Q4 2024 Earnings Call Transcript

Welcome to Teledyne's Fourth Quarter Earnings Release Conference Call. Here's our first speaker, Mr. Jason VanWees.

Good morning, everyone. This is Jason VanWees, Vice Chairman, and I'd like to welcome everyone to Teledyne's Fourth Quarter and Full Year 2024 Earnings Release Conference Call. We released our earnings release this morning before the market opened. Joining me today are Teledyne's Executive Chairman, Robert Mehrabian; CEO, Edwin Roks; President and COO; George Bobb; Senior Vice President and CFO, Steve Blackwood, and Melanie Cibik, EVP, General Counsel, Chief Compliance Officer and Secretary.

After remarks by Robert, Edwin, George and Steve, we will answer your questions. Of course, though, 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.

Thank you, Jason, and good morning, everyone, and thank you for joining our earnings call. In the fourth quarter, we achieved many all-time records. Record sales increased 5.4% and accelerated from the third quarter. Fourth quarter and full year non-GAAP earnings per share were records, as were fourth quarter and full year non-GAAP operating margins.

Finally, our record annual free cash flow, given that, we ended the year with a very low leverage despite $1.1 billion of capital deployment in fiscal 2024. We successfully closed the Micropac acquisition at the beginning of fiscal 2025 and we continue to expect the completion of the Excelitas carve-out transaction in the first quarter. We entered 2025 optimistic about our business portfolio in both commercial and defense markets. Our short-cycle commercial businesses improved throughout 2024 and comparison eased in 2025. We also believe our defense businesses, which favor purchase orders versus protracted appropriations, unmanned versus manned platforms and standard products versus highly customized solutions are well positioned in the current environment.

Nevertheless, especially given the very strong US dollar, we believe it's prudent to be a bit cautious in our 2025 outlook. Including the acquisition of Micropac, but excluding the Excelitas carve-out, since this acquisition has not yet closed. We believe 2025 sales may grow approximately 4%, with non-GAAP earnings double that amount at approximately 8% at the center of our outlook range. I will now turn the call over to Edwin, who will further comment on the performance of our Digital Imaging segment.

Thank you, Robert. This is Edwin and I will first report on the Digital Imaging segment, which represents approximately 54% of Teledyne's portfolio. Fourth quarter 2024 sales were a record and increased 2.5% compared with last year. The performance of Digital Imaging largely reflected record sales at Teledyne FLIR, with healthy growth across FLIR's commercial and defense infrared imaging systems, unmanned and counter unmanned air systems as well as maritime hardware and software.

While sales to industrial machine vision markets declined year-over-year, quarterly sales were at the highest level in 2024. Our legacy space-based imaging business continued to grow. While some healthcare businesses such as cancer radiotherapy were resilient, sales of X-ray detectors for more consumer discretionary dental markets declined year-over-year. Non-GAAP operating margins improved sequentially and year-over-year, primarily due to the contribution from FLIR, which more than offset the year-over-year decline in higher contribution margin machine vision sales. 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 and measurement businesses, which contributed a little under 25% of sales. For the total segment, overall fourth quarter sales increased 10.1% versus last year, with growth in each major product line. Sales of marine instruments increased 21.1% in the quarter due to both strong offshore energy and subsea defense sales.

Sales of environmental instruments increased 1.7%, primarily due to greater sales of laboratory instrumentation as well as air safety instruments. Sales of electronic test and measurement systems, which include oscilloscopes, protocol analyzers and Ethernet traffic generators, sequentially improved for the third consecutive quarter and increased 2.3% year-over-year. Instrumentation operating margin in the fourth quarter increased 27 basis points to 27.3% and 96 basis points on a non-GAAP basis to a record of 29.1%. In the Aerospace and Defense Electronics segment, which represents roughly 14% of Teledyne sales, fourth quarter sales increased 6.8%, driven by growth of Defense Electronics products.

Overall segment operating profit increased year-over-year, with GAAP and non-GAAP segment margin increasing over 150 basis points. For the Engineered Systems segment, which contributes approximately 8% to overall sales, fourth quarter revenue increased 11%. However, segment operating profit decreased due to higher cost to complete estimates on certain programs. I will now pass the call back to Robert.

Thank you, George. I'll conclude with a few comments on capital allocation. In 2024, we continued our tradition of prudent and flexible capital deployment. That is, we opportunistically repurchased stock when we felt our shares were very undervalued.

