Ladies and gentlemen, thank you for standing by, and welcome to the Teledyne's Fourth Quarter Earnings Call 2021. And as a reminder, this conference call is being recorded. I would now like to turn the call over to your first speaker, Mr. Jason VanWees. Please, go ahead..

Good morning, everyone. This is Jason VanWees, Vice Chairman of Teledyne. And I would like to welcome everyone to Teledyne's Fourth Quarter and Full Year 2021 Earnings Release Conference Call. We released our earnings earlier this morning before the market open.

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. And also joining today is Edwin Roks, Executive VP of Teledyne and President of our combined Teledyne Digital Imaging businesses.

After remarks by Robert and Sue, we will ask for your questions. But 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 yes, 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 1 month. Here is Robert..

Thank you, Jason, and good morning, and thank you for joining our earnings call. 2021 was a defining year for Teledyne with record sales and adjusted earnings, operating margin and cash flow.

Furthermore, with the successful acquisition and integration of Teledyne FLIR, Teledyne has further evolved into a global sensing and decision support technology company. We provide specialty sensors, cameras, instrumentation, algorithms and software across the electromagnetic spectrum, and unmanned systems in the subsea, land and air domains.

I've never been more pleased with our portfolio of businesses in its simple description. We are a high-technology commercial industrial business balanced across multiple end markets with a resilient, predictable portion of long-cycle government business. In the fourth quarter, our operational execution remained very strong.

We achieved revenue -- record revenue, 70% greater than last year, driven by organic growth of 8.4% and the remaining 61.6% of sales increase contributed by Teledyne FLIR. Sales growth was especially strong in our commercial imaging and electronic test and measurement instrumentation businesses.

In addition, our Aerospace Defense Electronics segment saw continued growth in government and space markets, along with ongoing recovery in commercial aerospace. Despite significant noncash purchase accounting charges, fourth quarter GAAP earnings per share of $3.39 decreased only 2.6% compared to last year.

Excluding acquisition-related charges, earnings were $4.56 per share, an increase of 23.9% on a comparable basis from 2020.

Compared to the midpoint of our fourth quarter earnings outlook in October, which was $4.12, stronger sales contributed about $0.12 per share, improved margins roughly $0.25 plus a small $0.07 per share increase related to discrete tax items, which, by the way, specifically excludes a larger tax benefit related to clear foreign tax matters appearing in the GAAP results.

Cash flow was also all-time quarterly record, allowing repayment of $345 million of debt and our leverage ratio declined from 2.9% -- declined 2 to 2.9 from 3.8, which was the number we had immediately after the FLIR acquisition. Turning to 2022 outlook. The overall demand environment across our businesses remains favorable.

Nevertheless, supply chain constraints continue to limit shipments. Given this, we think, a reasonable outlook for total company organic sales growth at this time is between 4% and 5%. Coupled with a full year sales contribution of approximately $2 billion from FLIR, this equates to total revenue of just under $5.5 billion.

Of course, if supply chain challenges ease or as it's necessary, we were able to increase pricing to offset inflation more than at the present time. We will increase the revenue outlook throughout the year as we did in 2021, where we achieved full year organic revenue growth of 8.2% relative to our initial outlook in January of 2021 of 5% to 6%.

I will now comment on the performance of our 4 business segments. In our Digital Imaging segment, fourth quarter sales increased 209%, largely due to the FLIR acquisition. But organic growth in our combined commercial and government imaging businesses was also very strong at 18.6%.

Sales growth was strongest for industrial and scientific vision sensors and systems. In addition, we had record health care sales with revenue greater than any pre-pandemic period. GAAP segment operating margin was 11.6%, but adjusted for purchase accounting and transaction costs, segment margin was 23.3%.

In our Instrumentation segment, fourth quarter sales increased 6.9% versus last year. Sales of electronic test and measurement systems, which include oscilloscopes and protocol analyzers, were very strong and increased 13% year-over-year to record levels.

Sales of environmental instruments increased 3.2% from last year with sales related to human health and safety markets, such as drug discovery and gas and flame detection being the strongest in the quarter. Sales of marine instruments increased 6.5% in the quarter.

In addition, quarterly orders were the strongest in the last 7 years with fourth quarter book-to-bill of 1.35. Overall, Instrumentation segment operating profit increased 5.5% in the fourth quarter and 19% in 2021, with full year segment operating margin increasing 226 basis points or 218 basis points, excluding intangible asset amortization.

