Teledyne Technologies Incorporated (TDY) Earnings Call Transcript & Summary

Thanks, everyone, for joining. I'm Joe Giordano. I cover diversified industrials automation robotics here. Excited to have Teledyne with us today. This has been one of my favorite companies since we launched coverage, it's been still one of our top picks. Today, we're lucky enough to have both Jason VanWees, Vice Chairman; and Edwin Roks, EVP. So we can go into any aspects of the business they're going to be well covered here. I'm going to focus more on some of the aerospace stuff to start, but we'll keep it -- I'll break a couple of times for your questions from the audience if anyone wants to jump in. But guys, thank you for joining us.

Thanks, Joe.

I just want to kind of set the stage here because you do a bunch of different things. So what's the easiest way -- I guess, it's an easy question with a complicated answer, I guess. But how do you define Teledyne? What's your core competency as an organization?

Yes. And part of this idea that Teledyne is complicated is kind of my fault because I've been here 24 years, I'm happy to tell everybody everything that we do, every product, every market, every subsegment. But despite 67 acquisitions, we've actually been quite a bit more simple. I mean, we have more business segments. Each of the business segments has a President, has a CFO, technically, digital imaging, there's 2, one overseeing the FLIR portfolio or the other portfolio. But at the highest level, what we're good at doing is making specialty sensors, instruments and/or cameras that include those sensors and ultimately deliver some kind of information to the customer. And that's really true across the whole portfolio. It could be digital imaging, could be the ambient air quality. Even in aerospace and defense. I mean what we do in commercial aerospace is data acquisition and data transmission avionics for aircraft flight time. That's essentially what we do. So call us a sensor company, a diversified industrial tech. I mean that's a lot easier and a lot simpler, but I tend to focus more on the actual products and hardware. But even in products and hardware, what we do in defense electronics is microwave devices and specialty interconnects. Largely, what we do in Marine is connectors that work underwater and sonar devices. In imaging, we make sensors for things that are hard to see. Why do we end up in verticals like James Webb Space Telescope or classified satellites looking down? Well, it's not that different from semiconductor wafer inspection, where maybe you're not trying to get feet of space, you're just trying to get microns or nanometers from an inch, but making that specialty sensor and delivering that information. That's what we do.

Basically, everything has to do with sensing and to a larger extent, decision-making are better to say, help to make decisions. And that's...

And is the answer somewhat different if I was to ask, I'm like a shareholder standpoint as to where the core competency lies, -- like on an operational basis, there is this connecting fiber, right? Of sensing and -- but given the diversity, is an investor here signing up for just effective capital deployment into areas that you hold close or how best do you kind of -- what exactly are you -- is the thesis there because it's hard to make it about any one specific thing?

Yes. I mean in terms of capital deployment, and this really goes back to our history as a SpinCo, I won't bore you with the ancient history. But when I joined again 24 years ago, it was -- we were clearly the Spin E in the spin-off process, had some nice cash cow product lines, but had a lot of other parent company doesn't want. And that kind of diversity, we remember well. And so the first acquisition criteria for us is does it fit with something that we have. Is it a market we're already in? Is it a customer base we already serve? Hopefully, it's both if the entire management team quit the next day, can we run -- pick up and run. And that's true for the little bolt-on acquisitions, but that's even true for FLIR. We watch them for a decade before they finally got out of their commoditized consumer businesses. It was a very clear fit, and then we bought them. That's -- that's really the model. In terms of capital deployment, we're that's conservative. We -- that fit is the #1 thing, I think that's a great risk reducer, not buying -- again, of course, we love businesses with high gross margin recurring revenue, more software content, negative working capital, who doesn't. And of course, we love all those things. Those would be things that we like on something that fits, maybe something that we'd be willing to pay a little bit more with something we truly understand. But there's no financial dogma, it's buying a business that fits well that we understand really well and then paying a reasonable price. Yes. Someone was just asking me about another potential acquisition in the back of the room. And I think that business is a good business. But the price is not the right price, and it's not the right time; This is a hypothetical.

