Teledyne Technologies Incorporated (NYSE: NYSE:TDY) has announced a record-setting first quarter in terms of non-GAAP operating margin, adjusted earnings per share, and free cash flow during their recent earnings call. Despite these achievements, the company faced a sales downturn, attributed to a decline in short-cycle imaging and instrumentation markets.
Looking ahead, Teledyne anticipates a significant drop in sales within the industrial automation and test and measurement markets for 2024. Nevertheless, the company expects this to be balanced by growth in marine, aviation, and defense sectors, maintaining overall sales at the same level as 2023.
Key Takeaways
- Teledyne reported record non-GAAP operating margin, adjusted earnings per share, and free cash flow for Q1.
- Sales were negatively affected by declines in specific short-cycle markets.
- Expected significant sales decline in industrial automation and test and measurement in 2024.
- Growth in marine, aviation, and defense is projected to offset the anticipated sales decline.
- The Digital Imaging segment experienced a sales decrease due to lower machine vision sensor and camera sales.
- The Instrumentation segment maintained flat sales, with growth in marine electronics and unmanned underwater systems.
- Engineered Systems segment sales decreased due to late approval of the US 2024 budget.
- Teledyne plans stock repurchases and is evaluating acquisition opportunities with a spending capacity of $1.5 to $2 billion.
- The company's debt-to-EBITDA ratio is at 1.7, expected to improve to 1.3 by year's end.
- Smaller acquisitions are anticipated this year, with larger ones expected the following year.
Company Outlook
- Teledyne expects to recover in the latter half of the year with cost-cutting measures in place.
- The company's diverse business portfolio offers opportunities for strategic acquisitions.
- Guidance remains conservative, factoring in potential recovery in defense and space businesses.
Bearish Highlights
- Higher costs than anticipated led to decreased sales and profit, with a $7 million hit to EBITDA in Q1.
- Sales in the Digital Imaging and Engineered Systems segments declined.
Bullish Highlights
- The company has the financial capacity for share repurchases and acquisitions.
- Recent acquisitions of Valeport and ongoing acquisition of Adimec to bolster the company's offerings.
- Improvements in the supply chain are expected to contribute positively to future performance.
Misses
- Teledyne experienced a slowdown in industrial automation but is taking steps to mitigate the impact.
- The company is addressing a $7 million EBITDA shortfall from Q1 and expects to resolve the issue moving forward.
Q&A Highlights
- Noah Poponak inquired about share repurchase plans and potential leverage.
- Robert Mehrabian confirmed authorization for up to $1.25 billion in buybacks and emphasized the company's solid financial position for future acquisitions.
- Teledyne has not used its line of credit and has a low fixed debt of $150 million due in the second half of 2024.
Teledyne's earnings call revealed a company navigating through market challenges with a strategic approach to financial management and growth. While facing some headwinds in sales, Teledyne is leveraging its record financial metrics to invest in its future through acquisitions and share buybacks. The company's leadership expressed confidence in its ability to overcome short-term obstacles and continue on a path of financial stability and expansion.
InvestingPro Insights
Teledyne Technologies Incorporated (NYSE: TDY) has shown resilience amidst market volatility, as evidenced by their recent earnings call. To provide a clearer picture of the company's financial health and investment potential, here are some insights based on real-time data from InvestingPro.
InvestingPro Data metrics show that Teledyne has a market capitalization of $17.5 billion and is trading at a P/E ratio of 19.66, with a slight adjustment to 19.82 for the last twelve months as of Q1 2024. Despite a modest revenue growth of 1.47% over the last twelve months, the company has experienced a quarterly revenue decline of -2.4% in Q1 2024.
An InvestingPro Tip worth noting is that Teledyne's stock is currently trading near its 52-week low, which may present a buying opportunity for investors looking to capitalize on potential upside. Additionally, the company is profitable, having achieved profitability over the last twelve months, which is a reassuring sign for investors concerned about the company's earnings stability.
