will continue going forward. But Any updated thoughts on even if it's not the presented number, at least presenting ex amortization, just given that's probably going to Fairly accretive as you get into the next year?
Yes. I think the EPS accretion, assume in E-2B was substantial, partially because there we really improved margins. For FLIR, on the other hand, If we exclude intangibles, which as you said, would be substantial and the one time cost that we will, We think that in 2022, we should have EPS accretion of about 20% or more. Of course, again, excluding the intangibles, which is substantial. The reason for that is 2 fold.
1 is Savings, what I mentioned. The other is, even in last year's revenue and earnings That they had in 2020, their margins operating margins after all of those one time costs on a GAAP basis We're 16.5%, which to us is a very healthy margin. As you know, we this quarter, we've been up to 17.5 percent, but 16.5 percent is very good. And if we can improve that, then obviously, We'll get substantial accretion ex intangibles.
Thank you.
Thank you, Greg.
Thank you. And then next, we're going to go to the line of Blake Gendron from Wolfe Research. Please go ahead.
Yes. Thanks for the time this morning. Just wanted to follow-up on Synergy question, maybe not so much focus on cost or revenue, but working capital here in terms of supply In overlap, is there any way we can think about maybe free cash conversion on a standalone basis versus incremental synergies there When you combine the 2 entities?
Yes.
I think, again, we got To do this properly, Blake, I have to exclude the one time charges because we while we have some handle on our charges At this time, for the rest of the year, we don't have a really good handle on what FLIR's charges would be. The one area, I think the conversion overall was It's going to be better than 100%. Having said that, in inventory buildup At FLIR, from what we saw in 2019 2020 was substantial and partially because of the Elevated skin temperature programs that they enjoyed, so they have a significant inventory buildup In that and some other areas that we have to look at very carefully, and we may have to write those up. We may have to write those down, but we'll see as we get to it. But overall, our projections are that We ourselves should have free cash flow that surpasses slightly Surpasses last year and last year was a record year for us at 5.40 $7,000,000 for $445,000,000 So if we can exceed that ourselves and do well with the free cash flow, That's very important, Blake, because we intend to pay down our debt as fast as we possibly can over the next 2 years.
That's really helpful color. I want to switch gears to digital imaging. You called out strength in some of the short cycle markets, specifically industrial, scientific and geospatial. Does that include healthcare? Because we're seeing hospital volumes improve.
So I'm wondering If that could be an incremental tailwind as we move forward here in the vaccine rollout and normalization? And then Very small exposure to commercial aero in digital imaging, but wondering how you expect that to evolve over the medium to longer term?
Let me start with the Healthcare. Healthcare, year over year, 2019 to 2020, we had about a 13.7% Decrease in revenue from $255,000,000 to $220,000,000 This year, we're starting to see some improvements, And we anticipate that between our CMOS X-ray Panels As well as some of the equipment that we supply for X-ray sources, We will have an increase of about 9% over last year to approximately $240,000,000 So That kind of speaks to what you just said. The recovery is a little slower than we anticipated, but it is there. We're getting some really good orders in that domain. More in the flat panel displays with the X-ray sources kind of lagging a little bit, but still coming up.
Going back to the question vis a vis regular The commercial systems commercial aero in digital imaging, first, it's small. 2nd, it's not that dependent on airline traffic. It's different than anything else. It's primarily in space domain, and we have not seen any deterioration there. And actually, we think that on our aerospace and defense in the digital imaging domain, We think we'll see about a 7% improvement in revenue this year from $270,000,000 last year to maybe $290,000,000 this year.
So The only area of aerospace that we've taken some punishment is in the Aerospace Business is in Teledyne's normal defense and aerospace domain.
Makes sense. Really appreciate the time. Thanks for the answers.
Sure, Nick.
Thank you. Then next, we'll go to the line of Jim Ricchiuti from Needham and Company. Please go ahead.
Hi, good morning. Just a couple of questions. Just you alluded to the fact that you've seen a little bit of stronger margin profile in parts of the instrumentation business. I'm just wondering, as you look out into The second half of the year, where do you see the most opportunity for margin expansion in the different business units? Sounds like you're with healthcare coming on, digital imaging margins look better?
