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. I would now like to turn our conference over to the host, Jason VanWees. Please go ahead.

Good morning. Thank you everyone. This is Jason VanWees, Executive Vice President and I would like to welcome folks to our first quarter 2021 earnings release conference call. We released our earnings earlier this morning before the market opened.

Thank you Jason and good morning and thank you for joining our earnings call. We began 2021 with a best first quarter sales, earnings, operating margin, and cash flow in the company's history. Furthermore, we achieved these GAAP results despite incurring $39 million or $0.79 per share of expenses related to the pending acquisition of FLIR. Excluding these nonrecurring charges, earnings increased 39.2% compared to last year. Operating margin increased 426 basis points and our free cash flow nearly doubled. In addition, I am 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 first quarter, we received all-time record orders, with a book-to-bill of 1.15X, resulting in quarter-end backlog of approximately $1.8 billion. Given our strong first quarter, 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, FLIR's people, products, technology, and manufacturing are outstanding. I am now even more excited about the prospect of FLIR as part of the Teledyne family.

Thank you Robert. In our instrumentation segment, overall first 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 flame 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, our operating profit increased due to aggressive cost management and business simplification and stabilization initiatives. Overall, instruments segment operating margin increased 291 basis points to 20.7%. Turning to the digital imaging segment. First 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. First quarter sales declined 3.3% as greater defense sales were more than offset by the 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, first 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 second quarter and our full year 2021 outlook.

Thank you Al and 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 second quarter and full year 2021 outlook. In the first quarter, cash flow from operating activities was $124.9 million, compared with cash flow of $76.4 million for the same period of 2020.

Thank you Sue. We would now like to take your questions. Sean, if you are ready to proceed with the questions and answers, please go ahead.

Our first question is going to come from the line of Greg Konrad from Jefferies. Please go ahead.

Good morning.

Good morning Greg.

Maybe just to start on margins before I get to full year. I mean it seems like a lift in instrumentation and engineered systems. You are probably running well ahead of the guidance 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, probably because it's primarily a short cycle business, we were not sure about how much 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.

That's helpful. And then you mentioned that you guys have visited over 90% of the FLIR sites. I mean any update just when we think about synergies or maybe some of the potential longer term revenue synergies, if anything surprising as you continue the diligence into the close?

Well, I think the most important thing that we found out in our visits were the quality of the operations and the people. We really haven't focused yet on revenue synergies, well, we have looked at synergies in the operating area, primarily by using some of the methodology, Greg, that we have used in our own operations such as procurement savings which have been substantial for us last year and are supposed to be the same this year as well as some of the cost reductions that we mentioned earlier vis-à-vis the $40 million of cost savings that we expect to enjoy in the first year and growing to $80 million over time. So those would be the synergies at this time. In terms of revenue synergies, we haven't really looked at that very closely. And frankly, we operate in different markets. There are things we can't obviously look at very quickly would be, how do we jointly go to market team 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 am 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 be fairly accretive as you get into next year?

Yes. I think the EPS accretion, it needs to be, were 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 costs 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.

Thank you.

Thank you Greg.

Thank you. And then next, we are going to go to the line of Blake Gendron from Wolfe Research. Please go ahead.

Yes. Thanks for your time this morning. I just want to follow-up on the synergy question, maybe not so much focused on cost or revenue but working capital here in terms of supply chain 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 two entities?

Yes. I think, again, to do this properly, Blake, I have to exclude the one-time charges because while we have some handle on our charges at the 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 is going to be better than 100%. Having said that, inventory built up at FLIR, from what we saw in 2019 and 2020, was substantial and partially because of the elevated skin temperature programs that they enjoyed. So they have a significant inventory built up 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 will see as we get to it. But overall, our projections are that we ourselves should have free cash flow that slightly surpasses last year. And last year was a record year for us at $547 million, $445 million. So if we can exceed that ourselves and do well with the FLIR cash flow, that's very important, Blake, because we intend to pay down our debt as fast as we possibly can over the next two years.

That's really helpful color. I wanted 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 are seeing hospital volumes improve. So I am wondering if that could be an incremental tailwind as we move forward here and into vaccine rollout and normalization? And then, very small to go to a 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 million to $220 million. This year, we are starting to see some improvement 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 would have an increase of about 9% over last year to approximately $240 million. So that kind of speaks to what you just said. The recovery is a little slower than we anticipated but it is there. We are 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-à-vis regular, the commercial systems. Commercial aero in digital imaging, first it's small. Second, it's not that dependent on airline traffic. It's different than anything else. It's primarily in the 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 will see about a 7% improvement in revenue this year from $270 million last year to maybe $290 million this year. So the only area of aerospace that we are taking some punishment is in the aerospace businesses in Teledyne's normal defense and aerospace domain.