In the Aerospace and Defense Electronics segment, fourth quarter sales increased 12.5%, driven by 6.4% growth in defense, space and industrial sales, combined with 38.5% increase in sales of commercial aerospace products. GAAP segment operating profit increased 75% and margin 888 basis points greater than last year.

Finally, in the Engineered Systems segment, fourth quarter revenue decreased 15.6% on operating profit and margin decline due to lower sales. And also since we exited the higher-margin cruise missile turbine engine business earlier this past year. Before turning the call over to Sue, I want to make a few concluding remarks.

First, as noted in yesterday's 8-K filing, an appeals court in Sweden, generally affirmed a lower court ruling made in March of 2020 regarding a clear tax method dating back to 2012. The court determined an estimated tax liability of $303 million.

This outcome was anticipated by us and the associated liability was accrued as noted in our most recent 10-Q. We do not plan to appeal the decision and expect to pay the tax in the first quarter of 2022.

Finally, regarding environmental, social and governance efforts for ESG, Teledyne's sustainability journey began more than 20 years ago with the belief that demand for environmental monitoring instruments would outgrow general industrial process implementation.

Our first 3 acquisitions were Advanced Pollution Instrumentation, Monitor Labs and Tekmar, 3 companies dedicated to analyzing trace contaminants in air and water. Today, our imaging sensors enable greenhouse gas and pollution monitoring from space.

Our environmental instruments provide data on the concentration of chemicals and particulates in ambient air and our autonomous underwater floats and vehicles enable the monitoring of ocean temperature and solidity from the surface to deep subsea.

While we have highlighted our strategy and products in our last 3 annual reports, next month, we will publish an inaugural corporate social responsibility or CSR report.

Here, we will further highlight our sustainability efforts as well as disclose matrices regarding greenhouse gas emission and reduction targets workplace safety and employee and management diversity. I'll 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 first quarter and full year 2022 outlook. In the fourth quarter, cash flow from operating activities was $295.6 million compared with cash flow of $236.4 million for the same period of 2020.

Free cash flow, that is cash from operating activities less capital expenditures, was $261.6 million in the fourth quarter of 2021 compared with $217 million in 2020. For the full year 2021, free cash flow was $794.6 million excluding FLIR transaction-related cash payments net of tax.

Capital expenditures were $34 million in the fourth quarter compared to $19.4 million for the same period of 2020. Depreciation and amortization expense was $86.2 million for the fourth quarter of 2021 compared with $28.7 million in 2020. In addition, noncash inventory step-up expense for the fourth quarter of 2021 was $47.8 million.

We ended the quarter with approximately $3.62 billion of net debt. That is approximately $4.1 billion of debt less cash of $474.7 million. Stock option compensation expense was $6.4 million for the fourth quarter of 2021, compared to $5.9 million for the same period of 2020.

Resulting from the FLIR acquisition, restricted stock unit expense for FLIR employees was $1.5 million in the fourth quarter of 2021. Turning to our outlook. Management currently believes that GAAP earnings per share in the first quarter of 2022 will be in the range of $3.12 to $3.22 per share with non-GAAP earnings in the range of $4.02 to $4.10.

And for the full year 2022, our GAAP earnings per share outlook is $14.10 to $14.55, and on a non-GAAP basis, $17.60 to $18. The 2022 full year estimated tax rate, excluding discrete items, is expected to be 22.8%. I'll now pass the call back to Robert..

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

Our first question comes from Mike Maugeri with Wolfe Research..

Robert, can you talk a little bit more about how you're thinking about doing deals again? What's the level of leverage that you're comfortable with the start doing deals again? And how does the size of those deals sort of flex with where your level of leverage is at?.

Thanks, Mike. First, we are rapidly bringing our leverage down. 2.9 leverage ratio that we currently enjoy is the number that we were really thinking would happen by the end of '22. So having moved that forward, I think by the end of '22, we should be in, what I would say, in an investment-grade range.

We are -- at the present time, we are pursuing bolt-on acquisitions but in the long term, we would also look at larger acquisitions. What do I mean by large? Anything that goes beyond a couple of billion dollars takes a little time, so even at this time, we can look at those things we take because it takes 10 months to a year to close.

Having said all of that, our longer-term leverage ratio is somewhere between 1.5 to 2.5. So if we get down to 2.5 or less by the end of 2022, we'll be in good shape to do all these things..

