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. As a reminder, this conference is being recorded. I’d now like to turn the call over to our host, Mr. Jason VanWees. Please go ahead, sir.

Thanks, Brad, and good morning, everyone. This is Jason VanWees, 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 for your questions. Of course though, before we get started, 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 disclosures, this call is simultaneously being webcast and a replay both via webcast and dial-in will be available for approximately one month. Here is Robert.

Thank you, Jason. Good morning, everyone, and 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 headwinds, 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 records. 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 3rd, on the first day of the second quarter. Turning to our 2023 full-year outlook, we are reaffirming our prior sales and non-GAAP earnings per share outlook. As supply chain challenges improved modestly, we were able to exceed our original first quarter sales and earnings outlook by pulling forward some revenue from the second quarter. Consequently, by maintaining the full-year guidance, we have 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 will 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 an 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, but 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 especially specialty semiconductor devices, offset by some lower sales of certain commercial infrared imaging and marine products. 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 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 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 includes 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 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, 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 am 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, and good morning, everyone. I will first discuss some additional financials for the quarter not covered by Robert and then I will discuss our second quarter and full year 2023 outlook. In the first quarter, cash flow from operating activities was $203 million and 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 Authority 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 per share to $3.88 per share, with non-GAAP earnings in the range of $4.56 to $4.66. And for the full year 2023, our GAAP earnings per share outlook is $15.80 to $16.05. And on a non-GAAP basis, we are maintaining our prior outlook of $19 to $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 are ready to proceed with the question-and-answers, please go ahead.

Thank you. We can first go to Jim Ricchiuti with Needham & Company. Please go ahead.

Hi. Thank you. Good morning. Robert, I am 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, but if you look at Instrumentation, any changes that you are seeing in that shorter-cycle business?

Not much. There is a little bit of softness in one of our businesses, which is our test and measurement; we make protocol solutions and provide protocol solutions to the electronics industry. There we have some new product protocols coming out, so people are waiting for the new ones and maybe not buying the old ones. Other than that, where the book-to-bill is almost 1, oscilloscopes are doing well and in the T&Ms we feel alright. On the environmental side, the only thing that there is a little softness that we are experiencing in the pharmaceutical market, where we supply a whole range of products, but we are making that up by some of our air quality and other products that are doing well in this environment. So, overall, I think we are doing okay.

Got it. Since you were good enough to give us a book-to-bill, which I think was for the entire Instrumentation business, I am wondering if you could provide some book-to-bill color on Digital Imaging and the Aerospace and Defense and maybe the company as a whole? Thank you.

Yeah. Jim on the Instrumentation, if you include marine in, which we didn’t talk about, marine has got a book-to-bill of 1.12, so it’s very healthy. So because of that, it pulls Instrumentation as a whole above 1 to 1.04. Going to Digital Imaging, the book-to-bill is less than 1, not substantially, but less than 1, primarily I think, because of some of the ground-based defense systems that we have which is about a little over 0.9. But having said that, we have some really large orders coming and we also post-quarter had a large order for our Black Hornet, small air UAVs. When we had right after the quarter, for example, we had a $94 million award for those, and by the way, those are also in high demand in the Ukraine conflict. So, overall, I am encouraged with what’s happening in Digital Imaging. There has 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. And then on the Aerospace and Defense Electronics side, I think the book-to-bill is 1.05. Engineered Systems is close to 1, but that’s lumpy. So, I think we are going to be fine there. Overall for the company, I’d say when you add all those numbers up, it’s slightly less than 1, maybe 0.96, 0.97, but that’s not a great concern at this time. We are just being cautious as we always are, because of the uncertain times that everybody is facing. Other than that, I feel pretty good about our portfolio and its resilience.

Got it. And just final question if I may, just in light of some of the uncertainty that’s out there. I think you have 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 a 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 are obviously chasing some of what we call string of pearls M&As. It’s possible that we might end up with something more mid-size near the end of the year, but 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 have only drawn down $25 million and it’s sitting there. We have paid all of our debt that’s coming due. We don’t have any debt payments until 2024. And we have a lot of capacity to do larger deals as opportunities arise, and of course, we are looking at things. But you are right; larger deals take time and it would probably be more like early 2024 or sometime in 2024.

Got it. Thanks very much.

Thanks, Jim.

And next we can go to Greg Konrad with Jefferies. Please go ahead.

Good morning.

Good morning, Greg.