Now I want to dive into M&A a little bit more in a bit. But just to give some context here, can you just talk a little bit about how the portfolio has evolved over time because it is -- and excuse the pun, but you guys fly under the radar of a lot of people. And is it because of where you used to be in the legacy businesses and what you used to do and then how that's changed now? I mean, now you're -- you've gone from an aerospace company from just a strict GICS reporting methodology to like an electronic component company and obviously, the expansion of the digital imaging portfolio that everyone manages, like can you just talk about what you used to do and like where that has gone and how that's been accomplished, whether it's divestment in or the acquisition?

Yes. So I mean kind of the composition of the portfolio has been intentional. It hasn't really changed a lot in the last decade. The first decade was very different. I mean when I joined, we were clearly an aerospace and defense company. All aerospace and defense markets were about 90%. The U.S. government was about 50% of revenue. We are clearly in A&D SmallCap 600. That was the origin that had one sort of sell-side analyst, that had one sort of buy-side analysts, that fell into a certain bucket, a small-cap, A&D. That's who we work. Things have been really up until about 2012, the main focus of the business was on portfolio management. And we like where we are, and that really hasn't changed even though we've grown, which is we like to think of defense and even to a lesser extent, other long-cycle markets, defense, energy, aero, medical is kind of a cyclical -- those kind of things in their proper proportion are great. We think 25% defense is good. It's a shock absorber against global macro. But when defense was 50% of the company when I joined, I mean it was not a shock absorber -- the DoD investment accounts in the U.S., that was your top line. Can run, can hide. And generally speaking, notwithstanding what I said about financial dogma before, we think over any 10-year, 5-year period, commercial is going to grow a little faster than defense. Commercial has got a higher gross margin profile. It's a little bit less capital intensive, more favorable dynamics from that point of view. So we've leaned to more commercial, but we've never run from some of these markets that have good products, good technology and are indeed a shock absorber. Maybe from the buy-side community, there's been a fair amount of changes in the last couple of years. I mean there was -- even for the people who cover us, as we've gone from small-cap 6, the mid-cap 4 to S&P 500 as we've gone from A&D GICS to electronic instruments GICS, both the sell-side group for the better has changed to some extent. And the people even in the buy-side organizations have changed. I mean there's been certain large institutions that I've met with over the last 10 years, and it's been a different person almost every time. That's not universally true by any means. But that certainly is true at some. It's been kind of odd define I sort of feel like we've always been who we are at least since 2012 on that kind of 75% commercial; industrial, 25%. And maybe it's my fall, I should have said we're a diversified industrial tech period. But I cannot tell everybody everything in this, this is a complicated company.

Yes. It depends on what day of the week as to what the better characterization is, I think, to some extent. But given the nature of the conference here on A&D, let's dig in a little bit there on to what your exposures are. So maybe a little bit more specifically, can you talk to what your exposure profile is in defense, like what are you actually selling? And like what -- who are you selling it to? Who are you competing with, just so we can kind of start there?

Yes. So there's a few exceptions to the rule, but we had to generalize traditionally, we -- this is both true in the defense side as well as the commercial side. We're generally a subsystem provider. Again, I'll get into the important exceptions to that in a second. But an average ASP for a product might be in the tens of thousands of dollars. Again, this clearly outliers. We make million subsea autonomous vehicles. We make $100 specialty interconnects. But typically a subsystem provider, tens of thousands of dollars, critical subsystem that's kind of what we supply. Again, there are outliers. We are the prime contractor for an AV seal delivery vehicle. But that's $40 million, $50 million a year of the kind of $1.4 billion of defense business, generally speaking, a big program for Teledyne is sort of $40 million to $50 million a year. So that's why I say subsystem. There's no Joint Strike Fighter at Teledyne, if you will, that really drives the defense business. There's a lot of little programs where we're critical component supplier, a sonar device, a microwave device meaning electronic counter measures or radar, specialty interconnects, microwave connectors that go into other microwave devices for sonars. Again, other or specialty image sensors. Obviously, there was the legacy Teledyne space-based imaging, big science out, James Webb Space Telescope, other DoD or other looking down. Then the FLIR, of course, bought all the ground-based and land-based. And with that, we probably sell more new programs to prime contractors. So the names you would suspect a Raytheon, the north of [ Baltic ]. L3Harris is becoming bigger and bigger because we sold the EDO because they did electronic counter measures, well, EDO became part of ITT. ITT became part of Haris, Haris became part of L3. So that's actually a pretty big customer right now because that tends to be a little bit more communications heavy. On an aftermarket basis, we clearly sell direct to the military or when they're upgrading radars or upgrading electronic counter systems. When we are prime, it tends to be in the autonomous vehicle, either legacy Teledyne, pre-FLIR, where we were still very strong in marine, we might sell direct to the Navy or in unmanned drones, there's a program called Soldier Borne System where headwinds micro hornet micro UAV and Black Hornet is directly sold program a record to the U.S. DoD and likewise. But again, critical subsystem is a common theme. But other than in the unmanned portfolio, which is about $450 million of total revenue there, yes, we're a prime contract.