Makes sense. I really appreciate the time. Thanks for the answers.

Sure Blake.

Thank you. Then next, we will go to the line of Jim Ricchiuti from Needham & Company. Please go ahead.

Hi. Good morning. Just a couple of questions. Just, you related to the fact that you have seen a little bit of stronger margin profile in parts of the instrumentation business. I am 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? It sounds like you are, with healthcare coming on, digital imaging margins look better.

Yes. If you go to instrumentation, we did have some significant improvements in margin in environmental and test and measurement in the first quarter. And we expect those to continue for the rest of the year. We also had some improvement in margin in the marine businesses, even though revenue as Al mentioned, was down somewhat. We think the revenue will catch the rest of the year and as that does, the margins there will improve also. So we think overall instrumentation, we have the best margins in the environmental area, about 23%. Second best margins in our test and measurement, over 21%. And marine is approaching over 19%. So when you roll it all up, we are going to get close to 20.9% in instrumentation. And 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 currently. If that improves, then I think that segment is 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 and Al, maybe you want to respond to this, are you guys seeing any disruption in the business from this? Or are you able to manage the supply chain well enough?

Both. First, obviously, we are seeing constraints, Jim. There's no question about that, both in the electronics 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 are able now to approach our suppliers as one 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 are managing it. But we also are getting products from foundries, for example, that come to our wafers that we get. In that case, we are fortunate because the guys who supply wafers are also our customers. So in some areas, we think we are going to be okay. In other areas, I am very cautiously optimistic. But this thing can really spin out of control and then we will have to deal with it again.

Yes. Okay. So last question, thank you for that. Yes, last question, just your nice bookings number for the quarter and backlog and I am just wondering as we think about the way you are characterizing the business and the acceleration and growth that seems to be suggested in the recent filings looking out to next year, where do you see the potential for accelerating growth and which areas of the business? I assume some of the businesses that have been weaker that recovered, but I am just wondering if there's anything else you can call out?

I think our primary areas is digital imaging. For me to say digital imaging is going to grow organically 10% year-over-year, I don't know if I have ever done something like that. So I feel pretty bullish to kind of predict that. I think we will end the year with a book-to-bill in digital imaging of 1.08, maybe 1.10. So that's our first area. I think in the instrumentation area, we are right now over one. 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, specially in test and measurement, we could have as much as 8% growth, in environmental 6%, 6.5%. 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 two-year cycle. But our defense businesses are doing okay. So I anticipate in aerospace and defense combined to enjoy a 4% of revenue improvement this year. Roll all of that together and you are 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 Jim.

And then next, we are going to go to the line of Joe Giordano 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 are thinking about the sustainability of strength there given some of the plans from some of the large manufacturers? I know you are more on the R&D side. But just curious for your color there?

Well, test and measurement, let me start there. We really enjoyed a good year in test and measurement, primarily because of being able to put out new products continuously. As you know, we have two areas that we focus on there. One of them is our oscilloscopes. And the other is protocols which are the rules that chips communicate with one another. We continue to put new products out. Like last week alone, we announced three products in oscilloscopes and protocols. 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's going to be very good for that area. You also asked me about semi. In digital imaging is primarily where we focus on the semi market. And there as 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 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 pellicles which are very thin, one-tenth of a human hair thickness but six to eight 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 have really done well and have now captured that market and we have a wonderful customer there. And 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 to follow up on one of the other question 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 are taking over there, your ability to be able to source that much in additional that you need to cover their operations as well as smoothly as you covered your own?

The answer is, Jim, I don't know yet. But having said that, because as I mentioned, they do have substantial inventory and we have to obviously dig into that to see what they are using. I think that would be right now an area that we will 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 developments, specially in antimonide for the cooled and VOx for the uncooled, I think It should be alright. But having said all of that, we just haven't looked at it that deeply. We anticipate that there would some challenges. But we will deal with those just like we deal with challenges that come up in our business.

Thank you.

Thank you Joe.

Next, we will go to the line of Andrew Buscaglia from Berenberg Capital Markets. Please go ahead.

Good morning guys.

Good morning Andrew.

I was hoping you could talk a little bit about, so just to clarify, digital imaging, are you calling for 10% for the full year up? I know you gave the subcomponent there. And then I don't believe you talked about a couple of the segments. I don't believe you talked about margins for digital imaging or any of the electronics which at least where A&D had a really strong start to the year. So what's kind of your outlook on the margins there?