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Full transcript - Teledyne Technologies Inc (TDY) Q1 2024:
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Teledyne Q1 2024 Earnings Call. [Operator Instructions] At this time, I'd like to turn the conference over to your host, Jason VanWees. Please go ahead, sir.
Jason VanWees: Hi. Thank you, and good morning, everyone. This is Jason VanWees, Vice Chairman. I'd like to welcome everyone to Teledyne's First Quarter 2024 Earnings Release Conference Call. We released our earnings earlier this morning before the market opened. Joining me today are: Teledyne's Executive Chairman, Robert Mehrabian; CEO, Edwin Roks; President and COO, George Bobb; SVP 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 ask for your questions. However, before we get started, the 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 their periodic SEC filings. And of course, actual results differ materially. In order to avoid potential selective disclosures, this call is simultaneously being webcast and a replay both by a webcast and dial-in will be available for approximately one month. Here's Robert.
Robert Mehrabian: Thank you, Jason. Good morning, everyone, and thank you for joining our earnings call. Today, we reported record first quarter non-GAAP operating margin, record adjusted earnings per share, and record free cash flow. While overall orders remained strong, sales were impacted by deterioration in some of our short-cycle imaging and instrumentation markets. We have previously assumed no full year sales growth in industrial automation as well as test and measurement markets. However, those markets weakened more than planned in the first quarter, and we now forecast full-year sales in those product families to decline meaningfully in 2024. Nevertheless, we believe such sales declines will be offset by our marine, aviation and certain defense businesses, resulting in full-year flat sales compared to 2023. Despite those anticipated sales reductions in what are among our highest margin businesses, we believe overall operating margin will remain flat in '24 versus '23. Within the Digital Imaging segment, year-over-year sales declined due to significantly lower sales of machine vision sensors and cameras related to industrial automation. However, this was partially offset by organic growth and significant margin improvement at Teledyne FLIR, given our unmanned system businesses, growth and the resiliency of our core Infrared Imaging businesses. Similarly, in Instrumentation, we were relatively flat, where significant reduction in sales of Test and Measurement Instrumentation were almost entirely offset by marine electronics and unmanned underwater system. And despite the overall flat sales segment, margin increased considerably. In our smallest segment Engineered Systems, which is largely a U.S. government prime contractors, sales were impacted by the very late approval of the U.S. 2024 budget. We also revised estimated progress and cost to complete the uncertain contracts, resulting in some revenue and profit reversal. Finally, given that our even stronger balance sheet with quarter-end leverage just at 1.7, combined with record free cash flow, we believe it's appropriate time for us to add stock repurchases to our capital deployment plan. I will now turn the call over to Edwin and George who will further comment on the performance of our four business segments.
Edwin Roks: Thank you Robert. This is Edwin and I will report on the Digital Imaging segment, which represents 55% of Teledyne's portfolio and like Teledyne as a whole, this segment is a mix of longer cycle businesses such as defense, space and healthcare, combined with shorter cycle markets including industrial automation, semiconductor inspection and infrared components, and cameras for applications ranging from factory condition monitoring to maritime navigation. First quarter 2024 sales declined 4.1% compared with last year as certain products declined considerably, but were largely offset by those with meaningful increases. For example, sales to Industrial/Machine Vision markets declined approximately 30% year-over-year. On the other hand, unmanned air systems, unmanned ground systems, and integrated counter-drone systems collectively increased nearly plus 30%. Other year-over-year changes were less significant, but included continued growth in our space-based imaging business, resilient sales in healthcare and FLIR's core infrared and maritime businesses, and declining sales of semiconductor-related micro electrical mechanical systems, or MEMS. As Robert mentioned, the FLIR businesses grew organically and for the third consecutive quarter were positive contributors to overall segment margin. Finally, segment orders were healthy with a first quarter book-to-bill of 1.06 times. George will now report on the other three segments which represent the remaining 45% of Teledyne.
