Ladies and gentlemen, thank you for standing by. Welcome to the Teledyne Third Quarter Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for questions and answers with instructions given at that time. And as a reminder, your conference call today is being recorded. I will now turn the conference call over to your first speaker, Jason VanWees. Please go ahead.

Thank you. Hello, and good morning, everyone. This is Jason VanWees, Vice Chairman. And I'd like to welcome everyone to Teledyne's third quarter 2024 earnings release conference call. We released our earnings earlier this morning. Joining us today are Teledyne's Executive Chairman, Robert Mehrabian; CEO, Edwin Roks; President and COO, George Bobb; and SVP, CFO, Steve Blackwood; and Melanie Cibik, EVP, Counsel, Chief Compliance Officer, and Secretary. After remarks by Robert, Edwin, George, and Steve, we will ask for your questions. Before we get started, our attorneys have reminded me to tell you that all forward-looking statements made this morning are subject to various assumptions, risks, and caveats as noted in the earnings release and our periodic SEC filings, and of course, actual results may differ materially. Here's Robert.

Thank you, Jason, and good morning, and thank you for joining our earnings call. Teledyne achieved all-time record sales in the third quarter with revenues sequentially greater in each segment, allowing us to report overall year-over-year growth as we expected. We continue to see robust demand in our longer cycle defense, space, and energy businesses. At the same time, while year-over-year comparison remains challenging, sales for most of our short cycle commercial businesses have either stabilized or have begun to recover sequentially. Year-to-date, we repurchased approximately $354 million of our stock. We completed 2 acquisitions for $125 million and repaid $450 million of gross debt. However, our quarter-end leverage has remained in the 1.7 times given record free cash flow over the last nine months. Orders were greater than sales for the fourth consecutive quarter, and we once again ended the period with record backlog. Nevertheless, given the timing of future shipments against this backdrop and some sales we were able to accelerate into the third quarter, we remain reasonably confident that quarterly sales will again increase sequentially in the fourth quarter, but only modestly compared with the third quarter. I will now turn the call over to Edwin, our CEO, who will further comment on the performance of our four business segments.

Thank you, Robert. This is Edwin, and I will first report on the Digital Imaging segment, which represents a bit over 50% of Teledyne's portfolio. Like Teledyne as a whole, this segment is a mix of lower cycle businesses, such as defense, space, and health care, combined with shorter cycle markets, including industrial automation, semiconductor inspection, and infrared components and cameras for applications ranging from factory condition monitoring to maritime navigation. Third quarter 2024 sales declined less than 1% compared to last year. Sales to industrial and machine vision markets declined year-over-year. However, this was partially offset by increased sales from FLIR, both in commercial infrared imaging and defense base businesses, as well as for Teledyne's space-based infrared imaging detectors. Furthermore, for the fifth consecutive quarter, healthy margins across the entire FLIR business portfolio helped us protect our overall operating margin, even given the significant year-over-year reduction in sales of our typically highest contribution margin product lines. George will now report on the other three segments, which represent the balance of Teledyne.

Thanks, Edwin. The instrumentation segment consists of our Marine, Environmental, and Test & Measurement businesses, which contributed a little under 25% of sales. For the total segment, overall third quarter sales increased 6.3% versus last year. Sales of Marine Instruments increased 24.1% in the quarter, primarily due to both strong offshore energy and subsea defense sales. Sales of Environmental instruments decreased 3.5%, primarily due to lower sales of select laboratory instruments and emission monitoring systems, offset by stronger sales of water quality instruments. Sales in electronic custom measurement systems, including digitizers and protocol analyzers decreased 8.6% year-over-year on a tough quarterly comparison versus 2023. Instrumentation operating margin increased in each product family in the third quarter, with overall operating margin increasing 155 basis points to 27.5% and 152 basis points on a non-GAAP basis to 28.6%. In the Aerospace and Defense Electronics segment, representing roughly 15% of Teledyne sales, third quarter sales increased 9.2%, driven by growth in both commercial aerospace and defense electronics products. Overall segment operating profit increased year-over-year, with GAAP segment margin increasing 117 basis points to 28.1% and 116 basis points on a non-GAAP basis to 28.2%. For the Engineered Systems segment, which contributes less than 10% to overall sales, third quarter revenue increased 9.4%. Segment operating profit also grew, with segment margin increasing 70 basis points due to higher sales and a greater mix of manufacturing programs. I will now pass the call back to Robert.