Yes. If you go to instrumentation, we did have some significant improvements in margin And environmental and test and measurement in the 1st quarter and we expect those to continue for the rest of the year. We also had some improvement And margin in the marine businesses, even though revenue, as Al mentioned, was down somewhat, we think The revenue will catch up the rest of the year and as that does, the margins there will improve So we think overall instrumentation, we have the best margins in environmental area, about 23%. 2nd best margins in our Test and Measurements over 21% and Marine is approaching 19 Over 19% when you roll it all up, we're going to get close to 20.9% in instrumentation. I think that's going to be healthy for us, especially if marine as we expect because of the oil prices Going up to about 65% currency.
If that improves, then I think that segment It's going to do really well. That's why I said our outlook for the margins has improved 130 basis points since January of this year.
Got it. And Robert, with all of the well publicized reports about Component constraints, Janelle, maybe you want
to respond to this.
Are you guys seeing any disruption in the business from this? Are you able to manage the supply chain well enough?
Both. First, obviously, We're seeing constraints, Jim. There's no question about that. Both in the electronics Matera components as well as in printed circuit boards, It's affecting a lot of our businesses. But having said that, we have even though we do have Very tight control of our inventory.
We have approved buying some of the critical components ahead of time. And the other thing is because of our collaborative and across Teledyne effort In procurement, we're able now to approach our suppliers as 1 fairly large customer, Get their forecasts in terms of their timelines for delivering product and putting orders ahead of time. Having said all of that, we're managing it, but We also are getting products from foundries, for example, that Come to our wafers that we get. In that case, we're fortunate because the guys who supply us wafers or also our customers. So in some areas, we think we're going to be okay.
In other areas, I'm very cautious, be optimistic. But This thing can really spin out of control and then we'll have to deal with it again.
Yes. Okay. Last question. Thank you for that. And last question, just with your nice bookings number for the quarter and backlog.
And I'm just wondering, as we think about The way you're characterizing the business and the acceleration in growth that It seems to be suggested in the recent filings looking out to next year. Where do you See the potential for accelerating growth in which areas of the business. I assume some of the businesses that have been weaker that recover, But I'm just wondering if there's anything else you can call out?
I think our primary area is digital imaging. For me to say Digital Imaging is going to grow organically 10% year over year, I don't know if I've ever done something like that. So I feel pretty bullish to kind of predict that. I think we'll end the year with the book 1,080,000,000,000 maybe $110,000,000 So that's our first area. I think in the instrumentation area, we're right now just over 1, But a lot of that is short cycle businesses.
If marine comes back as we expect and the other areas come back as we expect, We think especially in Test and Measurement, we could have as much as 8% growth in environment of 6%, 6 point 5 percent and if marine comes back, that would be another 2%. So overall, I think instrumentation Should give us about 5.3%, 5.2% for the year. For us, that's again very good because those are the Highest margin businesses. Engineered Systems, I think, would be fairly flat year over year. We don't expect aerospace to really come Back that much this year.
It's probably a 2 year cycle, but our defense businesses are doing okay. So I anticipate in aerospace and defense combined to enjoy a 4% margin 4% revenue improvement this year. Roll all of that together and you're going to end up with about 6% for the company, which would be one of our healthier Organic growth rates in revenue in the recent past.
Okay. That's very helpful. Thank you.
Thank you, Chip.
And then next, we're going to go to the line of Joel Gordano from Cowen. Please go ahead.
Hi, everyone. Good morning. Good morning, Joe. Yes. I just wanted
to talk about semiconductor and test and measurement and how you're thinking about the sustainability of strength there given some
of the plans from some of
the large I know you're on the more on the R and D side, but just curious for your color there.
Well, Test and Measurement, Let me start there. We're really enjoying a good year in Test and Measurement, primarily because of being able to put out new products continuously. We have 2 as you know, we have 2 areas that we focus on there. One of them is oscilloscopes and the other is protocols, which are the rules that We continue to put new products on. Like last week alone, We announced 3 products in oscilloscope and protocol.