Maybe just to revisit Digital Imaging, is there any way to kind of decompose the organic growth, just given your short-cycle commentary, when you think about health care, machine vision, space and maybe the legacy FLIR business, just kind of what trends you are seeing and 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. Organic—and let’s also do what you suggested, which is stay with the 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%. So, overall, we are very happy with that and some of those 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, primarily in the unmanned drone vehicle systems. As I said, after the quarter, we have had some very healthy awards in our UAVs, which are unmanned air vehicles. Surveillance declined and was plus 5%. Tomography was down a little bit—just a little under 4%, but uncooled and cooled cores, which are infrared cores, they were up 3%. And industrial vision system was up almost 19%—over 19%. So it was a mixed bag. The drag down for that business was primarily in the defense and primarily on ground unmanned systems. Now we had a little softness in tomography and maritime, which is our Raymarine businesses. But, overall, I think we were okay. We just have to fill out the backlog for our unmanned ground vehicles and we will be fine.

And this might just be mis-modeling on my part, but I mean margin seemed a little late in Digital Imaging in the quarter. Can you maybe talk about price-mix going forward and how you are expecting margins to trend for the year, given your commentary? I think you still expect them to be up, just a lesser degree than the total 40 for the company?

Well, right now what I’d say is, I expect the margins to be up about 30 basis points for the year. Let’s start with the year and this is the overall Digital Imaging margin. So that would be pushed out on one side. I think, in Q2, we will improve sequentially on our margins and we should be fine. And we are also going to 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 and if we can have better price increases going forward, we should improve on that. So when I look at it, I’d say, look, in our instrument businesses, we are going to 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 will be happy to just keep our 27.1% operating margin. Engineered Systems will probably increase by 50 basis points, and overall, the segment’s 40 basis points and the company about 40 basis points. That—I hope that helps you.

That was perfect. I will leave it to you. Thank you.

Thank you.

And next we have Elizabeth Grenfell with Bank of America. Please go ahead.

Hi. Good morning.

Good morning, Elizabeth.

Could you give us some color on defense on a consolidated basis for the quarter and then 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 and we think for the year it will be probably low-to-mid single-digit growth in our defense businesses. The primary reason, again, I am saying the U.S. Government programs were flat, primarily driven, as I said, by the unmanned ground vehicles. We think for the year we are probably growing in the mid-single digits in our defense.

Great. Thank you very much.

For sure, you're welcome.

And next we will 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 have pulled in about $10 million and most of that was in Instruments; most of that was in our marine businesses. We shipped more underwater vehicles in Q1 than we had anticipated. We have some really good orders—we actually have good orders for Q2 also. So that’s just to ensure that we hit what we expected to. And also, as I said, that was affected by the fact that we are having improvements in our supply chain. We are seeing improvement, significant improvement, and I expect that to continue the rest of the year based on what we are seeing and based on what the Chief of our Procurement is doing with various companies. So that’s why we pulled it forward; we felt we could and did.

No. That makes sense. Now when I think about the full year guide, I mean, so you come in, it’s clearly at the high end of your guide here. You are guiding the second quarter high end is basically in line with consensus. You guys tend to be—you are 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 or are you kind of like derisking that full year guide, like, how should we think about the—what the—between the lines there?

Between the lines, I don’t think it’s going to be weaker, except that something terrible happens. I feel good about—look, as you know, we are always more conservative. I can go out and say we are going to make a lot more in our earnings per share, and we probably could. On the other hand, with the uncertain environment that we are facing, with semiconductors being down, everybody is projecting semiconductors will recover in 2024, not this year, both equipment and supply. We grow—we serve those markets. I am being cautious as we always are. But I don’t think the second—right now I don’t think the second half is going to be weaker. I think it’s going to 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 want to take the high-end.

Yeah. Okay. Two more quick ones from 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? And then 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 bps, how much you are getting from there and where is it getting offset from in other elements of costs? Thank you.

Let me start with the free cash flow. We are going to beat last year’s free cash flow by a couple of $100 million, let’s just say, $850 million is our current estimate. I hope we can do better than that and we have just continued deleveraging the company, get ready for—when all of this uncertainty is behind us and use our capability and ability to buy things that have not done as well in this environment. Coming back to the supply chain, we have seen improvement in Q1. Last year, in Q1, we—our brokerage, we bought about $23 million of goods from brokerage and that does repay a 70% premium let’s say. This year first quarter, it’s the same type of thing, cost us about half as much as that and so that’s a savings, obviously. But 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 are not missing a lot of revenue because we don’t have parts. So there is improvement in the supply chain. We are seeing that. There is improvement in the premium that we are paying and also the fact that we are not going to miss as much revenue because we can ship products, because they are sitting on the shelf, waiting for one or two parts. That’s it.