While at the same time, we were willing to forgo more large acquisitions when we thought price expectations were unreasonable. But then as our own valuation partially recovered and M&A markets became more rational, we pivoted by stopping repurchases and we're pleased to announce the Micropac and Excelitas acquisitions. Given over $1.1 billion of free cash flow in 2024, our balance sheet capacity is the highest in years and our M&A pipeline remains healthy. Nevertheless, we will continue to exercise discipline and flexibility as we have always done.

I will now turn the call over to Steve Blackwood.

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 first quarter and full year 2025 outlook. To begin, our fourth quarter non-GAAP earnings per share reflect the removal of $16.6 million of FLIR acquisition related tax benefits. Remaining tax benefits of $13.6 million were approximately half offset by a higher tax rate.

In the fourth quarter, cash flow from operating activities was $332.4 million compared with $164.4 million in 2023. Cash flow, that is cash flow from operating activities less capital expenditures was $303.4 million in the fourth quarter of 2024 compared to $124.2 million in 2023. Cash flow increased in the fourth quarter, primarily due to lower income tax payments, but also due to improved working capital performance. Capital expenditures were $29 million in the fourth quarter of 2024 compared with $40.2 million in 2023. Depreciation and amortization expense was $77.1 million in the fourth quarter of 2024 compared with $77.4 million in 2023. For the full year 2024, free cash flow was $1.11 billion.

We ended the year with just under $2 billion of net debt. That is approximately $2.65 billion of debt, less cash of approximately $650 million. Now turning to our outlook, which includes the acquisition of Micropac, but excludes the Excelitas carve-out, which has not yet closed. Management currently believes that GAAP earnings per share in the fourth quarter of 2025 will be in the range of $3.90 to $4.04 per share, with non-GAAP earnings per share in the range of $4.80 to $4.90. And for the full year 2025, we believe that GAAP earnings per share will be in the range of $17.70 and to $18.20 with non-GAAP earnings per share in the range of $20.10 (sic) [$21.10] to $21.50. I will now pass the call back to Robert.

Thank you, Steve. We would now like to take your questions. Paul, if you're ready to proceed with the questions and answers, please go ahead.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Noah Poponak with Goldman Sachs. Please proceed with your question.

Hey, good morning, everyone.

Good morning, Noah.

Robert, you referenced 4% growth top line in the 2025 guidance. Is that 3% organic and a point from Micropac or is that 4% organic?

No, it's -- what I mentioned is, as you said, a little over 4%, 3.2% organic and about 1% through acquisitions. Acquisitions include Micropac, Noah, but they also include part of Valeport, which we acquired for our marine businesses and a part of Adimec that we acquired earlier in the year for the Digital Imaging. Those add up to about 1.1%. So 1% -- total is 4.2%, yes.

Okay. And if Excelitas closes on schedule, can you talk about what that adds in revenue, EBITDA, earnings to the year?

Yes. I think it depends on when it closes, as you can appreciate. But I'm going to say, about $15 million a month, Noah.

Okay. Great. And then maybe if you could just talk about the 3% or slightly over 3% organic assumption. I mean, we've had this discussion for a few quarters now of your short cycle versus your long cycle.

I guess in the release, it sounded, it looked like you referenced kind of long cycle still strong. It looked like you were seeing short cycle better. Hard to tell how much better. All the leading indicators there still look a little kind of better but a moving target.

So what are you seeing in those businesses in machine vision and instrumentation? And how did you go about deciding what kind of recovery to assume in the guidance in those businesses?

Okay. So let me start with, if I may, I'll do it by segment, which is, should make it clear. On an organic growth basis, as you and I agree, our target is about 3.2%. If you go to Instruments, which includes marine, environmental and test and measurement, we expect all three of those subsegments to grow with a combined organic growth of 3.8%.

In Digital Imaging, we believe the total Digital Imaging organically will grow just under 3%, maybe 2.8%. Aerospace and Defense, right now, we're targeting it at 4%. But once you include that Micropac acquisition we just closed, that will then jump up to 8%. Engineered Systems, we assume it will grow about 2.3% organically.

So that kind of is the summary of the segments and the growth. So in other words, Noah, we expect everything to grow organically in the lower single to mid-single-digits.

Okay. I appreciate all that detail. Thank you.

For sure, Noah.

Thank you. Our next question is from Greg Konrad with Jefferies. Please proceed with your question.

Good morning.

Good morning, Greg.