But more importantly, what our guys have been able to do is Marry those two businesses, those two products together, so now people can do protocol Development and analysis using the oscilloscopes as real time Observation of the signals, and that is that's going to be very good for that area. You also asked me about semi. In digital imaging, it's primarily where we focus on the semi market. And there is mask and wafer inspection. That's been a really good market for us.
If I look at our growth in Vision Systems, which includes flat panel displays as well as semi inspection. We anticipate that Year over year is to be about 12% to 13% revenue growth. So that kind of speaks for that. And then lastly, I would point out one example of why digital imaging and relevant semiconductor markets are doing so well for us. We do have a product That comes off our MEMS Foundry in Canada.
These are telecoms, which are very thin, 1 tenth of a human hair thickness, but 6 inches to 8 inches in diameter Consumable products that are used in extreme UV lithography for very fine Semiconductors, they essentially are screens that protect the wafers below them. And in that area, we've really done well and have Not captured that market and we have a wonderful customer there. So overall, to answer your question, test and measurement, I talked about. And in the semi, the products that we supply to them are doing pretty well.
And just a follow-up on one of the other questions asked already about Your ability to source components and the scarcity going on, how do you get comfortable With FLIR's ability to do that historically and now that you're taking over there, like your ability to be able to source that much Additional that you'd need to cover their operations as well as smoothly as you've covered your own?
The answer is, Jim, I don't know yet. But having said that, we are because as I mentioned, they do have substantial inventory and we have to obviously dig into that to see what areas it's in. I think that would be Right now, an area that we'll have to bring our procurement to it. On the other hand, FLIR also gets wafers and they also make a lot of their own sensors, both on the cooled and the uncooled side. So as long as we can enjoy having The wafers and as long as we can enjoy doing some of the development, especially in In demand, ammonite for the cooled and VOX VOX for the Uncooled.
I think we should be all right. But having said all of that, we just haven't looked at it that deeply. We anticipate that there'll be some challenges, but we'll deal with those just like we deal with challenges that
Next, we'll go to the line of Andrew Buscaglia from Berenberg Capital Markets, please go ahead.
Good Good morning, guys. Good morning, Ian. I was hoping you could could you talk a little bit about so just to clarify, digital imaging, are you calling for 10% for the full year growth, I know you gave the sub components there. And then, I don't believe you gave you talked about A couple of the segments, I don't believe you talked about margins for Digital Imaging or A and D Electronics, which We saw A and D had a really strong start to the year. So what's kind of your outlook on those margins there?
Okay. Let me Start with the margins, please. Right now, we think digital imaging margins Should go up to up about 150 basis points over last year, so just north of 21%, let's say 21%. Let's say 21%. Aerospace, Base and Defense, we're going to have significant margin As Al mentioned, we had a really good uptick in the Q1, partially because we had long time charges last year in our aerospace.
Nevertheless, having said that, we think the margins are going to be approaching 18.5%, maybe 18.6%, which would be 490 basis points improvement over last year. Engineered Systems is going to be relatively flat. So if you take the instruments margin that I mentioned before, which was 20.9% And bringing it all the way down, we think the company operating margin, I mentioned in January that we think we thought it'd be about 17%. Now we're projecting the Total company operating margin to be closer for the year to 17.6%. Okay.
All of this is excluding, of course, anything that has to do with the acquisition of here. I don't know whether I answered all your questions.
And digital imaging, the top line there, I know you gave some subcomponent I'll look there. But I think you had called for about 9% growth for the year. Is that now closer to 10%, Like you were saying?
Yes. Yes. It's closer to spend, led by our vision products, Cameras, including scientific cameras, sensors, as I mentioned for semi flat panel display, etcetera. And everything there is going to do well. The only area that may be flat year over year is our geospatial.
Everything else seems to be going really well.
Okay. And then, lastly, I'm Having a little bit of difficulty just getting to the midpoint of your guide. And I think it might be are you should we be modeling in Some transaction costs to add back or secondly, the interest expense was elevated this quarter. If you I guess you can't really assume a flat line or you got to add that back. How do you I guess how do you get to the midpoint of your guide with some of the below the line items?
