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Operator: Ladies and gentlemen, good morning. Thank you for standing by, and welcome to the Teledyne Fourth Quarter Earnings Call. At this time, all lines are in a listen-only mode. Later there will be an opportunity for your questions and instructions will be given at that time. And as a reminder, today’s conference is being recorded. At this time, it’s my pleasure to turn the conference over to our host, Mr. Jason VanWees. Please go ahead.

Jason VanWees : Thank you, Tom, and good morning, everyone. This is Jason VanWees, Vice Chairman of Teledyne, and I’d like to welcome everyone to Teledyne’s Fourth Quarter and Full Year 2022 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; Senior Vice President and CFO, Sue Main; Senior Vice President, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibik. Also joining today is Edwin Roks, EVP of Teledyne. After remarks by Robert and Sue, we will ask for your questions. Of course though, before we get started, attorneys have reminded me to tell you that all forward-looking statements made this morning are subject to various, risks, assumptions 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. Good morning, and thank you for joining our earnings call. 2022 ended up being an excellent year. We concluded it with all-time record quarterly and full year sales and earnings per share. During 2022, Teledyne, as with many other companies, found itself faced with external forces beyond our control. These were inflation, strong dollar and part shortages. Nevertheless, with continued €“ we continued our long history of navigating difficult market environment and will ultimately deliver earnings in excess of our own expectations. Excluding foreign currency headwinds, which negatively impacted fourth quarter sales growth by approximately 2.6%, growth in local currency would have been 5.7%.

Excluding ETM acquisition, core growth in local currency would have been approximately 5%. GAAP operating margin of 19.3% was an all-time record and non-GAAP operating margin of 22.4% and increased 95 basis points from last year. GAAP and non-GAAP earnings of $4.74 and $4.94 respectively, were also records for Teledyne. Fourth quarter free cash flow was reasonably healthy, but included interest payments of approximately $30 million, which last year were made in the third quarter of 2021. While we completed the acquisition of ETM, our leverage ratio continued to decline from 3.8 times in May of 2021 when we acquired FLIR to 2.4 times at the end of 2022. Finally, our acquisition pipeline remains healthy as evidenced by the recent addition of ChartWorld was maritime navigation software and hardware tools bridge a product and technology gap between our Teledyne Marine and Raymarine businesses.

Turning to our 2023 full year outlook, while still very early in 2023 and with many unknowns including projections of a recession, we’re inclined to offer an initial revenue and earnings outlook in line with consensus expectations. On revenue, we see total 2023 sales growth of approximately 5% including incremental sales from recent bolt-on acquisitions. For our backlog-driven long-cycle businesses, we expect growth to be higher than average. For the majority of our short-cycle commercial businesses, foreign currency headwinds will impact the first quarter of 2023 where comparisons are tough and economic uncertainty and export regulations remain fluid. We continue to see overall growth, not contraction in these businesses, but expect that growth will be less than the total company average.

On the other hand, supply chain constraints are improving, albeit modestly. There are a few minor other non puts and takes such as increased scope on our NASA contract at Engineered Systems equally offset by the 2022 completion of our OneWeb contract in the Aerospace and Electronics segment, but no other significant items to highlight this early in the year. Our earnings outlook approximately 50 basis points of margin improvement in 2023 and we currently think instrumentation and digital imaging will be above-average contributors to this, while margins at Aerospace and Defense Electronics may be flat or declined slightly, given especially tough comps as a greater mix in 2023 of Defense Electronics relative to commercial aerospace aftermarket sales.

I will now further comment on the performance of our four segments. In our Digital Imaging segment, fourth quarter sales were relatively flat despite currency translation headwind of approximately 3.5%. Sales increased year-over-year for our industrial and scientific vision systems, as well as our low-dose high-resolution digital x-ray detectors. Sales of commercial infrared imaging cameras and components also increased and were at record levels since closing the FLIR acquisition in May of 2021. While total FLIR-related sales increased sequentially from the third quarter, sales of some surveillance and unmanned gun systems declined from last year on especially tough comparison. On the other hand, sales of unmanned air systems increased considerably year-over-year.

GAAP segment operating margin was 18.8% and adjusted for intangible asset amortization only, segment margin was 23.8%, approximately 50 basis points greater than the fourth quarter of last year. In our Instrumentation segment, overall fourth quarter sales increased 7.9% versus last year, despite approximately 2.4% of FX translation headwind. Sales of electronic test and measurement systems, which include oscilloscopes, digitizers and protocol analyzers increased 3.8% year-over-year despite a tough comparison with the fourth quarter of last year’s. Sales of oscilloscopes and protocol analyzers remained healthy with continued strength in products for industry standards such as peripheral component, Interconnect Express or PCI Express and Universal Serial Bus or USB.