George Bobb: Thanks, Edwin. The instrumentation segment consists of our Marine, Environmental and Test and Measurement businesses, which contribute a little over 24% of sales. For the total segment, overall first quarter sales decreased 0.9% versus last year. Sales of Marine Instruments increased 15.3% in the quarter, primarily due to both strong offshore energy and subsea defense sales. Sales of Environmental Instruments decreased 5.8% with greater sales of process gas emission monitoring systems, and gas and flame safety analyzers more than offset by lower sales of drug discovery and laboratory instruments. Sales of Electronic Test and Measurement Systems, which includes oscilloscopes, digitizers, and protocol analyzers, decreased 18.2% year-over-year on the toughest quarterly comparison of 2024 versus 2023. Overall Instrumentation segment operating profit increased in the first quarter, with GAAP operating margin increasing 183 basis points to 26% and 175 basis points on a non-GAAP basis to 27.1%. In the Aerospace and Defense Electronics segment, which represents 14% of Teledyne sales, first quarter sales increased 7.2%, driven by growth of Commercial Aerospace and Defense microwave product. GAAP and non-GAAP segment operating profit increased year-over-year with segment margin increasing approximately 80 basis points. For the Engineered Systems segment, which contributes 7% to overall sales, first quarter revenue decreased 10.5% and operating profit was impacted by lower sales and the cost to complete estimate revision Robert mentioned earlier. I will now pass the call back to Robert.
Robert Mehrabian: Thanks, George. In conclusion, orders have been strong for two consecutive quarters, with the increase almost entirely due to our longer cycle businesses such as Defense and Energy. However, given the nature of these businesses, converting much of the greater backlog to sales will not begin until the second half of 2024. At the same time, the pace of orders in our short cycle Instrumentation and Imaging businesses did have a near-term sales impact in the first quarter and likely will continue to impact total sales in the second quarter of 2024. So while our current outlook for full-year sales is flat with 2023, we expect second quarter sales to be sequentially flat with the first quarter, and then increase in the second half of the year. The current market environment is reminiscent of the 2014 to 2016 period, that is when total Teledyne sales and earnings were flattish, except market dynamics were the opposite of what we are experiencing today. Specifically, growth in certain short cycle markets were partially offsetting declines in our longer cycle Defense and Energy businesses. Hopefully this time, the recovery in the short cycle businesses would be shorter. In any event, during the 2014 to 2016, we executed approximately $400 million of opportunistic share repurchases, completed 10 acquisitions, and subsequently experienced significant sales and earnings growth when markets normalized. Today, we're pleased to renew our stock repurchase authorization and plan to begin repurchasing shares this quarter. At the same time, because of our strong balance sheet, we're continuing to evaluate a number of acquisition opportunities. I will now turn the call over to Steve.
Stephen Blackwood: Thank you, Robert, and good morning. I'll first discuss some additional financials for the quarter not covered by Robert and then I will discuss our second quarter and full-year 2024 outlook. In the first quarter, cash flow from operating activities was $291 million, compared with $203 million in 2023. Free cash flow, that is, cash from operating activities, less capital expenditures, was $275.1 million in the first quarter of 2024, compared with $178.6 billion in 2023. Cash flow increased in the first quarter due to stronger working capital performance. Capital expenditures were $15.9 million in the first quarter of 2024, compared with $24.4 million in 2023. Depreciation and amortization expense was $78 million for the first quarter of 2024, compared with $82.1 million in 2023. We ended the quarter with approximately $2.33 billion of net debt, that is, approximately $3.25 billion of debt less cash of $912.4 million. Now turning to our outlook. Management currently believes that GAAP earnings per share in the second quarter of 2024 will be in the range of $3.57 to $3.70 per share, with non-GAAP earnings in the range of $4.40 to $4.50 per share. And for the full-year of 2024, our GAAP earnings per share outlook is $16.02 to $16.27. And on a non-GAAP basis, $19.25 to $19.45 per share. The 2024 full-year estimated tax rate, excluding discrete items, is expected to be 22.5%. I will now pass the call back to Robert.
Robert Mehrabian:
Operator:
Operator: [Operator Instructions] At this time, our first question is going to come from Jim Ricchiuti with Needham and Company. Please go ahead.