Okay. Let me start with the margins, please. Right now, we think digital imaging margins should go up about 150 basis points over last year as well. So just north of 21%, let's say 21%. Aerospace and defense, we are going to have significant margin improvement. As Al mentioned, we had a really good uptick in the first quarter, partially because we had one-time charges last year in our aerospace but 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 going to be relatively flat. So if you take the instruments margin that I mentioned before, which was 20.9% and bring it all the way down, we think the company operating margin, I mentioned in January that we thought it would be about 17%. Now, we are projecting the total company operating margin to be closer for the year to 17.6%.

Okay.

But all of this is excluding, of course, anything that has to do with the acquisition of FLIR. I don't know whether I answered your call, your question.

And digital imaging, the top-end, I know you gave some subcomponent outlook there. But I think you had called for about 9% growth for the year. Is that now closer to 10%, is what you are saying?

Yes. It's closer to 10% led by our vision products, cameras, including scientific cameras, sensors, as I mentioned for semi flat panel display, et cetera. And everything there is all going to do well. The only way that maybe flat year-over-year is our geospatial. Everything else seems to be growing really well.

Okay. And then lastly, I am having a little bit difficulty just getting to the midpoint of your guide. And I think it might be, should we be modeling in some transaction costs to add back? Secondly the interest expense was elevated this quarter. I guess we can't really assume a flat line, we have got to add that back up. I guess, how do you get to the midpoint of your guide with some of the below the line items?

Well, if you look up the guidance that Sue provided, the $12 to $12.20, that excludes FLIR'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 will have to put the interest for the total company as part of our moving forward normal cost in GAAP. But there are going to be some other costs associated with the transaction that are going to be substantial. Those would be one-time charges and as we talked earlier, we call those intangibles. Later on also would be inventory write-ups and other things. Having said all of that, the $12 to $12.20 excludes the FLIR transaction costs which in the first quarter were about $39 million. $5.9 million of it was above the line which was legal fees and also fees for bankers. And the rest of it or about $33 million was interest and getting the bonds and redeeming some of the bonds that we already had outstanding. So I hope that answers your question. Come July, we will kind of clean this up and do it. What did we say in April, as Teledyne stands alone, how are we looking at FLIR, what we expect to happen there, we will learn a lot more about them as they do their own earnings. I think it's May 6. And then we will 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 a credit, even on a GAAP basis in 2022.

Got it. And I was hoping, Robert, could you maybe provide a little more color on one more thing. In the S-4, the internal projection that FLIR had for their defense technology business was about 12% CAGR. It seems like as you will learn more about the company, you are talking about quality of the assets and the people. Are those some of the projections something you would sign off on that there is a lot of growth in that defense segment which just hadn't transpired for that company to-date?

Yes. Let me start, Andrew, if I may with a little precaution. How should I put it? We are a little bit concerned that maybe the projections for them were a little aggressive in the S-4. Having said that, we have now looked at their businesses a little differently than the way they reported into two segments, which is the industrial segment and the defense segment. We have gone back, Andrew and looked at the businesses from a division of perspective the way they were in 2014 which were fixed divisions. So we have 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 two new things to it. And I am going to come to the defense 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 of the order of $80 million. 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, they have eight 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 their unmanned systems, both UAV and ground-based unmanned system. And that has enjoyed reading good growth, primarily because they have made some good acquisitions and they have also starting with an acquisition they made in 2016, Prox Dynamics, which makes the very small UAVs. And they have enjoyed about $260 million 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 am hoping that it will grow enough to make up for some of the detriment that we see from the business that they provided, elevated skin temperature products that are going to go down maybe last year well over $100 million, go down to less than $20 million or whatever. Having said that, so we are hoping that, as you mentioned, the defense businesses because of the acquisitions are now kicking in fully years, that those would makeup the detriment in the EST business. I don't know if I have answered your question but I think that's the best I can do at this time.

No, it's helpful. Thank you.

Thank you Andrew.

At this time, I have no further questions in queue.

Thank you Sean. I will now ask Jason VanWees to conclude our conference call. Jason?

Thanks Robert. And again thanks to everyone for joining the call this morning. Of course, if you have follow-up questions, please feel free to call me at the number on the earnings release. Sean, if you could end the call and provide the replay details for everyone, I would appreciate it. Goodbye.

Yes. Thank you. Ladies and gentlemen, today's call will be available for replay after 10:00 AM today through 5/28/2021. You may access the AT&T TeleConference replay system at anytime by dialing 866-207-1041 or internationally at 402-970-0847 with an access code of 555-6868. Those numbers again are 866-207-1041 or internationally at 402-970-0847 with an access code of 555-6868. That does conclude our conference for today. Thanks for your participation and for using AT&T Event Services. You may now disconnect.