Thank you, George. I'll conclude with a few comments on strategy and capital allocation. Over the last several quarters, some of our markets have experienced weakness, but we lowered costs to protect margins in these businesses while growing and increasing margins in those businesses where the environment was more favorable. During this period, we also opportunistically purchased our own stock. Our current $1.25 billion stock repurchase authorization remains active. We're fortunate that our near-term acquisition pipeline is healthy. While there are always new challenges, I'm optimistic that we have begun to exit some of our more difficult quarterly comparisons and will continue to grow both organically and through acquisitions. I'll now turn the call over to our CFO, Steve.

Thank you, Robert, and good morning. I will first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our fourth quarter and full-year 2024 outlook. In the third quarter, cash flow from operating activities was $249.8 million, compared with $278.2 million in 2023. Free cash flow, which is cash flow from operating activities less capital expenditures, was $228.7 million in the third quarter of 2024, compared to $255.2 million in 2023. Cash flow decreased in the third quarter due to higher income tax payments. Capital expenditures were $21.1 million in the third quarter of 2024, compared with $23 million in 2023. Depreciation and amortization expense was $76.9 million for both the third quarters of 2024 and 2023. For the first nine months of 2024, cash flow from operating activities and free cash flow were $859.5 million and $804.8 million, respectively. We ended the quarter with approximately $2.24 billion of net debt, that is approximately $2.8 billion of debt less cash of $561 million. Now turning to our outlook. Management currently believes that GAAP earnings per share in the fourth quarter of 2024 will be in the range of $4.27 to $4.41 per share, with non-GAAP earnings per share in the range of $5.13 to $5.23. For the full year of 2024, we are raising our GAAP earnings per share outlook to $17.28 to $17.42, and we are narrowing our non-GAAP outlook to $19.35 to $19.45, the top end of our prior outlook range. I will now pass the call back to Robert.

Thank you. We would now like to take your questions. Operator, if you're ready to proceed with the question and answers, please go ahead. Did I lose our operator?

Our first question will come from Jim Ricchiuti with Needham. Please go ahead.

Hi, thank you, good morning. Robert, I think you alluded to some acceleration in sales perhaps coming pull-ins in Q4. Was that mainly in the defense area? Or were there some other markets where you saw that?

No, I think it was primarily where we have the largest backlog, which would be the defense businesses, a little bit from energy, but primarily different ratings.

Got it. It seems you had a strong quarter in terms of orders. Can you provide more details about the book-to-bill ratio by segment? Also, how do you view overall revenue growth compared to your expectations from a few months ago?

Yes. Let me start with the book-to-bill. Book-to-bill at the end of Q3 was about 1.48. Almost all of the businesses had healthy book-to-bill, except for one of our environmental businesses. In instruments, book-to-bill was about 1 with Marine, of course, being much higher and T&M coming along to over 1 and environmental below 1. In Digital Imaging, we are experiencing good book-to-bill numbers; historical Teledyne book-to-bill was 1.08, and FLIR had excellent book-to-bill of 1.17. Aerospace and Defense, 1.04, and Engineered Systems 1.82. Regarding revenue, we've decided that with all the uncertainty in the world today, starting with elections and then, of course, the various conflicts in the Middle East and Europe, we've decided that it's prudent to maintain the revenue number that we had at the end of Q2, which is about $5.624 billion or $5.6 billion. We might do better, but right now, Jim, with all the uncertainty, it's prudent not to be too effervescent.

Got it. Makes sense. Just one quick follow-up before I turn it over. Regarding the test and measurement business, are you experiencing sequential growth? Do you believe that the weakness in the scopes business is behind you, or is the strength of the critical analog business still playing a key role in these improved results?

In the third quarter, it was primarily the protocol business; we're a little hesitant about projecting the oscilloscope businesses. But usually, what happens at year-end is our people do capital expenditures, and we pick up business in that domain. So we're hopeful that this year would be a repeat of last year, with Q4 being higher than Q3.

Thanks very much.

Thank you, Jim.

We will next go to the line of Greg Konrad with Jefferies, go ahead.