Yes. Sure. And so what -- I know you don't have like a Joint Strike Fighter like you mentioned, but what are some of the key kind of either things now that you work on? You mentioned [ SWK S ]? Like what are some things that we should keep in mind that are either in planning phases or that we can see that could be potentially decent sized for you?

Yes. Well, again, I'd sort of quantify this decent size. So FLIR program, it was announced in Q2 of 2022 called Family of Weapon Sights that had a headline value of about $500 million over 5 years. Now again, you probably won't get the contract ceiling, but that's maybe $40 million a year, as an example again of that size. There's space-based imaging programs. There's a lot of funding these days for a space force, for space force development agency. So some of these infrared constellations for missile warning, missile tracking, we're a critical supplier to some of those programs. Again, that's sort of the same magnitude or maybe it's a little bigger because there's a couple of them of each of those might be $40 million, $50 million a year kind of thing. But that's an area in terms of areas of growth that could be good. But generally speaking, I mean, I sort of joked earlier today that I've never seen a corporate manager say, let me tell you why we're going to grow slower than the defense budget. I mean everybody is going to grow faster, but things do converge to a mean. But I think themes like standoff observation, be it infrared, be it radar, be it unmanned drones, those of each -- I think, reasonably good areas. But that could be ground-based soldier systems or it could be space-based the Tranche 1 tracking layer as an example. Yes.

You've touched on these points a little bit, but I did want to touch on unmanned. So I know legacy Teledyne subsea delivery platforms kind of you've been doing that for a while. FLIR brings on aerial and on land based. Can you maybe go through what that portfolio looks like? How big is that? What's in the pipeline for how large that can get?

Sure. Well, I'll let Edwin talk about the specific product, but the sort of size -- sort of that $450 million generically speaking, $150 million is Teledyne, which leans more subsea. FLIR is the larger piece closer to $300 million, actually a little bit larger in terms of both ground and air. Edwin, why don't you talk about...

Yes, sure. When we acquired FLIR, we got basically $700 million of defense business, correct? So $350 million of that is basically surveillance. It's fixed cameras, cameras in a gimbal system under a fixed wing or helicopter. The other $350 million is unmanned systems, both ground-based and aerial. And especially the aerial, I think we have a lot of success looking at the nanodrone, and there is a family of products, by the way, it's not only that one. And then in Canada, we have the larger [ craft ], also very successful with different payloads to do all kinds of missions. So that's working out well, not only in the U.S., but also, for instance, in Europe and Middle East we are gaining business back there.

And I know that you characterized some of that stuff in the -- particularly like the aerial drones as military grade by commercially available. So if we start thinking about escalation in Russia, Ukraine, like what can that look like for your defense business? How quickly could that -- could things ramp for you if it's not all big platform driven?

It's not a matter of, let's say, supply, let's say we can deliver. It's more a matter of, let's say, how Europe can organize their things. If there's a conflict in Ukraine, a lot of that business is captured by funding and by consolidation of sales funds in -- sometimes in the U.K. That's a slow process where I personally see more [ tension ], let's say, is are in the other NATO countries, they all have to protect themselves. And that's -- you're dealing with one single country. So that's a big difference. So yes, I see a lot of potential there.