Yes, I don't know what they called me upfront. But maybe just starting with the Digital Imaging outlook, I mean, a lot to unpack in the quarter and you have both short cycle and FLIR. Can you maybe just put a finer point on kind of last year into next year, how you're thinking about vision, what you're seeing out of FLIR defense? And maybe stuff like health care that was a little bit weaker in 2024, how you're kind of thinking about that recovery?

Yes. Let me do '24 and then '25. And I'll break it up between FLIR and our what we call our historical Digital Imaging before FLIR. So in '24 over '23, we had a little growth in FLIR overall. Primarily, it was held back by a small business that we have, which deals with mid-market two dimensional area scan, which is kind of a machine vision business.

That declined about $40 million. So if you take that out, the rest of FLIR actually increased about $70 million year-over-year and it increased in almost all areas. It increased in our cores, which we sell, microbolometers, as well as indium antimonide cores. It increased in tomography, both infrared, instruments and cameras.

And our Raymarine businesses kind of held steady. They were down a little bit, but not much. So overall, FLIR increased. Defense in FLIR did really well and it increased about 9% and all of its various subsegments did well.

So FLIR now going to '25, we're assuming about a 2.8% to 3% overall increase because we are still a little cautious about the commercial businesses. But forgive me, FLIR by itself will increase about 3.9%, but we're still a little cautious about the camera businesses. But we think the defense businesses they are very, very healthy because we have really good backlog. If you go to what we call our traditional digital imaging before FLIR, we think the growth is going to be modest.

Overall growth would be about 3.1%, but some of that comes from the Adimec acquisition that we did in midyear. So if you subtract that out, it's closer to 1.2%. So when you add those two up, it's overall growth, both through acquisitions and organic for the total Digital Imaging would be about 3.6%. We have part of the reason we're being a little cautious especially in the commercial Digital Imaging, especially the legacy part is because while we had a little bit of tailwind this quarter from foreign exchange, we think we're going to have headwinds right now with the dollar being strong, about 1.3% going into 2025. And if that doesn't change, of course, that's going to affect us.

So we're kind of programming it into our projections as we go forward. I hope that answers your question, Greg.

Yes. That's good. And then maybe a follow-up. I mean, implied EPS, it seems like you have good margin expansion into 2025. I think in the past, you've maybe talked about mix of some of that short cycle markets, which it doesn't seem like you're embedding any big increases in 2025. Can you maybe just level set the margin outlook and maybe the drivers, just given it doesn't seem like mix would be that much of a tailwind given volume expectations?

Yes. Let me go through the overall company. We finished the year at 22%. We expect that to grow by 80 basis points.

Now if you look at the segments, it will be more like 70 basis points. So it will go from what is now 23.4% for the full year 2024 to 24.1% in '25. So there's growth there. If you go to the larger business, which is obviously segment, Digital Imaging. We finished the year from a segment, non-GAAP operating margin at 22.2% for the year.

We think we'll get about 80 basis points, which is significant. Next year, maybe a little less, but between 70 and 80 basis points. Some of the other segments, we've had very strong margin growth since 2022. For example, in instruments, our margins between '22 and '24 grew 310 basis points. So we're being a little more cautious.

Maybe it will grow in 2025, 45 basis points. And the other thing is that in when you go to Aerospace and Defense, where we've had really excellent growth also of 150 basis points in the last two years, we're a little cautious going into 2025 primarily because the Micropac acquisition is not going to initially have the kinds of margins that we enjoyed there, which were 28.6% in 2024. So we're dialing in maybe 14, 15 basis points increase because of the Micropac effect. Of course, once that thing is tucked in properly, you'll start enjoying margin expansion like all of our acquisitions do. I hope that answered your question, Greg.

That's perfect. Thank you.

For sure.

Thank you. Our next question is from Andrew Buscaglia with BNP. Please proceed with your question.

Hey, good morning, guys.

Good morning, Andrew.

I was just trying to understand with 2025, so you're talking about 3.2% organic. Just to be clear, that would include some FX in that organic number? And then do you assume some and how much short cycle recovery do you assume as the year goes on? Can you talk a little bit about the cadence of your estimates?

Yes. First, yes, we do account headwind from FX. As I mentioned, at the present time, it's 1.2%. So we dialed that in because we don't know what's going to happen, obviously.

Because this year, it was not bad. This year, actually, FX was basically 20 basis points tailwind. So we have a big headwind. So that's that.