Sales of environmental instruments increased 9%, compared with last year with greater sales of both drug discovery and laboratory instruments, as well as air monitoring and process gas analyzers. Sales of marine instrumentation increased 9.8% in the quarter, primarily due to a strong marine defense sales and the ongoing recovery in offshore energy markets. Overall, Instrumentation segment operating profit increased 18.4% in the fourth quarter with GAAP operating margin increasing 215 basis points to 24.2% and 162 basis points on a non-GAAP basis excluding intangible asset amortization, which brought the non-GAAP margins to 25.3%. In Aerospace and Defense Electronics segment, fourth quarter sales increased 8.9%, driven by broad-based growth of both defense and commercial aerospace products.

GAAP and non-GAAP segment operating profit increased approximately 30% with margins over 480 basis points greater than last year. In the Engineered Systems segment, Fourth quarter revenue increased 6.7%, but operating profit declined given lower margins for some of our electronic manufacturing service products. Before I turn the call over to Sue, I want to make a couple of concluding remarks. First, I was very pleased that Teledyne was able to overcome issues faced by most companies in 2022. Despite the macroeconomic and supply chain challenges noted earlier, our results exceeded the top end of our earnings outlook issued at any point during the year. While difficult to predict outcomes in 2023, we are reasonably confident that a number of our long-cycle businesses serving defense, medical, energy and aerospace markets will grow.

While demand is more difficult to predict in our short-cycle instrumentation and imaging businesses, supply chain constraints and the previous premiums for gray market electronic components have begun to ease modestly. Given the strength of our balanced business portfolio and our management’s long history of navigating challenging markets, I am optimistic that Teledyne will continue on its successful path in 2023. I will now turn the call over to Sue.

Susan Main : 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 first quarter and full year 2023 outlook. In the fourth quarter, cash flow from operating activities was $237.7 million, compared with cash flow of $295.6 million for the same period of 2021. The fourth quarter of 2022 reflected greater interest payments due to the timing of fixed rate bond interest and increased inventory purchases, compared with the fourth quarter of 2021. Free cash flow, that is cash from operating activities less capital expenditures was $203.6 million in the fourth quarter of 2022, compared with $261.6 million in 2021. Capital expenditures were $34.1 million in the fourth quarter of 2022, compared with $34 million in 2021.

Depreciation and amortization expense was $81.8 million for the fourth quarter of 2022, compared with $86.2 million. In addition, non-cash inventory step-up expense for the fourth quarter of 2021 was $47.8 million with no comparable amount recorded in the fourth quarter of 2022. We ended the quarter with approximately $3.28 billion of net debt, that is approximately $3.92 billion of debt less cash of $638.1 million. Our stock option compensation expense was $6.2 million in the fourth quarter of 2022, compared with $6.4 million in 2021. Turning to our outlook. Management currently believes that GAAP earnings per share in the first quarter of 2023 will be in the range of $3.57 to $3.69 per share with non-GAAP earnings in the range of $4.37 to $4.47 and for the full year 2023, our GAAP earnings per share outlook is $15.80 to $16.10 and on a non-GAAP basis, $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 to Robert.

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

Operator: We’ll begin today with a question from Greg Konrad representing Jefferies. Please go ahead.

Greg Konrad : Good morning.

Robert Mehrabian: Good morning, Greg.

Greg Konrad : Good quarter. And then, I mean, maybe just to start, given your commentary around supply chain and long cycle outperforming in 2023, can you maybe just update us on your expectations for defense across the businesses? I mean, it seems like peers have called out somewhat underperformance on supply chain this year. What are you seeing just in terms of the supply side and also in terms of demand?

Robert Mehrabian: Frankly, we think defense, while the growth was relatively modest in 2022 was 2% to 3%, that’s our generally our U.S. government businesses. We think in 2023 it’ll be about 5% organic growth. So we are relatively optimistic. And then

Greg Konrad : I mean, I was pleasantly surprised with just margins in the commentary. I mean, some of them seem very outside across the segment. Just in terms of your margin commentary for this year, what are some of the assumptions around price and inflation add back and just looking at that Q4 outperformance, anything unusual in that just let me think about the opportunities for 2023.