And then as my follow-up.

Can you update us on free cash for 2022? And is there any update to the billion-dollar number that you put out there for 2023?.

Yeah. Mike, its Robert. So, Mike, I guess -- I think our '22 number is something like a little over $900 million. '23 will still be over $1 billion. We might be able to improve on that as we go along. But right now with what I see or what we see in organic growth and also CapEx and other expenses, that's about the range..

Our next question comes from Greg Konrad with Jefferies..

Maybe just to start, I mean, embedded in your guidance, how are you thinking about margins just given maybe some of the one-timers and Digital Imaging in 2021? And if you could just give a little bit of granularity around segment margins?.

Yeah, Greg, the Digital Imaging we ended full-year at a little over 24%. If you exclude the not one-time charges, it's a tough comp for us in '22. And the reason I say that is in Q2, when we acquired FLIR, they have always had their hockey stick sales profile during a quarter.

So, at the beginning half of the quarter, they had a lot of costs which they made out in the second quarter of the quarter, as they sold product. And what we enjoyed this year was significant increase in the second half of third quarter, after we close the transaction right in the middle of the quarter on May 14. So that helped us with the margin.

Having said that, when you strip away all the one-time charges except for intangibles, we still think we're going to be in 22% close to 24%, 23.9%, 24 %, which is a little less than 21%. But we're stripping everything out there except intangibles.

And those are pretty good margins and it's probably the result of the fact that we're able to maintain our reduced cost structure that we enjoyed implemented after the FLIR acquisition.

Now, if we can increase, as I said earlier, if we can increase price to make up -- better make up for inflation, I think our -- and with where our sales as robust as they have been, I think our margins will definitely increase..

And then maybe just a follow-up on that comment, I mean, you talked about both supply chain and price kind of if those improve as kind of upside drivers.

Is there any way to quantify maybe the impact or what you're seeing there? And then, just in terms of pricing, where could that be most impactful and maybe where you can get some price?.

Yes. Let's start with price increase for us. In '21, on the average, we increase price about 2%, and we had volume increase of 6.2% and that resulted in the overall organic growth of 8.2%. On the flip side, we had some price increases from our suppliers.

We were fortunate in that one because we instituted a very strong procurement program starting in 2019 before the pandemic. And because of that, we also ended up with some good contracts longer-term contracts with some of our supplies.

Having said all of that, I think about $2 billion that we buy from our various suppliers between the -- in the new Teledyne, I think we are going to have some price increases from them that are going to be in the 2% to 3%, maybe a little more.

But we are offsetting that right now in 2022 with our own price increases of 1.5% to 2%, but maybe we can do a little better than that. Right now, we're predicting -- projecting our volume to go up 2.5% to 3% on top of the price increase which goes with the current outlook that I gave you between 4% and 5%.

Having said, that if an increase prices more and as we go down the year like we did in '21 and things turn out to be working for us our organic growth should be better, just like it was in 2021. .

Our next question comes from Jim Ricchiuti with Needham & Company. .

Robert, I'm wondering if we think about your annual revenue outlook, any sense as to how much of a revenue impact you're seeing, you're anticipating, as you think about some of the supply chain challenges that are out there?.

I can only do the short-term, Jim. In Q1, the way we're looking at it, it's probably going to affect us somewhere about $80 million right now, what we see. Of course, we are working very hard on that one.

We have buyers across our company focused on that, but more importantly where you also using buyers across the globe, specifically more in the far east that identify parts for us. So, if we have, let's say, 500 parts shortages across the company, they can usually find something about -- something around 60% to 70% for us.

And then, of course, we have to qualify and use them. Now we also have our semiconductor board manufacturers. They are also looking for parts for us at the same time. So we have this cooperative activity going on that I think has helped us so far certainly in 2021. Right now we're looking at $80 million decrements.

But as we did in Q4, we'll overcome some of that as we go forward and we've kind of bake that in to our projections. So I don't think supply chain is going to kill us as it does in some of the other companies..

And you gave -- I may have missed it, but you give some color on the book-to-bill in marine instrumentation.

Did you -- could you provide some booking book-to-bill information on some of the other business segments? And just related to your comment about operating margins and Digital Imaging, if we think about some of the business areas that you've restructured, it would seem like there would be some nice margin expansion opportunity in some of those areas..