The second part of your question was short cycle. We think that most of our short cycle businesses should be growing, but modestly because of FX partially like test and measurement and environmental in the low single-digits. And as I mentioned before, while we think FLIR will grow about 3.9% for the year, a lot of that comes from defense, the non-defense part would grow a little less. And then, of course, as I mentioned, our historical Digital Imaging would grow modestly.

Okay. And on the Excelitas or [indiscernible] or how do you say that acquisition, would you, should we assume some accretion to non-GAAP earnings in '25 once that's closed?

Yes, I think, well, it depends how many it's closed. But I think if I look at the full year, as I answered Noah's question, we think we'll bring in about $15 million a month in revenue. And we think for a full year, if we were to have it for a full year, it should give us about $0.15 to $0.20 of accretion. But again it's -- just tucking in an acquisition, not doing a whole bunch of things in margin expansion, which we always do in subsequent years.

Got it. Okay. Thanks, Robert.

Thank you.

Thank you. Our next question is from Damian Karas with UBS. Please proceed with your question.

Hey, good morning, everyone.

Good morning, Damian.

Good morning. I appreciate all of the color you've provided. I was wondering if you can maybe just give us a little bit better sense for the order trends that you've been seeing? Are there any areas that have maybe picked up more meaningfully than you had expected three months ago or vice versa?

Yes, Damian, let me start with book-to-bill and I'll go to the most recent quarter, we just finished Q4. Overall, book-to-bill for the company is about 1.04. So it's positive, but it varies between the various businesses. In Instruments, for example, book-to-bill is 1.12, which is pretty high for us. Our marine business is leading that by 1.23. And then environmental is positive, 1.09. We're a little cautious on T&M. We think it's just a little below 1, maybe 0.95, 0.99 for the whole year.

Digital Imaging, FLIR is positive at 1.03. Our historical imaging is slightly below 1 at 0.97. AD&E is 0.96, but we have to take into consideration the orders that are a little lumpy, as they are in our Engineered System, which is at 1.16. So overall, we think we have a positive trend in our book-to-bill. Now if you go to some of our commercial where we have the headwinds, and we've had it last year, is in very specific areas of Digital Imaging. As Edwin mentioned, primarily in machine vision and machine sensors. Machine vision is recovering.

So it's recovering slowly, but it is recovering. We've had order increases throughout the year. Machine sensors, where we make the detectors for other folks, that always lags behind six to nine months. So we think that recovery will be closer to the second half of 2025. I hope that answers the question.

Yes, that's very helpful. Thank you. And my second question, so obviously, quite a bit has changed since last quarter with an election and a new administration that's come in. Could you maybe give us updated thinking about potential policy implications?

There's the question of tariffs in China and Mexico. And the US government is certainly an important customer of yours and there's this new Department of Government Efficiency. So could you maybe share your thoughts on how you're thinking about all of that and what it might mean for Teledyne?

Yes. Please remember that I am not any more knowledgeable than anybody else, but I can relate it to our businesses. Let's talk about tariffs first. If you look back a couple of years, 2022, where we had all these shortages, right, coming out of COVID.

We had experienced peak supply chain challenges. That cost us about $100 million in 2022. What did we do? We increased prices. Not only in some of our businesses that we could, but also we improved margins.

So we made up for it between those two and then our own efficiencies. The way the tariffs are laid out, at least initially, the Canada, Mexico or China, we think the impact of those would be less than what we experienced in 2022, maybe half as much. So we think we can deal with that. The other thing is the sophistication of the tariffs.

We have to yet dive into it because we make products in different countries and we make products in Canada that then we finish off in the US. Sometimes we export, sometimes it's for domestic consumption. So the value add changes. But having said all of that, we think we can deal with that.

In terms of the DOGE Efficiency, I think it kind of would favor us, partially because compared to others, partially because most of our defense businesses, as an example, is purchase order businesses with products that we have rather than protracted appropriations. We also are in unmanned platforms. If you take our unmanned air vehicles, ground vehicles and underwater vehicles, which we have all three, it's almost $400 million plus. Our platforms are unmanned.

A lot of our sensors go on those and versus manned platforms. And a lot of our products are also standard products rather than very highly customized solutions. So I think we will do okay.

That makes sense. Appreciate all the color.

For sure. Thank you.

Our next question is from Jordan Lyonnais with Bank of America. Please proceed with your question.

Hey, good morning.

Good morning, Jordan.

On the defense outlook, the 4% organic growth, how much of that is conservative? Just when we look at outlays being up 26% from FY'23 to '24, I would expect the momentum to continue. So is there -- are there programs that are ending or it's just a mixed bag?