Good morning.

Good morning, Greg.

Can you provide insights on the Digital Imaging segment for the quarter and your observations across the different businesses? Leading up to this quarter, we noticed a few negative pre-announcements from some of your competitors in the vision sector. Do you have any insights on the various vision end markets, whether from an order perspective or general trends?

Let me provide an overview of the larger picture first. In our digital imaging segments, we have our historical digital imaging, which includes DALSA 2B and our scientific imaging, along with FLIR. In the third quarter, our traditional historical digital imaging revenue has seen a decline, with organic growth at nearly negative 9.8% to 9.9%. Conversely, FLIR performed exceptionally well, particularly in its defense sector, which constitutes 40% of FLIR, where growth reached 8.2%, with all subdivisions within that area showing healthy growth. The FLIR commercial segment remained relatively flat, but it’s important to note that this includes our camera vision system, an aerial camera with lower sales, similar to the vision camera systems in DALSA 2B. Overall, FLIR experienced a growth of 3.2 despite the decline in other areas. Within DALSA 2B, we observed a mix of performance; we had some positive developments, such as our micro-electromechanical systems (MEMS) showing strong growth, which could indicate future trends as they are related to the semiconductor industry. The Aerospace and Defense segment within our historical Digital Imaging also performed well, growing almost 13%. However, we saw declines mainly in scientific and industrial vision systems, as well as some in healthcare. I anticipate a recovery in healthcare, and I believe that the industrial and scientific vision systems, especially in the camera segment, have hit a bottom, expecting a slow recovery. Overall, DALSA 2B and Teledyne Imaging showed some mixed progress, but FLIR led the overall results in Digital Imaging.

And then, I mean, maybe it's a little bit early to talk about 2025, but it seems at least on the long cycle, whether that's defense or on marine, you've experienced positive book-to-bill on ramping sales. If you look out over the next year, can you maybe talk about how much visibility you have on the long-cycle businesses versus how you're thinking about the recovery in short cycle over the next year?

The long-cycle businesses, Greg, assuming there are no catastrophes that can affect our long-cycle businesses, are healthy. We think they're going to grow year-over-year. We have some really good program wins in our FLIR Defense, as well as in our Teledyne Imaging here in space and other programs. So we think those are going to grow. On the short-cycle businesses, we're just going through the first cut of our plans for next year. I think it's a little too early to predict how that's going to work. I'll wait another couple of months and see what happens with the elections, but more importantly, what kind of capital expenditures people exercise as they get near the end of Q4.

And then maybe just sneaking in one last one. I mean, if you think about defense across FLIR and engineered and A&D Electronics, what was defense up in the quarter?

Defense U.S. government business was up organically maybe 2.5% plus, but we do have programs overseas that are doing really well. For example, Ukraine. We supply a whole range of products to them, also some to the Middle East. Those programs have been very healthy, and we seem to be winning new programs, especially with offers we have in counter-UAV systems as well as our own UAVs, the small Black Hornet, which are doing really well. Overall, we're very positive in that domain.

Thank you.

For sure.

We'll move on to the line of Andrew Buscaglia with BNP, go ahead.

Hey, good morning, everyone.

Good morning, Andrew.

I wanted to mention that Marine has performed exceptionally well all year, and it appears you have good visibility in that area. I'm curious about the sustainability of that growth into next year. How confident are you in your ability to maintain such a strong segment? We have some concerns about challenging comparisons, but how do you anticipate that will develop?

That's a good question. Marine has had variation in their book-to-bill with Q1 being very strong at 1.27 and then Q3 being around 1.04. Here's the story on Marine. We acquired about 23 small businesses to form our Marine group. Those include interconnect services for commercial oil exploration and production as well as defense. We have a variety of underwater vehicles, including floats, gliders, and autonomous vehicles, which are used in both this country and Europe. We expect this segment to remain strong. However, it is possible that with current projections, oil prices may decline significantly, though not as dramatically as they did from 2014 to 2016. If that happens, some of our production interconnects may decrease, but the other businesses in Marine should remain healthy. There are some positive signals for Marine for next year.

Okay. That's helpful. You mentioned in your press release that you've been buying back stock, but it appears that M&A activity is increasing. Can you elaborate on that? Specifically, what is the size of the deals you might be encountering?