Jim Ricchiuti: Hi. Thanks. Good morning. First question, just given the weakness that you're seeing in some of the higher margin areas of the short cycle business, I wonder how you're thinking about gross margins over the next couple of quarters?
Robert Mehrabian: In terms of the gross margin, we're looking at relatively flat gross margins of somewhere around 43%.
Jim Ricchiuti: Okay.
Robert Mehrabian: Yes.
Jim Ricchiuti: All right, Robert with the shift in capital allocation, I'm wondering, what is this? What does this really imply just in terms of the M&A pipeline? Are you still seeing more opportunities for the smaller deals as opposed to the larger M&A? Is that a fair way to characterize the environment right now?
Robert Mehrabian: All right, Jim. Kind of, but let me just start with some numbers that are significant. Our debt-to-EBITDA is at 1.7 now. We have one acquisition in the pipeline. Once we make that, we would have spent over $300 million since we bought FLIR in acquisition. If we don't do anything else, by the end of the year, our debt to EBITDA ratio will be closer to 1.3, where it is at 1.7 today. So we think that it's an appropriate time first to look at our stock and repurchase some shares, because since we bought FLIR, our shares have increased by almost 700,000 shares because of stock option exercises and restricted stock awards. We'd like to get that off the table first. But at the same time, we have a lot of capacity for acquisition. We can spend up to $1.5 billion, $2 billion, because we haven't touched our line of credit at all, and we have cash on hand. So we are looking at acquisitions. The issue is that smaller acquisitions we may be able to complete this year. Larger acquisitions, even if we find it with all the various regulatory hurdles that you have to go through, won't happen until next year. But the answer is, we're going to do both. We're going to do exactly what we did in 2014 to '16. We bought our shares back, we bought 10 companies, and then some of our competitors didn't do as well in that constricted period, and we were able to acquire it to be right after that, because we had the financial wherewithal. I don't know if that answers your question.
Jim Ricchiuti: It helps. I mean, in the past, at least, more recently, you've talked about valuations still being a bit on the rich side. Are you -- do you see, as you look at the pipeline for some of the larger M&A? Have you seen any change in terms of the prices out there that it's going to take to do some of these larger deals?
Robert Mehrabian: Not yet. On the other hand, I have to tell you, Jim, they haven't all come out with their earnings. And in this market, kind of a bifurcated market, I expect that some of those will come down and there will be just like it did before. Interestingly enough, history does repeat itself. It doesn't repeat itself on the time scale that we always expect, but repeats itself.
Jim Ricchiuti: Got it. Thanks very much.
Robert Mehrabian: Thank you, Jim.
Operator: Our next question is going to come from Greg Konrad with Jefferies. Please go ahead.
Greg Konrad: Good morning.
Robert Mehrabian: Good morning, Greg.
Greg Konrad: It is a bit of an unusual question, but one I've been getting from investors. And in light of the uncharacteristic guidance cut, which there hasn't really been many over the past 20 years, is Teledyne different today than what has made it so successful, thinking back over the past 20 years? Or what's really changed just given some of these uncharacteristic items, or is this just you think about it as part of the normal cycle?