Thanks very much.

For sure.

And next we have Guy Hardwick with Credit Suisse. Please go ahead.

Hi. Good morning.

Good morning, Guy.

I think the previous guidance for at Group level was a 50 basis points improvement in the adjusted margin, so you are now guiding to 40s. So 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. In January, you are perfectly correct; we guided 50 basis points, and now we are guiding 40 basis points. We are taking some guidance down in Instrumentation from January to today. We had over 100 basis points; we are closer to 80 basis points. Digital Imaging, we are taking down about 10 basis points, all in. Aerospace and Defense, we are actually guiding flat and we had it going down and so that’s good. And then in Engineered Systems, we have a moderate up, which are smaller business, but we still have a moderate 45 basis points or so up. So, overall, I think we will be up 40 basis points. 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% to 5%. Our purchasing of direct and indirect goods is going up with inflation and so we have to catch up a little more with price increases to make up for those in order to keep or be able to increase our margins. That’s the kind of uncertain part. How much can we gain from price increases? First quarter, we were okay. We made up what we paid out and we are a little positive actually. So, rest of the year, can we keep that pace of reasonable price increases to make up for inflation in both goods and wages?

And is the intention to be price/cost neutral or do a little bit better than that and then on the second...

I’d like to do better than that. I’d like to do better than that. For sure.

Okay.

Last year...

All right.

...we were negatively impacted by 60 basis points. This year I hope to be positive.

And 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.

So potentially $35 million...

So it will...

...$30 million to $40 million lower.

Yeah. $35 million.

Okay.

Again, that’s a moving target. So, so far, we have been successful. As the semiconductor industry has 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, etc. are still harder to get. So it’s a mixture. But things are improving, which makes me feel positive.

And 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?

No. I don’t believe so.

Okay. Thank you.

For sure.

We will now turn the call over to Kristine Liwag with Morgan Stanley.

Hey. Good morning, everyone.

Good morning, Kristine.

Robert, on the supply chain, just want to follow up on the premiums paid to brokers for component sourcing. So you have talked about how that’s declined. And is that because traditional sources have reopened and therefore you are now sourcing less parts from these brokers or 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 are able to buy more from the OEMs than from brokers. We obviously prefer to buy from OEMs because the prices are stable or it might be price increases versus last year. But brokers, you—you there end up paying premiums of 70% to them. So that’s the big picture. And the availability is improving; it’s very interesting just anecdotally, there have been a few brokers that have called us asking if we want some of their parts. Last year, we were out there begging for parts, and obviously, if that were to happen, I look at that as they have some obsolete or some excess supply and we are buying, but we buy them at a discount to what we paid to the OEMs. So the market is improving. I like that.

Great. And then, Rob, you mentioned that you anticipate that you can pass on whatever inflation costs that you have into pricing. So that should be a net positive for you. But can you talk about the demand environment? What’s been the customer sensitivity to pricing, and right now, if you look at the financial markets, we have had two regional bank failures last month and there is more uncertainty today. Is that macro environment affecting your customer’s decision for capital purchases or to have some sort of pricing sensitivity?

Yes. The answer to it is, yes. On the other hand, because we are in such a diverse market, if you look at some of our longer-cycle businesses, as I mentioned, like marine with energy dependence—some of our defense businesses or others, they are 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. But in some areas, like healthcare, where we make X-ray panels that are very high resolution, very low dosage, there we have pricing power and so it’s a mixture. Overall, when I say uncertainty about economic uncertainty, I am speaking exactly to what you pointed out; some of the uncertainty in the financial market that’s shipping out into other markets as well.

Great. Thank you for the color. And if I could sneak a last one in, when you look at your overall portfolio, what percent of it would you say you have more pricing power versus what percent 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 has evolved, today we sell about 22% to the government, 28% U.S. commercial and 50% commercial and defense outside the U.S. So the macro—global macro environment is what we are more sensitive to, to a 40% not so.

Great. Thank you very much.

For sure.

And currently, we have no further questions in queue.

Thank you, Brad. I appreciate that. I will now ask Jason to conclude our conference call.

Thanks, Robert, and 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 e-mail 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 8989973. International parties may dial 402-970-0847. Those numbers again 1-866-207-1041, international parties 402-970-0847, with the access code 8989973. That does conclude our call for today. Thank you for participation and for using AT&T Teleconference. You may now disconnect.