Yes, Andrew, that's a very good question. And the reason it's timely is for the first time, I would say since we acquired FLIR, we've done a couple of acquisitions every year. This year, we bought a small business for our Marine group. We acquired Atomic, which is an imaging business for our overall imaging DALSA 2B. But there hasn't been much activity or opportunity for us to do acquisitions. Suddenly, in the last month or so, the funnel seems to have opened up. We are seeing more opportunities, especially outside digital imaging for example, in our aerospace and defense as well as our instruments. We are positively inclined to look at what we can do, how much power we have to make acquisitions. Frankly, we bought our stock when it was close to 52-weeks low, and we've continued buying it through Q3. I think it's more likely that we will focus more highly on acquisitions since we have the capacity to spend up to $2 billion to $3 billion if we want to. I don't know if we'll do that much, but we are in the market to buy some smaller companies in the $50 million range and maybe some things that are closer to $500 million or more. It won't be anything as large as FLIR at this time, but there are many opportunities.

Okay, very helpful. Thank you.

For sure.

We'll move on to the line of Joe Giordano from TD Cowen, go ahead.

Hey, guys. Good morning.

Good morning.

Can you just talk us through what's contemplated in the guide for next quarter? And how you're thinking going forward about what's going on with Boeing?

Let me start with Boeing because that's a subject that we kind of study and follow. In our aerospace business, which serves Boeing, as well as other Airbus and a whole bunch of airline customers, we think the strike could risk for us. I'm hoping that it settles, but the risk for us is in the 737 MAX, where we have the data acquisition systems that could hit us. Assuming the strike continues through the quarter, that could hit us as much as $5 million in revenue from Q3 to Q4. If the strike is settled, depending on timing, it could be less than that, maybe $2 or $3 million. So it's a little bit of a headwind for us. The other part of your question was for me. I kind of lost the trend of…

Boeing was the first question, I can move. You also mentioned in instrumentation, I think you indicated that there was a piece of that business on the environmental side that was weak with orders below revenues. Can you provide a little more color on what that is and what type of applications or end markets that's facing?

Yes. In the environmental side, we have two sets of businesses. One that deals with drug discovery and water quality, etc. That business has been okay. Where we've seen a little weakness is in our air quality monitoring, stack monitoring, and monitoring the quality of products. We've had a little weakening there. We depend a bit on the Middle East where they buy our systems, and I think it may be a little weak for a few million dollars, but I'm not overly concerned about it. It’s just – we anticipate Q4 should be a little better than Q3. So it doesn't concern me right now. Instrumentation includes Marine, Test and Measurement, and environmental as George said.

And just last for me. The margins in DI were good. I think probably better than some expected. Can you give us maybe some color on what drove that? And how are you thinking about margins to wrap up the year across the portfolio here?

I think what you have is FLIR's margins really improved significantly, and they are very healthy. Digital Imaging overall remains relatively flat in margins. I would say maybe went down 30 basis points. If you look at the whole year, 2024 versus 2023, the same here, of course, as I mentioned, was FLIR. On the FLIR side, Edwin and his team were able to take out costs in our camera segments, especially in our camera and some health care businesses to compensate for lower revenue. That helped protect some of the margins in those businesses. Most of our high-margin businesses are in the camera business. There's been a combination of FLIR being very strong and Digital Imaging, the rest of Digital Imaging, taking the costs out. I'm hopeful that as the recovery come, we will not put that cost back in, given our positive past experiences with defense and with Marine where, after taking costs out, we've maintained healthy margins. Overall, I'm optimistic about Digital Imaging.

Can you estimate how significant of an impact those cameras and sensor businesses are having on the margins you are reporting, considering they are typically high-margin businesses?

I would estimate that those businesses are responsible for about $300 million in revenue decline, with approximately $50 million impacting overall performance. While it may not seem significant, these are our highest margin businesses, so when revenue falls, it adversely affects margins. However, we believe the camera segment has reached its lowest point, and the book-to-bill ratio is above one. It's important to consider that the deal volume is lower than last year, and improvements in the sensor business will take some time.

Thanks, guys.

For sure.

We'll go next to the line of Jordan Lane with Bank of America, go ahead.

