Teledyne Technologies Incorporated (NYSE:TDY) Q3 2023 Earnings Call Transcript
Teledyne Technologies Incorporated (NYSE:TDY) Q3 2023 Earnings Call Transcript October 25, 2023
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Teledyne's Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Mr. Jason VanWees. Please go ahead.
Jason VanWees: Thanks John and good morning everyone. This is Jason VanWees, Vice Chairman, and I'd like to welcome everyone to our third 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’ and Senior Vice President and CFO, Sue Main. Also joining today are Steve Blackwood who will assume the role of SVP and CFO on December 1st; Melanie Cibik, currently Senior Vice President, General Counsel, Chief Compliance Officer and Secretary will be promoted to Executive Vice President on January 1st; and Edwin Roks and George Bobb, currently Executive VPs of Teledyne will assume the roles of CEO and President and COO, respectively, on January 1st.
After remarks by Robert and Sue, we will ask for your questions. Of course, 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. 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.
Robert Mehrabian: Thank you, Jason, and good morning and thank you for joining our earnings call. These are exciting times for Teledyne. We have new leadership coming in, but we also have continuity and resilience in our programs, in our operations and our ability to meet what we say we would do in our earnings. In the third quarter, as example, we achieved record operating margin and earnings per share. GAAP operating margin of 18.8% was a third quarter record. On a non-GAAP basis, the operating margin was 22.8%, which was an all time record for any quarter. Likewise, GAAP earnings per share of $14.15 (sic) [$4.15] was a third quarter record and non-GAAP earnings per share of $5.05 was an all-time record for Teledyne. Compared to last year, GAAP and non-GAAP operating margins increased 119 and 86 basis points, respectively, and both GAAP and non-GAAP earnings per share increased approximately 11%.
Our overall third quarter performance was led by growth in our marine, medical, aerospace and certain defense businesses, coupled with vigilant cost control. There was, however, some deterioration in certain end markets such as industrial automation and laboratory instrumentation. Nevertheless, given our focus on operational excellence, operating margins increased, both sequentially and year-over-year in Digital Imaging and Instrumentation segments, helping generate record earnings. Given continued debt repayment through September, which totaled about $680 million year-to-date, our consolidated leverage ratio declined to just under 2 times. And finally, we're pleased to have added Xena Networks to our test and measurement businesses which also continued to perform very well in a challenging environment.
In terms of our outlook, we now see total sales for 2023 growth of about 4% or a little less than the second half versus our July outlook with the fourth quarter sales being roughly $1.45 billion. Approximately half of this change in incremental -- is due to incremental currency translation headwind from July to now, and the balance being further deterioration in industrial automation and laboratory instrumentation markets mentioned earlier. However, given the strong margin and earnings achieved in the third quarter, we're raising our non-GAAP earnings outlook to $19.25 at the midpoint from a prior outlook of $19.10. I will now further comment on the performance of our four segments. Third quarter sales in our Digital Imaging segment were flat compared to last year.
Sales of x-ray products, infrared imaging detectors and surveillance system increased year-over-year but were offset by lower sales of unmanned ground systems, and micro-electro-mechanical systems or MEMS. Sales of commercial marine hardware and software were flat, but declined organically. Finally, cameras and sensors for industrial automation declined compared to last year. Like Teledyne as a whole, the Digital Imaging business portfolio is exceptionally well balanced across market segments and geographies. With the help of bolt-on acquisitions and growth in our medical and defense markets, we were able to offset declines in industrial automation and its -- and the small portion of our overall portfolio that is associated with consumer discretionary spending.
Despite of the flat revenue, margins performance improved considerably to record levels with the FLIR businesses collectively slightly higher than segment average margins. Turning to our Instrumentation businesses. This segment consists of marine instruments, test and measurement and environmental instruments. Overall, third quarter sales in Instrumentation segment increased 7.4% versus last year. Sales of marine instruments increased 20.5% in the quarter, primarily due to ongoing recovery in offshore energy markets and also greater sales of acoustic imaging systems. Sales of electronic test and measurement systems, which includes oscilloscopes, digitizers and protocol analyzers, collectively increased 2.5%. We continue to see some softness in sales of analyzers for electronic storage and data center application.
But, this was more than offset by sales of devices for wireless and video protocols as well as continued strong sales of oscilloscopes. Demand for high-speed networking customers remains very healthy, and we see the Xena acquisition, enhancing our offerings in this market. Sales of environmental instruments decreased slightly compared to last year, with sales of air quality and gas and flame safety analyzers offsetting some decline in drug discovery and laboratory instruments. Overall, Instrumentation segment operating profit increased over 20% in the third quarter with GAAP operating margins increasing 277 basis points to 26% and 253 basis points on a non-GAAP basis to 27%. These were all-time records for this segment. Third quarter sales in our Aerospace and Defense Electronics segment increased 8.1%, driven by growth both in defense electronics and aerospace -- commercial aerospace products.
GAAP and non-GAAP operating profit increased 11.5% with margins 81 basis points greater than last year. Finally, in the Engineering Systems segment, third quarter revenue increased 4.1%, but operating profit declined slightly, given an unfavorable product mix but also a tough comparison with the prior year period. So, in conclusion, we are pleased to continue to do what we know best, grow sales and margin in businesses with favorable markets, while cutting costs and protecting margins in those businesses where market trends are more challenging. At the same time, especially now that our leverage continues to decline, we should acquire and integrate complementary businesses. Before turning the call to Sue, I want to thank her for her more than 34 years of service to Teledyne, and I wish her very, very well-earned retirement.
I will greatly miss her. And finally, I want to congratulate our other executives on their well-deserved promotions announced yesterday, and I and the entire Board are delighted that the same talented group of executives will continue to serve Teledyne's leadership. Sue?
Sue Main: Thank you, Robert, for the kind words, and good morning, everyone. 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 2023 outlook. In the third quarter, cash flow from operating activities was $278.2 million. Free cash flow, that is cash from operating activities less capital expenditures, was $255.2 million in the third quarter of 2023 compared with $252.2 million in 2022. Capital expenditures were $23 million in the third quarter of 2023 compared with $16.7 million in 2022. Depreciation and amortization expense was $76.9 million for the third quarter of 2023 compared with $80.8 million. We ended the quarter with approximately $2.74 billion of net debt.
That is approximately $3.24 billion of debt less cash of $508.6 million. Our stock-based compensation expense was $8 million in the third quarter of 2023 compared with $6.7 million in 2022. Turning to our outlook. Management currently believes that GAAP earnings per share in the fourth quarter of 2023 will be in the range of $4.07 to $4.21 per share with non-GAAP earnings in the range of $4.95 to $5.05. And for the full year 2023, our GAAP earnings per share outlook is now $15.82 and to $15.96. And on a non-GAAP basis, we are raising our outlook to $19.20 to $19.30. Both the fourth quarter and full year non-GAAP outlook excludes estimated pretax charges for further FLIR integration costs. The 2023 full year estimated tax rate, excluding discrete items, is expected to be 22.1%.
I will now pass the call back to Robert.
Robert Mehrabian: Thank you, Sue. Operator, we'd now like to take questions. If you're ready to proceed with the questions and answers, please go ahead.
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