Robert Mehrabian: Well, I think basically in 2022, we hit just about every cylinder at the end of the quarter especially the last month, month and a half that we stand out very favorably. Of 2023, we think Q1 is going to be softer just like we had in 2022. Mostly, we have some headwinds from FX in the first quarter. We think there will be a decline in our revenue, maybe as much as 10%, but we don’t know. It’s too early. Maybe 1% of headwind, maybe 1% of revenue decline, I would say that. On the other hand, I think we will pick up in Q3, Q4, just like we did this year. Right now, early in the year, the first two weeks, we had some slower orders in some of our short-cycle businesses. But the last two weeks they seem to be picking up. So overall, Greg, I am optimistic about 2023 altogether. .

Greg Konrad : And then maybe just sneaking one last one in. I mean, how are you thinking about free cash flow in 2023, just given top-line growth, margin expansion and any working capital needs? I mean, in the past, you talked about a target, how are you thinking about 2023 in terms of free cash flow?

Robert Mehrabian: Yes, I think just pausing for a second because this would be asked. In 2022, we were a little short on cash. Well, a little $200 million, to be exact and we think that’s not going to happen in 2023. We think our cash in 2023 is going to be higher, approximately $900 million in cash, whereas in 2022, we really have to be very careful. We build a little more inventory than we wanted to primarily because of the shortages. We fell about $30 million short on revenue in the fourth quarter because of shortages. Also in 2022, there was that lack of R&D deductibility which everybody has referred to, that costs us about $40 million. And we had about $60 million of more cash taxes, which brings us $400 million. We don’t think that’s going to repeat itself in 2023. So, we’re optimistic.

Greg Konrad : Thank you.

Operator: And next, we’re going to go to the line of Elizabeth Grenfell, representing Bank of America. Your line is open.

Elizabeth Grenfell : Just a couple of questions, one, in the 5% revenue growth guidance. Could you break out what is price and what is volume in that?

Robert Mehrabian: I think it’s a little too early to do both, but I’ll tell you that’s about 3.5% of organic growth and then 1.5% from our acquisitions that we made including the most recent one that we announced. If you look at projections from GDP and inflation at the current time, I am one of those people that doesn’t really believe in these projections at this point. But the projections are that pre-GDP in the U.S. will only grow 1.4% in 2023 and inflation will drop to about 2.7%, overall developed markets probably GDP will grow 1.1%. That’s where the projections are maybe a little higher in inflation. But Elizabeth, it’s a little too early for me. I don’t think the economies know either. So, I’ll just say that we expect to have an organic growth of 3.5% at this time. If things move like they did in 2022, hopefully, we’ll increase that and of course, we’ll make more acquisitions too.

Elizabeth Grenfell : Okay. And then, can you give us a little more detail on your outlook by segment and where you see the most opportunity for upside?

Robert Mehrabian: Sure. First, I think in the instrumentation, which includes marine, environmental and test and measurement, we expect growth to be about 5% or average of the company. Of course, that doesn’t have acquisitions in it. In the Digital Imaging segment as a whole, we again expect a 5% growth, maybe 5.1%, aerospace and defense, maybe 4% and Engineered Systems, maybe a little over 5%. Part of the reason for aerospace and defense being a little less than the average, last year, we had that OneWeb program that we ended successfully, which contributed about $20 million in revenue. On the other hand, in Engineered Systems, we think we’ll be a little above the average, because we won that very successfully won the NASA MOSSI contract, which adds about $20 million. So, that’s – at this point, that’s all I can say about that.

Elizabeth Grenfell : Thank you very much.

Robert Mehrabian: Sure Elizabeth.

Operator: And we’ll go to the line of Jim Ricchiuti with Needham & Company. Please go ahead.

Jim Ricchiuti : Hi, thank you. So is it the short-cycle commercial business where if you looked at 2023, Robert, where there might be some upside or are there some parts of the long-cycle business that could drive the upside versus the 5% that you are talking about for the company as a whole?

Robert Mehrabian: I think if I broke it down, the marine businesses have a little longer look at them. We think marine as a whole also because the energy €“ offshore energy markets are improving and our projections for that are over 7%, maybe as much as 7.5% in marine. And in the short-cycle businesses, which is environmental and test and measurement, we think that will be about 3.5% together. We think that I have already talked about some of the others. In digital imaging, where we did have a really good year and a really good fourth quarter which was in DALSA and e2v. We think we are going to be relatively flat organically, but we made some acquisitions, so that should give us about with the acquisitions maybe 3.8%. We think FLIR would do better last next year, maybe a little over 5%, 6%.