Yes. It's hard to quantify. I mean, I would say direct near-term impact that's already happened. I mean, there was an article we sold the nano drones is through a U.K.-funded effort into the Ukraine, and let's just call it $10 million order of magnitude, FLIR makes the thermal on some of the, let's call them, kamakaze drones made by other U.S. companies, the thermal pay a lot to me by FLIR. So there's clearly been a little bit of benefit there in terms of orders. But again, that's tens of millions. So I think it would be bigger, still probably in the tens of millions, it's not hundreds. But again, call it, the increased NATO spending, and this is not just the FLIR portfolio, but some of the subsea portfolio. People are more curious about North Sea, Baltic Sea, Black Sea. That's more an area of interest right now. So even on the marine side. But it does take a little bit of time. That said, I think both Teledyne and FLIR becomes a little quicker because it's that we don't always need, to your point, and commercially drive military qualified. We don't always need an appropriation, then a program, then an outlay. Well, then that's in the backlog, and that's revenue and you're talking 2024. It can come a little quicker. We think there'll be growth in 2023. How much? TBD, but we do think 2023 as defense growth, right? I know some other people have sort of large companies have top up to back to like 2024. We'll just see it this year.

Can you...

Coming back to FLIR defense. Basically, what we did in '22 is we improved the business, yes, better products, better product quality, better sales force, and that's what we see now benefiting in 2023.

And if you were to compare where those businesses are, maybe like on the FLIR surveillance side versus maybe peak Iraq, Afghanistan kind of deployments. How big is that? And is the function -- is that step function dependent on kind of U.S. troop deployments? Is that what will require something?

Yes. I mean, if you're sort of talking P to kind of size it, so FLIR was really harvesting the -- there were a series of programs, 1 calls EO/IR Force Protection, one was called [ Betsy ], one was called GBoss, I think it was basically gimbal on a pole, gimbal on crane to spin around and look for protect force -- force protection at Iraq, Afghanistan and that's when supplementals, overseas contingency operations when those budgets were like $100 billion per year, FLIR was having revenue in the surveillance gimbal $550 million a year. Last year, surveillance was more like $300 million. So I mean, that's kind of -- so no one -- that's why I sort of quantified it as tens of millions because could $300 million turn into $350 million, $400 million, maybe the next 2 years, yes. Will it turn to $550 million when you had hundreds of billions per year? Probably not. That would be unrealistic. Yes.

That's fair. I also wanted to get into space a little bit. So you mentioned it earlier in James Webb, things like that. Maybe a little bit more detail on like where you're exposed, what types of products, how much is civilian space versus defense-oriented space, we can start there.

Yes, sure. So all things space give or to, call it, $400 million, $450 million revenue kind of similar to the unmanned number. A reasonable -- and frankly, $300 million of that is actually in digital imaging. The sort of $100 million scattered in Aerospace and Defense Electronics as well as in the Engineered Systems segment, where there's NASA work. If I included all civil space mass, the number would probably be more like $455 million, been $450 million, but let's sort of take that out. So in the part of space sort of civil versus defense , I'm not going to lie at we get into some of the specific products. But civil is a reasonable amount. It's maybe sort of like $150 million of that is -- and that's primarily our science satellites. If sort of could be even $170 million if you've taken some of the big science that assess it to James Webb Space Telescope is the Nancy Roman Telescope where James Webb takes a very, very deep focused single point kind of thing, the Roman Space Telescope is very, very wide field of view. We're going to make the sensors for that as well. And the earth science part has been growing, all the climatology satellites. I mean, the way you get data on how much methane there is in space is short wave infrared. You'll be -- some of our sensors for things like SOx, NOx, Ozone, that's sort of visible near IR, its all use sort of Teledyne sensors. On the defense side, it's not just imaging sensors, which -- we talked much about the programs, but I mentioned the [ hide ] rad-hard provider.