Robert Mehrabian: Well, two things. First, in the 25 years or so, Greg, we've only had this occasion in four earnings, almost 100 earnings calls and release us. We've experienced this four times, 4%. So it's not something that happens very frequently. The flip side of it is that the economy and the market are not quite predictable. Some parts of the economy are doing well, like our Marine businesses are -- we're hitting the ball out of the park. And Defense, of course, is doing well. With recent passage, etc., we intend -- we expect that to continue. What is unusual is that the prediction of the slowdown in industrial automation took us by surprise. We thought in January that we would be relatively flat for the year in our Machine Vision businesses. And now we're suddenly faced with, in April, projecting a 20% decline. Now that sounds like a lot, but it's only $120 million. What is different today from the past is that, Teledyne can absorb those kinds of shock much more easily than it could before. In 2015 to '16, when oil went from over $100 down to $30, that was a shocker to Teledyne, because our revenue was only $2.5 billion, $2.6 billion, and that decreased our Marine businesses by almost a third over a very short period of time. So what is different is that the shock absorber in Teledyne, is a lot different and can absorb shocks like that. And we did this quarter, everything else being equal. But when I look at it, I said, look, we had two hits that we took in one quarter. One of them was this significant decline in Industrial Automation and Semiconductor. But Semiconductor seems to be recovering slowly, so we see signs of that, and I think the Machine Vision business will come back. We took another hit in our Engineered System business, which was unexpected, but we had to go in and look at everything and do some estimates and change our estimates to complete. That was a one-time event, so I'm not going to worry about that too much. What I am saying is that look, yes, we took a hit, and we're taking our revenue down by $220 million out of 5.9 to 5.7. In the old days, at those days, we've taken a $220 million hit that would have been just devastating. We recovered those times, those kinds of shocks, I think we'll recover this time just as well, if not better because we have the muscle to and the ability and the credit by companies and when necessary buy back our stocks.
Greg Konrad: And then I appreciate that. And maybe just kind of a follow-up to that. I mean, just thinking back about to what Teledyne did out of the oil and gas downturn and there was the sequester before that and impacted defense. I mean, if I remember back, you took pretty aggressive actions and we saw what margins and growth did out of those two downturns. I mean, is there similar actions that you're undertaking on the short cycle side? Does that offer opportunity maybe to examine the margins where you have an even better kind of trajectory coming out of market recovery?
Robert Mehrabian: Yes. First, if you look at the FLIR businesses year-over-year the margins are up almost 200 basis points year-over-year. And the reason that happened is very simple, we took about $52 million worth of cost out last year and we're taking additional $10 million to $15 million cost off this year, early on. So that is affecting the margin. If you look at the DALSA, e2v, which is our traditional businesses, our estimates are that by the end of second quarter we'd have taken another $40 million out of that altogether. We're talking about almost $100 million in cost offs, and we anticipate that DALSA, e2v margins were the lowest have been for a long time. They're at 19.5% in Q1. We expect that to recover and frankly we expect the overall margins for Digital Imaging to be flat with last year on much lower revenue. So it basically says that we have taken the cost offs, and if need be we'll take more. But I think right now we're doing okay. We're just not very aggressive in our hiring.
Greg Konrad: Thank you.
Operator: Our next question comes from Joe Giordano with TD Cowen. You may begin.
Joe Giordano: Hi. Hey guys, how are you doing?
Robert Mehrabian: Hi.
Joe Giordano: Maybe I'll start on DI as well. Just, I'm curious on the timing of this, right, because if you look at some of the pure players within vision, they had huge declines last year and you guys did okay relative to them last year and now this year it seems like. Well, they are yet to report largely, but it sounds like they're going to be sequentially improving offload levels starting like now. And it seems like now is when you guys are starting to see declines, so I'm just curious your thoughts on what that timing mismatch is because it's pretty short cycle stuff.
Robert Mehrabian: It is. We know a couple of businesses that took a pretty good hit, but their quarters are kind of a little different and their years are a little different from ours. They took a pretty big hit and lowered their numbers significantly. So now they're coming up from the bottom slightly bettered. We didn't take a hit because we didn't have short cycle declines of the magnitude we saw. We anticipated it could happen, but it happened fast and we took the cost out. The flip side of it is that, in even Digital Imaging we have, of course, the short cycle businesses, but we also have long cycle businesses like Space and Defense, and those markets are doing really well. So I got to be a little careful when we designate what is Digital Imaging be, basically the average, we think in the second half we will recover because of the Space and Defense business.
Joe Giordano: And then just to follow up on the question earlier about, is Teledyne different today? I think, what you guys have been known for, for so long is being very good estimators of your own businesses and with high precision. And when you think about all the M&A company you've done, does that become just inherently more challenging today versus a decade ago, just because you have so many more businesses? And is there maybe, like -- does there need to be a tinkering of the process with how you communicate upwards from the businesses towards management to finetune the budgeting process in light of some of these being caught off-guard here?