Well, I don't know if I say the 4% number. As I mentioned, in FLIR, we think it will be higher than that our growth. It was approximately our FLIR defense businesses in Q4 grew almost 9%. We expected next year to grow another 6%.

So that's -- is not as conservative. Now the problem is that really we don't know what's going to happen to the various programs yet. But as I mentioned, if you take where the fields that we're in, which are the unmanned systems primarily, and then of course, electronic warfare, and then of course observations using EO/IR, those favor us by and large, regardless of which programs go forward. So I'm pretty bullish about the defense part of our businesses.

Got it. Okay. Thank you so much.

For sure.

Thank you. Our next question is from James Ricchiuti with Needham & Company. Please proceed with your question.

Hi. Thanks. Good morning. Hey, Robert, are you at all surprised by the slow recovery in that legacy Digital Imaging business?

Yes. To be very honest, I am. Part of it is really, people are very cautious in building up inventories, especially our distributors. Partially, it's the China effect, both in terms of their imports, even though we don't export as a total company that much to China, we do in Digital Imaging.

And partially because they are building up their own systems and their own sensors. But by and large, Jim, these are short cycle businesses. They can turn on two, three, four weeks. So we don't have a lot of visibility.

And I can only talk about what happened. It's very hard to predict where things are going. But overall, if you look at the book-to-bill, even though when your billing is low, book-to-bill is -- looks healthy. We've been enjoying book-to-bill positive book-to-bill in our camera businesses for the last three quarters.

So having said all of that, yes, I was surprised on why it's not recovering as fast as we should. I think it's partly because other people are conservative in building inventory, as are our distributors. And last question I'll answer that I will add to is some of our customers, which are trying to lower their prices that they pay us. And frankly we won't take those orders because the business is what the business is.

Now we're not going to lose margin just to get revenue.

Got it. That's helpful. And it appears that within that commercial business and I think you indicated there appears to be some conservatism embedded in the full year outlook. If you were to look at areas that have the potential to maybe do a little better, would you say it would be some of the Instrumentation business or potentially in the Digital Imaging business, maybe things starting to come back as we get through some of this destocking that people have been talking about for a while now?

Yes, I think I will start with the Instrumentation. Some of the conservative is Instrumentation and primarily in test and measurement. We're assuming the growth there is going to be 2.5% or so, but it could be a lot more because it's been doing better and better as the year has gone on in 2024. In Digital Imaging, frankly, we have a slew of new products going out, which you think will be much more competitive. So, yes, we are being conservative.

Having said that, at this time, it's prudent to be conservative. But we've always been, as you know, we've always been conservative in everything that we do or say. So you have to take that into consideration.

Understood. Thanks a lot.

For sure.

Thank you. Our next question is from Joe Giordano with TD Cowen. Please proceed with your question.

[indiscernible] for the year.

Hi, Joe. I think you got cut off the first sentence. I didn't get it.

I'm just asking about free cash flow outlook for the year.

Yes. Just to reiterate, I like bidding this one because we did so well. We got free cash flow of $1.11 billion, as Steve mentioned. We think it will be over $1 billion.

If we hit $1 billion again, I'll be happy. We had some lower taxes, but we also enjoyed some improvement in our working capital and inventory. We had some advanced payments on some programs. Those may not happen.

But having said all of that, I think, $1 billion is a good number.

And then I know this question has been asked on other calls and you've been consistent with your answers. But it's a question we get from investors fairly often who want to look at Teledyne. But given the free cash flow generation you have and you've shown the ability to be a bit more flexible with buybacks lately, is the dividend at all interesting to you guys to bring in a new class of investors who can't currently invest in the shares?

That's a tough one. You know, just a little dividend, I don't think will do us a lot of good, although I know companies that do that. Right now, I think we're better off if we can use our money to buy companies, especially since our acquisition pipeline seems to be richer than it has been. Having said that, when our stock was what we thought undervalued, we bought back stock, which is another way of returning cash to the investors.

Yes. Thank you. For what it's worth, from what we're hearing, people will be fine with a small dividend if there's a view that it could get somewhat larger over time, but that's just the feedback we're getting. So thanks guys.

Thank you for that input. Thank you.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Jason VanWees for any closing comments.

Again, thanks, everyone, for joining us this morning. If you have follow-up questions, please feel free to call me at the number on the earnings release. And again, a replay of this is available via webcast and by dial-in. Thank you, operator. If you could conclude the call, we'd appreciate it. Thanks, Paul. Bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.