Right. Well, let me start with the first part of your question, which is book-to-bill. In the instrument area, book-to-bill is about 1.08. So pretty healthy. In Q4 it was higher, it was like 1.16, but the average is out over the fourth quarter there is 1.08. The strongest category there being enjoyed by marine.

Nevertheless, all of our programs, all of our businesses in the instrument business have -- in the instrument segment have ratios over 1. In Digital Imaging we have about 1.05, healthier in our historical Digital Imaging which includes of course, -- e2v and other things, that is really doing well. It's about 1.3. FLIR is less than 1.

And the reason for that is primarily in their defense businesses, which are both lumpy and also they -- there are projecting at this time the kind of programs that we anticipate.

That's why by the way, we restructured the management of that business under JihFen Lei, who was, as you know, the Deputy for Research and Engineering Acting Deputy for Research and Engineering in Department of Defense. And we think that's going to come along fine. In AD&E, Aerospace and Defense segment, there was over 1, it was 1.04.

And in Engineered System, which is big programs fairly lumpy was close to 1. So overall, I'd say if you look at the total company, at the end of 2021 averaged over 2021, we're talking about 1.05, which I think, at this time for us that's a pretty healthy number. And then, let me go to the second part of your question which had to do with margins.

We have significant margin improvement in all of our businesses except fairly flat in Engineered Systems in '21. Let me start with that because the trick is to maintain those margins as we move into '22 and as we grow.

First, in Instruments, our margins increased from '20 to '21, 218 basis points and we expect to increase that another 30 basis points to 23.8%. As I mentioned, in Digital Imaging, overall we have some tough comps, our margins may decline just a little bit maybe 30, 40 basis points.

But I think as we improve our revenue and pricing, that should take care of that. In Aerospace and Defense, our margins between 2021 and 2020 increased 745%, and we expect to improve that another 80 basis points in 2022.

Engineered Systems is the toughest comp we had because we did exit the turbine engine business and we think we're going to have some margin shrinkage there. Maybe 40, 50 basis points, but it's of course 48% of the company.

So, overall, I think total company margins right now with the organic growth that I projected between 4% and 5%, I think, our total margins were the company will improve about 20 basis points to 21.5%.

But as I said before, if we can enjoy a little more price increases and if our revenue goes up, just like it did '21, then our margins will go up accordingly. I think that helps..

Our next question comes from Kristine Liwag with Morgan Stanley..

Robert, on the parts shortage issue that you mentioned in the supply chain, are trends starting to improve and you're seeing more availability or are you seeing the issues more widespread and potentially seen more parts affected?.

I would say, Kristine, overall, things are improving. There are pockets where things have not improved. Basically, the lead times are increased a little bit.

And the trick is, of course, to make sure that you build certain products that you're waiting for a single part or 2 parts, build those products and put them on the shelf and be ready to move as soon as you secure the part. That especially becomes important in something like our cameras.

We have thousands of cameras that can go out as soon as the part arrives. And because of the efforts, Kristine, that I mentioned before, with buyers across the world, especially in the Far East, looking for specifically people dedicated for looking for parts for us, we're able to offset those.

I think, overall, the -- across our portfolio, part shortages are not that important in certain areas like aerospace and defense and certain parts of Digital Imaging.

For example, some of the people that supply us semiconductor products for our Digital Imaging, that is the people that make the various products that we designed, they're also our customers. So there is a little bit of a -- we enjoy a little bit of leverage there, in that what goes around comes around. So we enjoy that leverage.

So I would say the serious matter, but it's not as serious as other companies are suffering from..

And maybe as a follow-up question, on one of the pricing increases you mentioned, it sounds like you've got efforts in place to pass on the 2% to 3% pricing increases from your suppliers and potentially get a little bit more.

Can you talk about the competitive environment what your competitors are doing? And also any feedback from your customers about their price inelasticity? And ultimately, I mean, 2% to 3% seems pretty low versus that we're seeing in the overall industry but more mid-single digits.

I mean, is this a very easy thing for you to be able to accomplish, which is passing that off and getting a margin on top of that?.

Kristine, I've never got to admit it's easy because if it were easy, then we would -- we'd enter a different world. What is happening to us is that we can't get price increases where our products have superior performance.

So if someone is going to buy a camera, that's got very specific requirements for their application, and we provided, then we can enjoy price increases. In our protocol analyzers and oscilloscopes, where we have very unique positions, we're way ahead of the curve on other people. we can enjoy significant price increases.