Robert Mehrabian: Well, I mean, you're right in one respect, and I'll kind of paraphrase what is that. The estimating the short cycle businesses actually has always been inherently challenging. The flip side of it is the part that you mentioned, we have a lot of businesses, etc., that part is actually a help to us rather than a hindrance, because it opens up the platform from which you can make acquisitions. And that is true, and it will remain true. So we will accelerate that. The only thing we don't want to do is make stupid acquisitions with very high prices that are not going to be accretive, but acquisitions we will do. We have a larger platform to do that with. And like, we just bought something in our Marine business, Valeport in the U.K., and we have Adimec, which is a Digital Imaging business in the Netherlands, that we are going -- we are in the process of buying. The only difference between that business and our short cycle businesses is that they do a lot more custom imaging design and they have a significant market in imaging in the Defense domain. So I think, this is an opportune time for us. Let's see what happens to the rest of the earnings and crawls that come out. We didn't lower our numbers significantly. If we lowered, we'd be up now. Right? So all we're saying is we're going to be flat with last year. Our margins are going to be the same by the end of the year. Our revenue is going to be about the same, with that's without making any acquisitions, and we have got -- we have enough muscle to buy our shares, and that's a good place to be with. Even after those purchases, I think we'll end the year, let's say we bought $200 million of our stock. We'll still end the year below 1.5 debt-to-EBITDA ratio, which is below our target of 1.5 to 2.5. So I think we're doing fine. I'm not worried.
Joe Giordano: Thank you.
Robert Mehrabian: Thank you.
Operator: Our next question comes from Andrew Buscaglia with BNP. Please go ahead.
Andrew Buscaglia: Hey. Good morning, guys.
Robert Mehrabian: Good morning, Andrew.
Andrew Buscaglia: So I wanted to get a sense of how much this guidance is really de-risked. Maybe number one, are you assuming buybacks in the guidance? And then secondly, why should we have confidence, given the low visibility, that there's not another step down here in some of these shorter cycle areas?
Robert Mehrabian: A very good question, Andrew. First, no, the buybacks are not built into the numbers, primarily because when we buy back it's really going to affect next year's EPS, not this year's. So that's fairly neutral for this year, depending on, of course, how much we bought. So I would put that aside. The second part of the question, we've struggled with that mightily over the last 10 days, and with our Board in the last two days trying to decide how conservative we should be or how aggressive we should be. We've ended up being somewhere in between the two. We think that we've de-risked some of the downside. On the other hand, we haven't de-risked it all. Flip side, our Defense businesses have relatively good backlog, and the overall backlog in the company is 1.06. So the Defense and Space businesses are going to come back in the second half. So they're going to balance that. In a situation like this, you can do one or two things. You can really lower the numbers and just play it very safe, or you can do what is a reasonable judgment of what you see in the market and go forward. We've taken the latter approach.
Andrew Buscaglia: Yes. Okay. Okay. Just, I think some investors are also somewhat confused by that the small portion of the sales. It seems like a small portion of Digital Imaging is driving sort of a profound -- these profound declines. Can you, can you kind of walk through within Digital Imaging? We know Machine Vision is weak, but that's probably only low double digits as a percentage of that segment. Can you walk through the other items beyond just Machine Vision and tell us how much that is as a percentage of that segment sales, just so we could get some more clarity around what's affecting the overall decline?
Robert Mehrabian: Sure. First, let's start with Machine Vision specifically. Approximately $600 million in 2023. We're projecting a decline of about $120 million of that. So the reason it's affecting other things is that the highest margin businesses that we have in Digital Imaging and overall there are -- when you put the two parts together, which is DALSA, e2v, TS&I and FLIR, our total revenue there is going to be down about, by year end, about 1.5%. So it's not a big number, right, 1.5%. But that's 1.5% with something like over $2.1 million -- $2.1 billion. So it's meaningful only because the top line 3.1 is significant, and it's our highest margin business. By year end, we're projecting that basically the declines would be 1.5% overall with FLIR up and DALSA to be down because of that. I don't know if that answers your question.