So €“ and the – it’s built between defense and aerospace, defense is longer cycle than aerospace. If you discount the $20 million that we don’t have in web, we think defense will grow some, Aerospace may be flat, more short cycle and I’ve already talked about Engineered Systems and theMOSSO, which we won which are longer-cycle businesses. We feel comfortable there. .

Jim Ricchiuti : So Robert, it sounds like you are relatively positive on constructive on what you are seeing out in the market. If I look at your commercial businesses, you alluded to some variability in bookings trends in some parts of the business and maybe you can provide a little bit more color on that. But is there anything that you are seeing in the commercial areas, whether it’s test and measurement or machine vision that might be consistent with a slowing economy?

Robert Mehrabian: Yes, a little bit. I think you hit it on the head. Just a sliver, I’d say in €“ if you look at Marine, our book-to-bill in the fourth quarter was 1.15. That’s why I said it’s longer cycle, we feel good about it. We’re just going to specifically what you said, environmental and test and measurement, while for the whole year, our book-to-bill is about 1 in the fourth quarter, it dropped down to 0.96. To me, that’s a sliver lower. So we are a little cautious about that. So DALSA, e2v dropped even further a little bit and I think FLIR would be okay, but some of our vision systems and scientific cameras, we just hit it out of the park in the fourth quarter and we think we’re a little cautious about predicting.

On the other side, I mean, just to cut to the chase, the other side is that it’s very early. Everybody is predicting one thing or another. All we’re doing is we are kind of hunker down and we are going to do what we always do. If we have to cut, we have cut and if we have to hire, we’ll hire and we’ll do what we have to do to make our numbers.

Jim Ricchiuti : Was the book-to-bill, last question, was the book-to-bill around 1 for the company as a whole?

Robert Mehrabian: Yes, just under 1, about 0.96, 0.97, but that has Engineered Systems in it, which was 0.9%, but that’s but it’s very lumpy. For the year, Engineered System was 1.12, which is a long-cycle business. For the year, the company was closer to 1.

Jim Ricchiuti : Got it. Thanks very much.

Robert Mehrabian: For sure.

Operator: And our next question will come from the line of Joe Giordano with Cowen. Please go ahead.

Joe Giordano : Hey guys. How are you?

Robert Mehrabian: Good morning, Joe. Very well.

Joe Giordano : I’ve been hearing more people talk about risks, what may be in the second half of the year from prices actually going down just given some of the deflationary characteristics you’re seeing in prices paid and things like that. Is that something that you’re seeing, like how do you think about price and your ability to continue to raise or is it more about supporting where they are now?

Robert Mehrabian: Well, in 2022, we added, Joe, we added about 4% in pricing. And then, if you hold against that, what we ended up spending, we had wages go up 4.5, overall buying stuff about $2.5 billion of direct and indirect materials, that went up overall, about 6.7%. Of course, that’s on the cost of goods sold. I am only saying this because I want to put this in perspective. So we increased prices across the board, 4%. Our materials inflation was 3.7% negative. Our wages were 1% negative to sales. So when you add those two, sales, materials inflation was and wage inflation was 4.7% negative. We increased prices 4%. So net-net, we suffered about 60 basis points of determent between the two. Now, going forward, we expect to increase prices.

How much? It’s difficult to predict because as you said, some people are talking about decreasing prices in the second half. But we have to increase prices somewhat because we are going to have more inflation that we inherited and we are going to have to €“ we are giving our employees about 4% raises across the board. So to make up for that we have to increase prices somewhat. It depends on how the market behaves itself. We are right now saying our overall margins are going to improve 50 basis points versus last year and that’s pretty good. So, we’ll have less broker premiums. Last year, we paid $90 million excess fees to our brokers for parts. We think in 2023, that will maybe be half. So, I mean, it’s a long answer to a short question. There is a lot of unknowns, but I feel we’ll maintain our crisis and maybe increase on that level.

Joseph Giordano : If I think about your €“ the bottom-end of your guide, I mean it’s a pretty narrow guide, but if I think about the bottom-end of that guide, how protected do you think you are if there is like, what kind of recessionary outlook does that have? If we do €“ some of these macro indicators are pretty bad. If we do go into a recession, do you feel like you have coverage there at the bottom-end of the guide and like which businesses? Like do you €“ are you anticipating declines at certain businesses at the bottom-end?