Hey, good morning. Could you just give us some color around how you're thinking about FLIR's opportunity for new programs like Replicator 2?

Let me take this. We have a whole bunch of programs for FLIR that are doing really well. Let's start with the small UAVs. The small UAVs, we have the best system in the world. These are UAVs that are about six to seven inches in size. If they were flying in the room with us, you probably wouldn't hear it or notice it, but your picture can grow automatically, and you'd get a good video of it up to 25 kilometers away. We also have a content UAV system being used in Europe. Additionally, we have loitering UAVs that we're introducing, which can carry munitions. The difference between these and other munition-enabled UAVs is that we can call them back if they reach the target and it's not an opportune time; we can recover the system. Overall, I think the entire UAV business for us is very strong. We also have a suite of sensors for chemical, biological, nuclear applications, and we just won a program for $168 million. So, especially in FLIR Defense, we're very positive. We have an excellent leader there, and we're very positive about that business.

Got it. And then so for Replicator 2 specifically counter-UAS systems.

We have a system in Europe right now with Casper which is being deployed, and it's successful. That's all I can say about that at this time.

Got it. Thank you so much.

For sure.

We'll go next to Guy Hardwick with Freedom Capital Markets, go ahead.

Hi, good morning.

Good morning, Guy.

Hi, many of my questions have been addressed, but I have a broader question. Digital Imaging margins reached 24% a few years ago. If the short cycle rebounds next year, what do you see as the potential regarding incremental margins and the higher margin mix of short cycle?

Right now, if I look at Q3, our margins overall in digital imaging are about 22.6%. Last year, at this time, they were more like 24.2%. I would hazard a guess that, as a minimum, we should be as good as last year. If the short-cycle businesses recover strongly, there's an opportunity for us to exceed 25%, which would be very healthy for us. However, I maintain that with the uncertainty, especially in our longer recovery, we'll probably see more 24% plus, around 24.2%, 24.5%. But if the sensors recover, then the margin would go higher.

Okay. Thank you. And just as a follow-up. Obviously, you indicated in the statement that you see short cycle has stabilized and maybe improving. I assume that's because of booking trends. Can you give us a bit more color on booking trends in short cycle?

Yes. In the last two to three months, our book-to-bill is above 1, let's say, 1.1. But I have to always keep in mind that when we talk book-to-bill, we're talking about builds that are lower than they used to be. So I don't want to overstate that. But what that tells us is that we have reached the bottom and are recovering. The flip side on sensors themselves, the book-to-bill has not recovered yet. So people are a little more hesitant to spend money on sensors because they have the longer haul of developing cameras, whereas it's easier for them to acquire cameras. The flip side, I have to say, again, going back to FLIR, because FLIR has been so successful; FLIR has both long cycle and short cycle infrared cameras. We are very pleased that FLIR Industrial has done really well in that domain, and we expect that they will continue to do so with new products with artificial intelligence-enabled cameras that simplify decision-making for customers. We are positive there, as we are with the FLIR defense businesses.

And Robert, is that the point formerly known as Point Grey that you're referring to?

No. Point Grey is more aligned with the cameras that we have in DALSA 2B. Actually, while we kind of put it in FLIR, it's more aligned with DALSA 2B from an organizational standpoint that reports to the leader. I was talking about the infrared offering being substantial.

Not visible light. Okay. Thank you, Robert.

Thank you.

We have no further questions in queue at this time.

Thank you. Operator, thank you very much. I'll ask Jason to conclude our conference call, please.

Thanks, everyone. And thanks, Robert. If you have any follow-up questions, of course, my number is on the earnings release, please feel free to call me. And then, Alan, if you please give the replay information at the end of the call, that would be ideal. Thanks, everyone. Goodbye.

Thank you. Ladies and gentlemen, this conference is available for replay, and that will begin today, October 23, 2024, at 10:00 Pacific daylight time through November 23, 2024, at midnight. To access the AT&T playback service during that time, you can dial toll-free 866-207-1041, and the access code is 128-4672. International participants may dial area code 402-970-0847 using the same access code. Those numbers again are 866-207-1041, an area code 402-970-0847. The access code once again is 128-4672. That will conclude your conference call for today. Thank you for your participation and for using AT&T Event Teleconferencing. You may now disconnect.