Andrew Buscaglia: Okay
Robert Mehrabian: The numbers, when you look at them, look large, but in retrospect, it's not huge. It's 1.5% of the total.
Andrew Buscaglia: Yeah. Okay. And beyond Machine Vision, what other areas are short cycle that are out of favor?
Robert Mehrabian: Well, the only other one that I would say is out of favor. I wouldn't call it out of favor. I'd say, it's decline. It's Test and Measurement. Test and Measurement is the oscilloscopes and protocol solutions that we have. Last year, we had $340 million of revenue there. We expect right now that -- in January we thought it remained flat. Now we're expecting it to go down about 10%. So that's $30 million in revenue. A good part of that is that its margins are remaining very healthy and at the very high-end of all of our margins. And we can take that decline in revenue without having a big hit anywhere else, because Marine is making up those sales declines.
Andrew Buscaglia: Okay.
Robert Mehrabian: The last area, which is a little different, is Engineered System. In 2023, we had $440 million in revenue. Right now, we're projecting about a 10% decline, or about $35 million to $40 million decline. If there's a good part to it, is that that's only 7% of our portfolio, and it's our lowest margin business at 10% or less. So that's why, well the surprise here is that, yeah, we do have declines, but we're saying we're going to keep our revenue the same as last year and our operating margins are going to be the same as last year in an environment that's a little more constricted for our Digital Imaging short cycle business.
Andrew Buscaglia: Yep. Okay. Thanks, Robert.
Robert Mehrabian: Thank you.
Operator: [Operator Instructions] Next, we will go to Kristine Liwag with Morgan Stanley. Please go ahead.
Unidentified Analyst: Hi, good morning, guys. This is [Gaby] (ph) on for Kristine. Thanks for taking the question. So I was just wondering if you can provide some, a little bit of color if you've been seeing improvements in the supply chain and your expectations for the supply chain going forward and how that's going to impact the business throughout the year?
Robert Mehrabian: Thank you very much. Great question. The supply chain improved in 2023 significantly versus 2022. It has improved further this year. Just to give you an exact number, we -- when we buy from brokers, we pay higher percentages of price. Last year in the first quarter, we bought about $10 million for electronic suppliers brokers. This year, first quarter we only bought a little over $2 million. So I think there's been significant improvement. Having said that, there are a couple of suppliers that make very sophisticated board or device, semiconductor devices that are still lagging and it's more of a delay problem rather than a price problem. So I think the supply chain is okay. We're all experiencing some delays of some sophisticated part. Other than that, I think that's behind it.
Unidentified Analyst: Great. Thank you so much.
Robert Mehrabian: For sure.
Operator: And our next question is going to come from Noah Poponak from Goldman Sachs. Please go ahead.
Noah Poponak: Hey, good morning, everyone.
Robert Mehrabian: Good morning, Noah.
Noah Poponak: Robert, to have the second quarter revenue be about flat from the first quarter, the year-over-year rate of decline would need to accelerate. Is that right? Is that what you're anticipating?
Robert Mehrabian: Right now, we're anticipating that it will be flat, only because -- the answer is yes, only because we don't think where we have really good backlog is going to kick in until the third quarter. The decline about 4.5% from last year -- year-over-year in second quarter, yes.
Noah Poponak: Okay. Yeah. And then I guess that would imply kind of mid-single digit organic revenue growth in year-over-year in the back half. I was going to ask you just alluded to it, but I was going to ask how much of that is kind of purely visibility from longer cycle things in the backlog versus what's the assumption embedded in that on the short cycle side?
Robert Mehrabian: I think primarily, it's what we have in the long cycle. The majority of that recovery is in what we have in our backlog, maybe 3.5% to 4% improvement in revenue in the second half. There is a little bit of positivity in some of our short cycle businesses only because our larger customers or platforms on which we serve, like semiconductors, the data shows that it's better than it was last year and improving, it's up. So we have a little of that in mind. That -- I think, that's there. But we're not counting on industrial automation, other things to improve significantly, because frankly, we have no visibility.