On the other hand, if you're making a product in the ambient particulate or ambient air monitoring and you're in China, and they're emphasizing by Chinese, and they are not really that interested in paying a high price for a product that's really superior then you don't have as much price advantage and you have to compete with what the market dictates.

Fortunately, for us, Kristine, as you travel across our portfolio of products, across the company because our end markets are so diverse, you get really -- because of our balanced portfolio, you get some places where can enjoy serious price increases and some places that you have to stay competitive.

So what you do is you just focus on cutting costs, focused on improving manufacturing operations..

Our next question comes from Elizabeth Grenfell with BofA. Please go ahead..

I was hoping you could speak to your operating margins over more of the medium term, so not just this year, but how we should think about them progressing through, call it, the next 5-plus years -- or 5 years?.

Well, I can tell you, we measure ourselves against the very best-in-class. We've closed our margin gap significantly over the last 5 years. We have improved margins about 400 basis points. Now going forward another 5 years, where I sit here now, I'll say if we can improve 40 to 50 basis points a year, it'd be great. We've closed the gap very fast.

On the other hand, if things go our way, which seems to have gone our way in the past, we could do better than that. But sitting here right now, I'd say, 40 to 50 basis points looking forward..

Our next question comes from Andrew Buscaglia with Berenberg. .

I was hoping you could dig a little bit more into Digital Imaging in the quarter. It definitely exceeded my expectations, And you made an interesting comment that health care sales had a record level of sales. Can you -- so I imagine that's the main driver.

But can you just talk about what you saw within that segment?.

Yes. There are two parts to it, Andrew. Of course, there's our legacy digital imaging, and there's our new acquisition clear. So if you would bear with me, I'd like to separate the 2 for a minute. And then, of course, going forward, we're going to talk as if there were one. But let me start with our historical Digital Imaging.

Without acquisitions, between '20 and '21, we enjoyed 15.5%, 15.6% increase in revenue from about $986 million to $1.140 billion. And then -- if you look at our machine vision within that, some cameras, scientific cameras, and sensors, that really did well. It was -- in the fourth quarter, it was 29%.

And in the fourth quarter, it was about 36%, forgive me. Overall during the year was 29%. Health care, which as you know, we make x-rays as well as x-ray source components for cancer treatment. We had our best quarter we've had in the last -- ever, this year. And it increased 19.5% in Q4 and 15.8% for the year.

And then we also had growth in our aerospace and defense in that segment. Fourth quarter, about 4.8%, over the year about 4.1%. And then MEMS, as you know, our Micro Electro Mechanical Systems, fabs and factories, we enjoyed about 17.9% for fourth quarter and 12.3%. So fourth quarter was a great quarter.

We had a little decline in our J-S ratio, but that's a very small part of that portfolio. It's only $60 million. So $2 million or $3 million would look like a lot of money, but it essentially didn't grow year-over-year. Now -- looking -- again, I'm going to stay with this segment for a while.

Looking forward to 2022, at this time, we're projecting about 5.35% growth for next year, something to go to about $1.2 billion. And that varies across the various products. A much more moderated increases that we had in 2021. But again, let me caution that it's the beginning of the year.

And I can't see -- we can't see too far forward to project things much higher than 5%, 5.3% in this domain. Let's go to FLIR for a second. Overall, before we acquired FLIR, in 2020, their revenues of about $1.924 billion.

And of course, that was the year that they really enjoyed the elevated skin temperature products, which contributed about $100 million to their revenue. If you go through 2021 and you add up pre-acquisition and post-acquisition revenue for the whole year for FLIR, it was $1.895 billion.

So it went down about $29 million, which means that we made up most of that $100 million decrement that we saw in the elevated skin temperature, which was also reflected primarily in the industrial segment businesses, which were down about $46 million. Next year, we're projecting those businesses to improve by about 5.9%.

And overall, the total business to increase to almost -- to $2 billion or increase from where we are today, 5%, 5.5% to $2 billion. And then if you track the diverse defense and Gray Marine, et cetera, Gray Marine had a great year. That's part of, of course, the industrial segment, almost 15.9%. We think it moderate about 3% next year.

Defense businesses enjoyed some pickup from $768 million to $785 million in 2020 to '21, but we're projecting another 6.4% increase going into '22. So -- and almost increases in all areas.