Yes. Sure. What happens, let's say, in every satellite system, you need to do the processing very close to the sensing -- close to the sensor. Else you're transmitting a lot of bandwidth. You need a lot of bandwidth. So that processing close to that satellite system, let's say, is a unique feature. And that's an activity, by the way, we do in Carnaval in France, and all the components are radiation hard, yes? Can we stand very low, very high temperatures and a lot of radiation and consists of a set of components. And that's a growing business in all aspects.

And what's the competitive landscape there? I mean there's not a whole lot of players. It's got to be very challenging to break into something like that. So what is that landscape? How dominant or...

Yes. I mean, I'll talk about that segment, but it's kind of true for most of the Teledyne and goes back to the original thesis of what kind of businesses do we want to be in. We want to be in business as I already said that fit, but we also don't want to be in businesses that we think are either commoditized or subject to commoditization. So the vast majority of product families, regardless of the market space, defense, commercial, they call it rational oligopolies of 1, 2, 4 kind of major market participants. And space is relatively limited. This isn't a little bit of an exaggeration, but if you're thinking about high-end infrared sensing and space, it's Raytheon, it's Teledyne, and it's a company in Europe called Lynred formerly known as Sofradir. That's the oligopoly. Again, this is the generalization. If Raytheon is making the satellite payload, again, Edwin has said, we are a sensor company. Here, they're called detectors, not sensors. But if Raytheon is making the payload pretty much uses the Raytheon sensor. Other people are making the payload, it's more like they have not the Teledyne sensor, not universally true, but that's a reasonable -- and now in visible. Other than e2v, I think ON Semi might still some sort of the former legacy Kodak business, I think maybe the competition in visible. But we also even -- also sell some visible light. But again, it's a pretty small oligopoly.

I'll pause there for a second, if anyone has any questions kind of on the A&D space unmanned area. Otherwise, I'll move on. All right. So maybe just from an operational standpoint, could we talk briefly about supply chain, where we are, where we came from, what that looks like today and what you kind of think the next 12 months might look like?

Why don't I turn that over to Edwin. He's got to live with it every day. So...

No, right. I think it's slightly improving. Of course, we don't have a crystal ball here. But again, I think from what I see, let's say, over of the last months of the last weeks, I think things are opening up a bit. And I think that will benefit us. So...

Yes. I mean allocations, I think, for the first time from OEMs where everybody has been getting packs, if you will, in the gray market for components or broker buys. Some of the allocations are actually grown up for the first time. Lead times are coming up. Now if the lead time goes from 50 weeks to 30 weeks its doesn't help you in Q1 necessarily. But it is the right trend. And we have I think we're going to be able to wean ourselves off some of those broker buys. I mean January was lower than December and December was the lowest month of 2022. So knock on wood, but that you know. Yes.

And you guys are in a bit of an interesting situation as you're not taking huge volumes relative to what you do, right, compared to some other large companies, but you are also a supplier to some of the people who are making some of this critical things that are insured. So maybe spend a second describing that dynamic.

Yes. So I mean this isn't universally true, but I'd like to think that were a size that's large enough to be meaningful to some of the OEMs. It's still hardware you're maybe looking for that exotic ones and twos and A&D land trying to find some these things. That's not the easiest, but we're large enough to be meaningful. But maybe to our detriment, but it's -- the reality is sort of that medium volume customer. We're probably slightly more profitable than something like auto or consumer electronics as an industrial end markets. I think we -- but then we've also been working very, very hard, both with some of our supply chain on contract manufacturers, hired a Chief Procurement Officer a couple of years ago. You're indirect discussions on some of those unique cases like the semiconductor company that build supplies and we supply it to that's Edwin in the senior leadership.

That's correct. Yes.

Yes. So when you think about the business today, where do you think we are kind of in a cyclical standpoint? Where does your order book look relative to backlog and how orders trended for the last couple of quarters here?