Noah Poponak: Okay. What are the pieces of the Engineered Systems margin in the quarter? I assume there's some kind of cumulative catch up adjustment mark-to-market writedown in that?
Robert Mehrabian: Yes. What happens in that business is that, as you well know, we're obligated to do 606 accounting. And so you estimate your cost and completion timing. When we went back and looked pretty hard, we saw that some of the costs were higher than we had anticipated, so we adjusted those. I think that took a kick out of our sales. But when you do cost-to-cost once you take sales down, let's say several million dollars, you have to take the profit down the same amount. So that's what took the hit. But I think we know exactly what happened. We'll fix it. We are fixing it, and we should get beyond that as we move forward.
Noah Poponak: Do you know the size of -- in front of you guys there on how much of a markdown you took in the quarter?
Robert Mehrabian: Well, we took in Q1, we took about a $7 million EBITDA, which was basically $0.10 to $0.11. So if that hadn't happened, we would have made our earnings.
Noah Poponak: Okay. Okay.
Robert Mehrabian: Despite the downturn in a short cycle imaging. We'll fix it. We are fixing it.
Noah Poponak: Got it. Got it. That's helpful. That's helpful. Last one, I guess given how much you've now delevered balance sheet, net debt to EBITDA post-FLIR integration, you're still going to have pretty healthy free cash flow despite the tweaks you're making here today. If you're coming out with a share repurchase, I guess the number you're talking about is kind of small relative to your forward annual free cash flow generation. How much balance sheet firepower you have if you were to take leverage a little higher? A little bit of like if you're going to lay up, lay-up type of thing -- I guess I'm surprised that you maybe part of it is you formulated all this before the move in the stock today. Is there a scenario where you reevaluate something more aggressive in 2024? Do you need to keep room for the M&A pipeline? How would you respond to that?
Robert Mehrabian: Well, two ways. First, we'll put out a K about our authorization. And if you look at that, we have authorization to go from what we said was $200 million to $250 million to $300 million, we can go up to $1.25 billion in buybacks. As you know, Noah, that depends on the stock price and how the markets reacts. But at the lower stock price that we -- I'm just looking at this morning -- I was looking at this morning, that would be a significant number of shares. We can do that if we choose. We'll still have enough powder to make acquisitions. Frankly, that part of our portfolio doesn't bother me. If you look at final data points, you may want to know is we have only $150 million of debt -- fixed debt, that we have to pay in the second half of 2024. In October, $150 million. We just paid $450 million. The next payment doesn't have come due until 2026. And then if you look forward the next three or four payments, our average borrowing cost, and those are all fixed, our average borrowing cost is more like 2.35%. So that's about as ideal as you want to have. And if, as we generate cash, we can buy the shares and we can make acquisition, and we haven't even touched our line of credit yet. So from that perspective, I feel pretty comfortable.
Noah Poponak: Okay. Helpful. Thank you.
Robert Mehrabian: Thank you, Noah.
Operator: At this time, there are no additional questions in queue.
Robert Mehrabian: Thank you very much. We would like now to conclude the conference. Operator, I will now ask Jason to do so.
Jason VanWees: Thank you, John, and thanks, everyone, for joining the earnings call this morning. Again, all the earnings release are on our website. The replay is available. And for those on the call, please feel free to contact me if you would like to talk further. So thank you, everyone. Bye.
Operator: As we mentioned, this conference has been recorded for replay, which will be available for one month starting at 10:00 A.M. Pacific time today, and ending May 24, 2024 at midnight. To access and listen to the replay at any time, you can call (866) 207-1041 and use access code 832-7266. International callers, you can use the number (402) 970-0847 and again, for domestic, that is (866) 207-1041 and international (402) 970-0847 and the access code to use is 832-7266. That does conclude your conference call for today. And we do thank you for your participation and for using AT&T Event conferencing. You may now disconnect.
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