So in sum total, we think that our overall digital imaging businesses, which would be both of those combined will be about $3.2 billion in revenue, which would be an increase of about 5%, maybe a little more over this year. No, no. This is all --.

Okay. Yes, very helpful. Yes. So maybe just switching gears, I was surprised to see we received a couple of quarters now where A&D electronics have really picked up. And I believe you said aerospace is up over 30%.

How much of this is just easy comps? Or is this the real sign of things -- of activity picking up in that area, do you think?.

Well, first, let me go into the aerospace part. Of course, that's the tilted towards commercial aerospace, that's a small portion of our overall portfolio. It's about $120 million, $125 million. But we look at real bidding from '20 to '21, from 2019 to '20, and that business just hit the bottom -- it went down about $100 million.

We took cost out, as we always do. We took the cost out, and some of the comps, therefore, were easy as we come into the new year. That business has grown significantly and our margins are over 30% because of -- we kept the lower cost and improve the revenue year-over-year.

But by and large aerospace business, like most of our other businesses is a small fraction of our overall portfolio.

And that's what I always kind of emphasize the fact that we like to have a balanced portfolio, even in digital imaging -- we have a balanced portfolio between machine vision, health care, aerospace, geospatial, thermal, unmanned, surveillance, components, et cetera. So none of these businesses get hurt. And the point back to aerospace and defense.

The other thing that's happened is we worked very hard to improve our margins in the defense part of that business. So if you look year-over-year, the margins in our Aerospace and Defense business from '21 to '22 because of the good The overall year margin went to 21.3% and increased 745 basis points with respect to '20.

And we think in '22, we can increase it another 80 basis I hope that answers your question..

Our next question comes from Joe Giordano with Cowen. .

Hey, guys.

Does anything -- as you look across all the different parts of your business, does anything feel kind of unsustainably high? Or -- and conversely, does anything feel like it's clearly inflecting off of levels and moving higher?.

Boy, you would ask that, Joe. I think the only thing I would say, no, nothing looks sustaining the just causes the comps to be a little tougher, right? I mentioned about digital imaging. When you kind of hit the ball out of the park, now you go up to bat again, you might hit singles rather than hit it out of the park.

Some of the later cycle businesses like Aerospace, we're enjoying in bonds. And I think that's going to keep moving, and it's going to be good. And our marine businesses are -- we have the best book-to-bill ratio in our instrument is in our marine businesses. So we think that's going to go up significantly.

But again, going back, you look at our overall Marine business, which ranges from defense to underwater vehicles, some oil, gas and all, overall, it's about $450 million, $425 million this year, maybe over $460 million next year. It's not a big chunk of our portfolio. So if it goes down or up 10%, 15%, it doesn't affect us very much.

So I don't see he's getting out of whack. There are some areas that I think if we do the right things, we're going to enjoy significant benefits. Let me give you 1 example. We have about $450 million of unmanned vehicle business portfolio. About $150 million is underwater.

It's $150 million is on the ground, and $150 million is in our drones that we got from FLIR. So if we can combine some of those technologies, if we can couple those capabilities together, then I think over the long run, that business can grow much faster than any of the businesses on their own stand-alone.

So -- and that's the kind of stuff that excites me at this time.

Can we put those things together and kind of get the kind of base that you're talking about?.

Yes. That was going to be my next question.

Like, kind of where do you think -- I know you don't want to talk revenue synergies or anything like that with FLIR, but kind of where do you think this can go in terms of like an overall pitch of the portfolio? Like, does this -- how does the scale help you when you're going to market or bidding certain applications?.

Well, by now that, by nature, relatively conservative. But just let me say that we have managed to take a significant amount of cost from FLIR. And we took as much cost this year as we talked we take between this year and next year combined. So that business is now stabilized. We're not going to squeeze that business anymore.

We just took a lot of cost out in the whole management, top management, the, of course, public company. And then they have zillions or consultants that we don't need. And we did all of that without increasing our own corporate budget, which is important. So where else do we have synergies. We have some synergies in costs right there.

The other areas are some of our purchasing powers have improved because of the coupling of the and then go to market together is important. And I think those synergies are small in each area, but they add up to significant numbers. Don't give you 1 example. We have a gas and flame business that we bought from 3M. It's a really good business.

When we bought it, it had about 12% margins. Last year, the margins went over 20%. FLIR has a gas detection camera that we're trying to couple the tour and sell it together. The same thing goes with enormous number of FLIR commercial products in the thermography business and a lot of our visible cameras.