Well,
if you look at the guidance that Sue provided, The $12 to $12.20 that excludes Clear's transaction costs. So you have to look at it at this time, you have to look at that excluding interest expenses related to the FLIR acquisition as well as some of the legal expenses that come above the line. Now Once we acquire FLIR, assuming the shareholders approve the transaction, Then what we will do is we'll have to put the interest in the for the total company As part of our moving forward, normal costs in GAAP, But there are going to be some other costs associated with the transaction that we they're going to be substantial. Those would be one time charges. And as we talked earlier, we call those intangibles.
Later on also would be some inventory write ups and other things. Having said all of that, the 12 to 12.20 Excludes FLIR transaction costs, which in the Q1 were about $39,000,000 $5,900,000 of it was above the line, which was legal fees and also fees for Bankers and if the rest of it or about $33,000,000 was Interest and getting the bonds and getting redeeming some of the Bob said, we already had outstanding. So I hope that answers your question. Come July, We'll kind of clean this up and do it, what did we say in April as Teledyne standalone? How are we looking at FLIR?
What do we expect to happen there? We learned a lot more about them as they do their own earnings. I think it's May 6. And then we'll project what the combined company would be like with and without the one time costs. And as I mentioned earlier, we think It's going to be accretive even on a GAAP basis in 2022.
Got it. I was hoping, Robert, could you guys provide a little more color on one more thing? In the S-four, The internal projections that FLIR had for their Defense Technologies business was about a 12% CAGR. It seems like you've learned more about this company, you're talking about quality of the assets and the people. Yes.
Are those some of those projections something you'd sign off on that there is a lot of growth in that defense segment, which just hasn't transpired for that company to date?
Yes. Let me start, Andrew, if I may, with a little precaution. And we're a little how should I put it? We're a little bit Concerned that maybe the projections for them were a little aggressive in the S-four. Having said that, we have now looked at their businesses a little differently than The way they report it in the 2 segments, which is the Industrial segment and the Defense segment, We've gone back, Andrew, and looked at the businesses from a divisional perspective the way they were In 2014, which were fixed divisions.
So we've gone back and fortunately, they were kind enough and good enough to provide us with the financial data in those divisions. And then they have added 2 new things to it, and I'm going to come to the first question that you asked. One of them is a small Vision products that they bought in Canada, Point Grey, which they report as part of their Components business and that business is fairly stable. It's a small business After order of $80,000,000 Now coming to the next area, which is new. So now they have kind of if you look at it the way I just mentioned that 8 divisions the way we look at it.
The way we look at the defense segment, It really has one part of it that is really new and that's the unmanned systems, both UAV and Ground Based on Managed Systems. And that has enjoyed really good growth, primarily because they've made some good acquisitions And they've also starting with an acquisition they made in 2016, Prox Dynamics, which makes the very small UAVs, and they have enjoyed about $260,000,000 in revenue in 2020 in that unmanned segment, which is both ground based and UAVs. That business, I think, will grow. And I think that business will grow significantly from our perspective. And I'm hoping that we'll grow enough to make up for some of the decrement That we see from the business that they provided elevated skin temperature Products that are going to go down, maybe last year were over $100,000,000 go down to Less than 20 or whatever.
Having said that, so we're hoping that, as you mentioned, the defense businesses, because of the acquisition Now kicking in 4 years that those would make up the decrement in the ESP business. I don't know if I've answered your question, but I think that's the best I can do at this time.
That's helpful. Thank you.
Thank you, Andrew.
And at this time, I have no further questions in queue.
Thank you, Sean. I will now ask Jason to conclude our conference call. Jason?
Thanks, Robert. And again, thanks Sean, if you could end the call and provide the replay details for everyone, I'd appreciate it. Goodbye.
Yes. Thank you. Ladies and gentlemen, today's call will be available for replay after 10 am today through 5th, twenty eighttwenty 21. You may access the AT and T teleconference replay system At any time by dialing 866-207-1041 or internationally at 402970 847, with an access code of 5,556,868. Those numbers again are 866 207-1,041 or internationally at 4029700847 with an access code of 5,556, 868.
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