Robert Mehrabian: Well, the longer cycle businesses are less cyclical which would be our government defense about 25%, medical, scientific, energy, aerospace in overall, which constitutes about 40% of our portfolio, I don’t think those are going to be affected. On the flip side, the short cycle businesses will constitute 60% of our overall portfolio. If the world macroeconomic really suffers, obviously, we are going to have to take some hits. As you said, we have a very narrow range that we came out with, primarily because we’re not sure what’s going to happen. We could have probably had a larger range, but coming out of 2020 as strongly as we did, we feel okay about that.

Joseph Giordano : Just the last one for me. Have you internally started adding things like, have you started to be a little bit more judicious on expenses and travel and things like that in anticipation of things weakening? Or is that you’ll adjust as necessary?

Robert Mehrabian: Oh no, that’s a mode of our operation. It’s something we do day in and day out regardless of what the macroeconomics are. We control everything. We controlled expenses in travel, we eliminate square footage of our manufacturing facilities. Everything we do we’re vigilant and that’s the only way we made it through 2022 as well as we did and we’re going to continue that. .

Joseph Giordano : Thanks guys.

Robert Mehrabian: For sure.

Operator: And we’ll go to the line of Guy Hardwick representing Credit Suisse. Please go ahead.

Guy Hardwick : Hi, good morning. So it’s been about 20 months since Teledyne closed on FLIR. Can you give us a bit of insight as to how to combine the portfolios is progressing, whether there is any €“ if we’ve seen some revenue benefits from combining the two technology platforms? I mean in the past, you’ve done the same with DALSA and e2v. I’m just wondering if there is any comparable success stories or potential success stories to come from that?

Robert Mehrabian: Thank you, Guy. Good question. The answer is yes. We have some new products. We are €“ we have some new markets, especially in machine vision and for example, also mapping or FLIR has this Raymarine business and we’ve had this geospatial business, where we do a lot of hydrographic mapping and the most recent acquisition that we made ChartWorld bridges the gap between those two. I don’t know if we would have bought ChartWorld if we didn’t have FLIR, we were just hold geospatial. So, those are really good. The other thing is that, FLIR has really exceptional products in the unmanned air vehicle domain. And we have had historically good products at Teledyne legacy in the underwater domain. FLIR also brings now ground-based vehicles.

So now, if you look at the combination of the two companies, we have about $450 million or so of revenue in unmanned vehicles, unmanned air vehicles, unmanned ground vehicles, unmanned underwater vehicles. And there is a lot of common technologies between those three in terms of control, because of software in terms of digitization and imaging. So, those are some examples, GUY, after 20 months. But that will, of course, grow as a function of time.

Guy Hardwick : Okay. Thank you. And just a quick follow-up. I am just trying to understand the FX guidance implied in your guidance, because it looks like at current rates that FX actually could be a tailwind in the second half?

Robert Mehrabian: It could be. As we think in the first half, certainly, first quarter, we think it’s going to be a 1% headwind versus 2.1% to 2.5% last year. Having said that, I don’t think anybody knows. I don’t think the economies know, they might say, but they don’t know. I don’t think anybody knows what’s going to happen. I certainly don’t ever put it that way.

Guy Hardwick : Okay. But can you just clarify what rates you perhaps think about dollar euro rate you have currently?

Robert Mehrabian: Well, currently, it’s 1.09.

Guy Hardwick : That’s not what you’re using in guidance, though, right?

Robert Mehrabian: We’re using about 1.06.

Guy Hardwick : Okay. Thank you. Operator And there are no other questions queued up at this time.

Robert Mehrabian: Thank you very much. Operator, I will now ask Jason to conclude our conference call.

Jason VanWees : Thanks, Tom, and thanks, everyone, for joining, of course, if you have follow-up questions, certainly feel free to call me or email me. My phone number on the earnings release. And Tom, if you could give the replay information on the call and conclude we’d appreciate it. Thanks you.

Operator: Absolutely. Thank you. Ladies and gentlemen, this conference will be available for replay starting at 10 AM Pacific and running through February 25 at midnight. You may access the AT&T playback service at any time by dialing 866-207-1041 and entering the access code of 347-2355. International participants, you can dial 402-970-0847. Those numbers again are 866-207-1041. International participants please dial 402-970-0847 and enter the access code of 347-2355. And that does conclude our conference for today. We thank you for your participation and using the AT&T Event Services. You may now disconnect.