And we're trying to couple those together, and FLIR had some mid-market cameras. We coupled that already with high-end cameras. So there are a lot of synergies. I've kind of baked that in so far for next year in our 5% overall revenue growth to about $3.2 billion. But I think if we have the synergies going forward, it could improve more than that.

But right now, we're trying to keep our stable or cost reductions so that we don't get smacked with some cost increases and then slowly work our synergies as we go forward..

Can I just have you clarify one thing as we went through a lot of numbers, and I was trying to write everything down have missed some stuff. I know that organic is a little bit tricky because part of FLIR is inorganic for the year. And if you were to totally segregate these 2 things.

How fast organically do you think FLIR on its own, like the totality of FLIR is going to grow in '22? And then total legacy ex FLIR Teledyne? And then where do you think the FLIR are in -- where were they in '21? And where are they in '22? Just FLIR..

Yes. Just FLIR, let me go back to '20 because that's a good starting position. They were at $1.924 billion in '20. In '21, if you take before and after the acquisition, they went down 1.5% to $1.895.

And that was primarily because of they didn't have the elevated skin temperature sales, okay? So if you take that as a basis, $1.895 billion, we're projecting a 5.5% revenue increase in 2022, all organic, to about $2 billion. If you take our legacy Digital Imaging businesses, they went up 15.6% from '20 to '21. We don't think that's sustainable.

At this time, I mean I always emphasize at this time. We think that can go from $1.14 billion to $1.2 billion, which is another 5.3% increase. So if you combine the 2, you're talking about somewhere between about 5.4% increase in revenue, organically, all in.

Does that answer your question?.

And the FLIR margins?.

FLIR margin is going to go down a little bit primarily because of -- as I mentioned before, I don't know if you were on the call there, well the Q2 was really good because they produce most of that material earning in Q2. Their margins are going to be close to 24%.

And our own legacy margins are going to be above 23.8%, which, by the way, that's 200 basis points higher than what we had in 2020. So if we can maintain that and increase it together, I think it's going to be tough. We may have a little reduction in overall margin, let's say, basis, 40 basis points, be close to 24%, which is pretty good.

Our margins in digital imaging and our instrumentation are very close to one another as we're projecting in '22 at almost 24% each. And as I said, in aerospace and defense, we've called up to 22%. So I'm happy with that scenario..

We now go to Noah Poponak with Goldman Sachs. .

Robert, could you spend a little more time on exactly why Digital Imaging -- legacy, ex FLIR, has had suddenly such high growth rates? I mean, I know the compares are kind of easy, but they're not that easy. It didn't draw down that much in 2020.

And I understand you've given the detail on what each of the pieces did, and I know the trends in those businesses, but it's sort of an out of nowhere step function in the growth rate that you've had for a few quarters here.

If you could just better educate me on what the successes are driving that?.

Sure. And I'll try not to emphasize brilliant management on Noah’s part, because he's sitting here..

Whatever the right answer is --.

No, let me take a couple of pieces of that. When the pandemic hit, our health care business has suffered because a lot of the selected X-ray treatment and even cancer treatment took a significant hit because the hospitals were overloaded. As things eased up a little bit, both our X-ray business and our X-ray source business went -- ticked up.

And so it enjoyed a 14% increase. That's the highest in the quarter, that was up 19.5%. So it averaged about 13.4%. So we picked it up as the year went on. And that was really driven by the fact that people started having more surgeries and treatments, et cetera.

In the machine vision business, our inspection businesses went up significantly throughout the year. And if you take our scientific cameras, which are also very important, they are used in all kinds of applications, including looking at details of called sources, and there you have very fast cameras, which we do.

We started the year okay, but then it started picking up. And by quarter 4, it was over 36%. So it's nothing that happened all suddenly. It was just a slow increase in those businesses as we went along. And MEMS, we have a unique capability in both promo that we bought this MicroLine MEMS business.

There's a scarcity of independent MEMS foundries, we are probably one of the top independent foundries in the world. And so with the shortages that are happening customers are coming where they can get stuff and where we can make them. And so that's helped us a lot too. That overall year-over-year increased 10% -- 9.4% but picked up almost 18% in Q4.

So it's not any one thing, it's a lot of these little things adding up. What we're trying to do is we're trying to give conservative guidance for '22 because the comps are so tough. And then as I said before, we have to kind of tip to our way through these supply chain issues.