Yes. So total company orders have been 1% or north last 6, 7 quarters. The shorter cycle stuff, it's been lower the last couple of quarters. So no, there's no commercial industrial business of any magnitude where there's been 2 quarters of 0.7 or 0.8 or a wow -- what's happened to demand. But the reality is, yes, environmental instruments for a $450 million business, electronic test and measurement of $325 million business, book-to-bills we've been ranging from 0.96 to 0.99. Now, that's not north of 1, but that's kind of why is the guidance, where it is, which is sort of 3.5% organic, 5% with a little full year effect of acquisitions because we say, okay, the backlog given business where we have the order book, it's about execution, supply chain is getting a little bit better. Who knows, maybe that's 5%. And then some of the commercial stuff, maybe if it stays 0.96 to 0.99 long enough, that means you probably shrink a percent or 2% or maybe a 1% or 2% on volume get a little bit of price. And maybe that's 0% to 2%. We were very early in earnings season, I mean third week of January. So we'll update people as we go along. But as of right now, there's no material group of businesses that it's been, like I said, 0.7, 0.8. But yes -- is -- you get enough 0.96s and 0.99s. So you have to sort of -- you don't want to plan on 10% growth, that would be foolish. Yes.

Yes. So what does that playbook -- most of the questions I get, particularly over the last 6 months is like, okay, what if we do have what if there is a -- like a more significant recession where book-to-bills do go down to levels like that. What is the playbook here? And how does -- like how would you think of financial performance potentially in a much worse macro environment ?

Well, I'll talk about the playbook and then the performance. I mean, obviously, they're their hand in hand. But the swath of all possible outcomes for all of Teledyne is actually relatively narrow. I mean, you take COVID 2020 major recession, Q2, Q3, total company organic shrinkage in 2020 was negative 4.8%. So that's hell-in-a-handbasket, global recession, COVID, not even negative 5% and then we had a little bit of a full year effect of acquisitions, and it was actually a little bit better. So that's kind of when things gone bad. Now what is the playbook is it's the same playbook we've had all along, and it's like I'd encourage people to look at the history, even though the portfolio has changed. In 2009, earnings went up. In COVID, margins in 2020 on a GAAP basis despite all the workforce reductions, we're higher in 2020 than 2019. So we're pretty darn good at protecting margin. And I can say that because that's happened in each of energy crisis 2016, global financial crisis of '09, 2020 COVID, margins actually went flat up. 2016, they were actually down a little bit. But for 2020, they actually went up 10 basis points, but they went up. And the playbook is it's just keeping a pulse on the business. I mean, again, it's not just people like Edwin, but even I who stand back, who don't have the direct management role necessarily. It's weekly orders. It's order sales, every business, every product line, every Monday, what happened the last week, then we have a meeting later that Monday about what's going on, what's the pulse of the business. I have a separate call on Friday with Edwin and the major business leaders is just trying to keep on touch. And yes, if you did get that 0.7, 0.8 one week that's Chinese New Year, okay. Next week, okay, let's see. If it's 3 weeks, 4 weeks, okay. Maybe it's not a workforce reduction, maybe it's a last week of the month [ furlough ]. Maybe it's mandatory vacation. If it happens 2 quarters in a row, then it's going to be a refer facility could say. If it happens 3 quarters in a row at may be a permanent cost reduction or lease termination. It's just keeping your pulse on it, and that's what we do. Yes. Hopefully, again, that hasn't happened yet, could it, I don't know. But that was the playbook 2009, 2016 in marine. Other businesses did fine in that 2020, that's the playbook. Yes.

And I think you've shown a propensity to try to be targeted and aggressive in terms of deployment in times where things are getting ugly potentially at other places. So maybe talk through how you're prepared to not specifics on some deals, but like how have you been opportunistic in the past? And then I want to jump into FLIR a little bit.

Yes. Sure. So I mean that is trimming part of me. So who doesn't like when the market is cooperating, business is good, stock is good. I mean, obviously, that's good. But some of the best periods in the history of Teledyne have been, I mean, arguably, our 2 fastest-growing businesses over the last decade were the where DALSA bought in 2011 after the global financial crisis in the electronic test and measurement business bought in 2012. Energy crisis in 2016 -- are another one of the best businesses we ever bought was e2v in 2017. And then now to COVID, and why FLIR actually did really good in COVID because they were selling cameras for elevated skin temperature. They kind of overpromised a few too many times in undo delivered, and it became a target of opportunity at that time. So yes, things -- part of me wants everything to go well, part of me wants things to get really, really ugly because we've done our best M&A when we've protected margin done well, maybe out-executed others and then they become an opportunity. So that's why we're being choosy on acquisitions. Balance sheet is definitely delevered after FLIR. We were as high as 4x debt-to-EBITDA, it's [ 24% ] right now. So there's not a pressure to do anything right now. And -- but we'll keep doing bolt-ons is the most likely course of events. But yes, there's a part of me that wants things to get really ugly to lead to something really good in 2024, 2025. but we'll see it.

So let's talk about FLIR a little bit. I know that was at least in my time covering you, certainly the most controversial move initially. And I think there was some confusion as to why are they making such a big splash? And just take us through what were you attracted to? Why then -- and then how has it gone since then?

Yes, I'll answer the first part and then turn it over to Edwin to say how that's gone. So FLIR had been one of the companies on the acquisition looks for a long, long time. In fact, the first meeting with the Chairman. It was almost more of a meet and greet a hypothetical. But nonetheless, it was in 2011 for an acquisition that we did in 2021. So it's something we've studied a long, long time. And I think it was considered controversial in part because people didn't know what was in FLIR. In the preceding 10 years, FLIR had 3 CEOs, 5 CFOs and 3 general counsels, its narrative of its business was all about commercial, all about democratizing infrared, all about making it up on volume, all about consumer electronics and advanced driver assistance systems, then it completely changed. It's all about defense. We're going to open in Arlington office, higher lobbyists. And in that time, they went from 6 reporting segments to 4 to 3 to 2. So no one really knew what was inside FLIR we did because it was a time when FLIR used to have 6 segments. And honestly, one of the best things about the business I'm exaggerating a little bit here. And -- but it's one of the reasons why the gross margin was 50% compared to Teledyne is at 40% there's kind of 6 large sites that generate hundreds of millions of dollars of revenue each. And that's a lot easier to manage than a company that's a 30,000 square foot box that's $50 million of revenue times before you get the rest. That's a much more complicated management span and control exercise. But the underlying businesses were very good. You can't lie when the gross margin is -- what the gross margin is, and they could do that because they had good products, good brand name. And the timing why was those consumer businesses that they were in, they sold them in 2018, and then that's going to became very attractive. It kind of turned into what Teledyne was. When we bought the company, they were 70% commercial, 30% U.S. government. We were 76% commercial, 24% U.S. government. Plus to our benefit, but to maybe the controversy, people would open their 10-K or punch up on Bloomberg and they got FLIR has been flat. FLIR doesn't grow. Well, FLIR never is go up the $240 million of consumer craft they sold into 2018. So if you look at it from 2016 to 2020, we bought it, gosh, I went from like to [ 1.8 ] to [ 1.9 ]. But no, really the continuing upset we acquired from [ 1.6 ] to [ 1.9 ]. Now that's not growing like weeds. But was it a commercial industrial kind of growing in mid-single digits on the continuing? Yes, it was. But they didn't make that -- that wasn't easily decipherable in terms of how it's going.

Yes. To explain what we did basically, let me split it up, let's say, in the industrial part of FLIR, let's say, in the defense part of FLIR, okay. First of all, I think the industrial part of FLIR, had good leadership, have good products. So basically, what we did is we accelerated all the new product introductions, even more nice products. And the second thing we did in that business is regaining sensor leadership. So in all the different technologies for infrared being cooled and uncooled technologies, let me not go in detail here, but we regained sensor leadership by investing in that product line.

What had taken them away from sensor leadership? What had fallen off...

They were -- some expect they were a bit slow, yes? And with the samples investments, you could bring them on power again. And now we have leadership again in cold and in un-cold. So that's...

They're being a little play. They also bought a fancy painted helicopter rather than investing in the semiconductor foundry. There are a few other...

We still like the helicopter. I will explain why. That's a joke. We still like the helicopter. So the industrial business, pretty good in shape. Yes. And basically, the growth -- if you look at the growth levels, let's say, looking back, it's more or less the same as digital imaging, so between the 7% and 9%, okay? Defense, it was a different story, and we knew it before the acquisition. We had to do -- we had to fix things. So we fixed the leadership, a new leader leading that whole defense business. Basically, there were 2 defense businesses, the unmanned business and the Surveillance business. What we did, we combined the thing. They had sales forces even competing with each other, yes? So we combine the whole thing. Everybody is now running to the same customers. And then last but not least, the products are now, let's say, at a good quality point. Coming back to that helicopter. We make gimbal system for helicopter when we acquired FLIR, these gimbal systems we are vibrating. You cannot sell a vibrating gimbal system, yes, impossible. So we lost customers. So what we did, we fixed that, we gained the customer back, and we use now our helicopter by the way, to gain new customers in that field. So again, I'm cheap on Dutch. But I think the helicopter was a good investment. The other thing is, let's say, a localization. Of course, U.S. business is very important for us. But also, let's say, Middle East, Europe, are things we are investing in. So I think we'll see improvements every week, every quarter, it's -- we're getting there.

I think there was some also investor concern, at least on the industrial piece of FLIR, like is Teledyne getting more cyclically exposed during a period where the cycle might go against them. I think when we discussed after the quarter, just like the outlook and things, I think there were some interesting countercyclical pieces within that commercial business, whether it's tolling and drone -- like can you maybe go into a little bit of that why maybe it's not as obvious as it might seem like...

Yes. I mean the -- I wouldn't want to say like the $600 million or so, that's the classic FLIR thermography. I mean, it's a global macro business kind of any way you look at it. It's held up and done better remarkably well. Even with things like FX translation and whatnot, I mean it was growing last year. Even things like Raymarine, which a couple of hundred million dollars a year, I mean, it doesn't much better than I thought, I thought consumer discretionary, that might start sort of rolling over I didn't noted it grew in local currency, it was slight in U.S. dollars. So -- but yes, you look at the FLIR thermography business that yes, maybe it's global macro, unless it's economically supposed, but it's also sort of very, very diverse firefighting cameras, it's optical gas detection for upstream, midstream oil and gas, that's good right now. And probably it's not changing. Some of the thermography for condition monitoring, the safety related. So -- but again, when you're selling into firefighting, optical gas detection, energy, thermography, marine [ boating ] that could be Navy, that could be a super yacht. I mean there's lots of different levers. But I think some of the things that have a little bit of an energy flavor or a little bit of a safety flavor, make it less than just the global macro business.

We just got a minute or 2 left here. When I look at like just the financial model of Teledyne, one of the -- by far, the most distinguishing feature for me is the free cash flow compounding. It's been remarkable over time and that...

It took first part of last year...

Sure. But I mean if you look on any sort of stack, it's been excellent. So maybe -- and even more so than like the EPS compounding. So what are you doing on the back end that is allowing these deals to be kind of leveraged for cash more than maybe people might know.

Yes. No. I mean I was sort of joking, but I was curious, I mean, yes, we were not overly proud of the $75 million inventory build job in the first 6 months of last year, but we sort of felt that, that was a necessity to in this kind of supply chain environment. And yes, there are some big broker buys even in July, August of last year, just to make sure we could hit year-end obligations. But generally speaking, I mean, it's -- it does go back to incentives. I mean so everyone in Teledyne that is on an incentive compensation plan, it's not just earnings, sales, it's cash flow and a lot of the personal objectives that everybody has and more often than not, their objective personal objectives. It could be a pack of the case of someone. But often, those are about 80/20 simplification, scrap, rework, warranty. It's just a part of everyone's incentive and it's part of everyone's dialogue. I mean very -- I mentioned the weekly reporting pack of orders and sales, that's weekly, every business, every product line order sales. But every month is orders, sales, cash flow, but we talk about cash flow every Monday, and it's just part of the incentives as part of the focus, and everyone is aware that, that free cash flow generation is how we do acquisitions as how we grow. This is part of the culture. Yes.

I think that's our time. So I'll have to leave it there. But guys, thank you very much for speaking with me.

Thanks, Joe.

Thanks, Joe.