I mean I guess the numbers are impressive, but the decent amount of that detail you gave there is COVID and some of the movement around that and then supply chain, all of which hopefully don't last forever or at least to the degree they do impact they have today.

Do you worry about not only a tough compare, but then just a resetting back to normal of some of those items? Or you just have enough incremental penetration you can find to keep growing that business. I think just to walk out of my shoes, my conservative shoes, I'd be surprised if we don't do better as we go on..

And then in the FLIR piece, the numbers you've provided on a multiyear basis there, very helpful and transparent. Those are pretty in line with where they were trending and what the outlook was for the business.

So it sounds like we know you haven't divested anything, and I thought there might have been some pieces in there you didn't quite see as aligned with Teledyne for the long term. I thought you might have some stuff that you just kind of let roll off with a focus on profitability and cash flow.

It looks like that hasn't happened, that you've determined essentially all of legacy FLIR stays with Teledyne.

Is that right?.

Yes. Yes. The answer is yes. And then -- by the way, there's a little difference between -- you covered for a long time. So you probably know those businesses historically, the trends, better than I do. Having said that, they may have projected revenues, robust revenues year-over-year.

But I am not sure how many of them they hit -- so when I say $2 billion in 2022, I kind of feel that we can achieve that. Having said that, let's talk about this divestiture issue. You recall that at one time, they were thinking of selling their Raymarine businesses.

Well, we don't because we have a huge number of marine businesses that fit tightly with that business. We have our whole Marine effort with all the capabilities we have in underwater imaging and then our LiDAR businesses, that's a go for us. That business has done very well in 2021, and we're projecting it to grow.

And that's not even counting the synergies that we should enjoy in that domain. So frankly, I don't see any part of that business that we would divest. It's a good portfolio. That's why we pay a dear price for us to get it..

And just 1 last one, if I might. The Aerospace and Defense Electronics segment margin increased pretty significantly through the year last year, even though the sequential revenue change isn't that significant. And historically, it doesn't have that -- doesn't quite have that seasonality.

So why -- I guess, why did it? Or should I be thinking about that -- why isn't the margin exiting the year kind of sustainable in that business?.

Well, two reasons, Noah. First, as I mentioned before, the aerospace portion of that business came back because we took the cost out and the revenue -- any revenue increase just was really huge gross margins. So that increased tremendously. And frankly, in 2020, that was depressed versus 2019.

That was depressed because of the cost cutting that we did in the aerospace portion of that. The other thing is on the defense portion of that, we had some really nice programs. We kind of stabilized that. We have really good new managers up there. And so that's helped us. And then lastly, in the aerospace part, we're enjoying good aftermarket.

The aftermarket in that domain is pretty good. And OEM is coming back, while OEM margins are a little less than we enjoy we'd like to think, especially in '22 and '23, with the aftermarket because they have already our products on the aircraft. We think that will be good.

And then we have some really exciting new products coming out like we've mentioned this, you may recall, we have an aircraft -- on-aircraft monitoring -- air monitoring product that we're introducing.

And it's kind of built on their monitoring products that we have in our instrument businesses for outside the aircraft I think that's going to be a very good product because everybody when you get on an airplane, was the first thing you worry about nowadays is the quality of the year..

Yes.

So essentially relative to the fourth quarter, you have to bring costs back on compared to the drop-through that you experienced in the fourth quarter?.

No, I don't think so. I think the mix between OEM and aftermarket, the margin should stay about the same. But as we said, in overall aerospace and defense market we expect an 80-basis point increase in margin between '21 and '22 for the full year..

And we have no additional questions in queue. The queue is clear..

Thank you, John. I'll now ask Jason to conclude our conference call..

Thanks, Robert. And again, thanks, everyone, for joining us this morning. Of course, if you have follow-up questions, please feel free to call me at the number mentioned on the earnings release, and all the earnings releases are available on our website. John, if you could conclude the call, will provide the replay information? Thank you..

Ladies and gentlemen, this call will be available for replay from 10:00 a.m. Pacific Time today, February 26 at midnight. To listen to the replay, dial (866) 207-1041 and enter the access code 7478140. International participants may dial (402) 970-0847.

Once again, those phone numbers are (866) 207-1041, and international is (402) 970-0847, and the access code is 7478140. That does conclude your conference call for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect..