Ladies and gentlemen, thank you for standing by, and welcome to the Teledyne Second Quarter Earnings Call. [Operator Instructions] As a reminder, today's conference call is being recorded. And I'd like to turn the conference call over to our host Jason VanWees. Please go ahead.

Thank you, and good morning, everyone. This is Jason VanWees, Executive Vice President and I'd like to welcome everyone at Teledyne's second quarter 2019 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; President and CEO, Al Pichelli; Senior Vice President and CFO, Sue Main; and Senior Vice President General Counsel, Chief Compliance Officer and Secretary Melanie Cibik. After remarks by Robert, Al and Sue we will ask for your questions. Of course though, before we get started, our attorneys have reminded me to tell you that all forward-looking statements made this morning are subject to various assumptions, risks and caveats as noted in the earnings release and their periodic SEC filings. And of course, actual results may differ materially. In order to avoid potential selective disclosures, this call is simultaneously being webcast and a replay both via webcast and dial-in will be available for about one month. Here is Robert.

Thank you, Jason and good morning, everyone and thank you for joining our earnings call. Today, we reported the strongest quarter in Teledyne's history. Sales and earnings per share were all-time record. Operating margin was also an all-time record and each of these exceeded prior records by a significant magnitude. Specifically in the second quarter, sales increased 6.8% including approximately negative 1.2% of currency headwind, organic growth was 3.6%. Earnings per share of $2.80 increased 20.7% compared to last year. Also we have increased our emphasis on margin improvement, while at the same time continuing our proven strategy of disciplined capital deployment for compound growth in earnings and cash flow. On that point, we are pleased to announce the acquisition of 3M's gas and flame detection businesses during this quarter. We expect to close this acquisition in the third quarter. Teledyne continues to benefit from our balanced portfolio of common technologies serving different, but complementary end markets. Our 2019 outlook reflect strong growth in our Life Sciences and Defense Imaging businesses, which more -- or more than offsetting declines in some industrial machine vision businesses. In addition, our Defense and Space Electronics businesses should far more than as offset some lower sales of avionics to certain commercial air transform -- platforms. Finally, our balance sheet remains exceptionally strong. In fact, our quarter end leverage ratio of 1.4% was the lowest in five years. I will now pass the call to Al and he will comment on the performance of our four business segments.

Thank you, Robert. In our Instrumentation segment overall second quarter sales increased 0.6% from last year. Sales of electronic test and measurement systems increased 12.2% organically. The strong growth was once again led by sales of protocol analyzers. However, sales of oscilloscopes also increased at double-digit rates. In the environmental domain, sales increased 2.0% largely as a result of greater sales of selected laboratory and scientific instruments. Sales of Marine instruments decreased 6.1% in the quarter, but the book-to-bill was 1.21 with quarterly orders and backlog the largest in four years. In addition, profit margins improved as we benefited from aggressive cost reductions and business simplification initiatives. Overall Instrumentation segment's operating profit increased 19.8% and margin increased 298 basis points with margins increasing in each product grouping. Turning to Digital Imaging segment. Second quarter sales increased 11.5%. Sales of our proprietary medical and dental x-ray detectors increased significantly year-over-year. Sales of Micro Electro-Mechanical Systems or MEMS also grew significantly. Sales of advanced infrared detectors and data converters for Space and Defense increased over 10% compared to last year. Finally, the scientific and industrial cameras acquired from Roper performed nicely in the first full quarter with sales increasing 5.7% comparable pre-acquisition period in 2018. The strong growth in these businesses, more than offset expected declines and the portion of our industrial machine vision business, which serve consumer electronics in fact during automation markets, especially in Asia. GAAP segment operating profit increased. And margin increased 167 basis points to 20.9%, a record for the segment. I should note, however, that our sales mix was especially strong in the second quarter. And in part due to final shipments of nonrecurring products. However, we do expect segment operating margin in the second half of the year to resemble the overall level for the first…

Thank you, Al, and good morning everyone. I will first discuss some additional financials for the quarter not covered by Robert and Al, and then I will discuss our third quarter and full-year 2019 outlook. In the second quarter, cash flow from operating activities was $83.2 million compared with cash flow of $107.9 million for the same period of 2018. The cash provided by operating activities in the first quarter of 2019, reflected higher working capital requirements, including the timing of accounts receivable collection, partially offset by the impact of higher operating income and lower income tax payments. Free cash flow that is, cash from operating activities less capital expenditures was $65.1 million in the second quarter of 2019 compared with $80.5 million in 2018. Capital expenditures were $18.1 million in the second quarter compared to $27.4 million for the same period of 2018. Depreciation and amortization expense was $27.1 million in the second quarter compared to $27.6 million for the same period of 2018. We ended the quarter with $683.6 million of net debt that is $791.7 million of debt, less cash of $108.1 million for a net debt-to-capital ratio of 21.7%. Stock option compensation expense was $5.8 million in the second quarter of 2019 compared with $5.4 million in the second quarter of 2018. Turning to our outlook, Management currently believes, that GAAP earnings per share in the third quarter of 2019 will be in the range of $2.50 to $2.55 per share. And for the full year 2019, our GAAP earnings per share outlook is $9.86 to $9.96, an increase from the prior outlook of $9.45 to $9.55. The 2019 full year estimated tax rate excluding discrete items is expected to be 21.9%, a 60 basis point increase compared to full year 2018. In addition, we currently expect less discrete tax items in 2019 compared with 2018. I will now pass the call back to Robert.

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

Thank you. [Operator Instructions] We do have a few questions in queue. The first question is from Greg Konrad with Jefferies. Please go ahead.

Good morning. Great quarter.

Thank you, Greg.

I was hoping you could maybe baseline the margins for the other segments outside of Digital Imaging and maybe your expectations for the year. I mean, both Instrumentation and the Electronics also had nice step-ups. I'm just trying to get a sense of how mix maybe plays into those margins. And maybe some of the initiatives that you've done around margins?

Sure, Greg, I'll try. First, as Al mentioned, we expect some improvement in margin, but fairly consistent with the overall first half of the year, but let me walk you through the various margins. If you look at instruments, the first half of the year, the margins were about 17.1%. We expect the year to finish off in total a little better than that at 17.3% and I'll remind you that in April, I mentioned that that was 16.5%. So we have some improvement moving up. In Digital Imaging, first quarter was low at 15.7%, second quarter was higher and we ended up with average margin for the first half of 18.4%. We think the full year as of right now should be about 18%. In Aerospace and Defense, we had a really good quarter -- second quarter. The average for the first half of the year was about 19.7%. We will -- probably are expecting that to pick up a little bit to about 19.9% for the year. Going to Engineered Systems, we had a modest margin in the first half of 8.1%. We expect that to improve somewhat to about 9.5% by the end of the year. And lastly, if you add all the segments up together, we expect year total margin -- operating margin for the segments to be about 17.4% that's against the backdrop of 17% that I mentioned in April. And then for the total company right now we are expecting a margin -- operating margin of about 15.3%, which is up from 15% in April at the end of the first quarter. I hope that answers your question, Greg.

That was very helpful. And then just one more. I mean, the last two deals you've done have been carve-outs from larger corporations. I mean, is that an opportunity maybe that you're seeing more today versus a year ago? And just general views on kind of the pipelines that continue to do M&A?

We have a healthy pipeline, Greg. We are -- the reason we like the carve-outs is that the valuation expectations are more reasonable. Usually the larger companies that we have -- we're dealing with have reasonable P/E ratios and their expectations when they carve something out is not as high as stand-alone companies. So we like that a lot. Having said that, that's kind of opportunistic. While we look for it it's -- we would like it to be able to hit two of them in one year. Having said that, in general, we do have a reasonably healthy funnel of potential acquisitions and we anticipate to move forward some small and hopefully some medium-size acquisitions in the future.

Thank you. I'll get back in queue.

Thank you, Greg.

Next, we have a question from the line of Jim Ricchiuti with Needham & Company.

Hi, thank you. Robert, I wonder if you can give us a little bit of color on the book-to-bill for the various segments. And then, I've got a couple of follow-ups. Thank you.

Yes. I'll try Jim. First in the instruments businesses the book-to-bill is over 1, it's 1.08, primarily as Al mentioned, is driven by our Marine instruments that are above -- over 1.2. So instrument is over 1. Digital Imaging is under one somewhat we think probably about 0.9, 0.95. Aerospace and Defense is a little different than the others, because the orders there especially in Defense are lumpy. We had a good first quarter book-to-bill and we think for the full-year, it probably would be just under 1, maybe 0.98, 0.99. Engineered Systems is again lumpy. As you know, we have big programs. First quarter book-to-bill was 1.43, second quarter is about one. We expect we'll end the year at a little over one, maybe 1.03. And overall, we think the book-to-bill for the year would be about one maybe 0.99, so fairly stable. We have some ups and downs, but because of our balanced portfolio, we believe we'll do all right.

So, book-to-bill for the quarter, it sounds like around one?

It's about 0.96, 0.97, but it's kind of -- as with everything goes you have to balance it versus first quarter. First quarter was 1.07. So, when you balance those two, it's slightly over one.

Great. That's helpful. I keep anticipating you to call out some slowing in the test and measurement business, but you continue to show strong results there. How sustainable is that? What you're seeing and then particularly with even a scopes business starting to showing pretty good growth in this quarter?

Yes Jim. There are two -- as you know there are two parts to it. There is the scope business and the protocol businesses. In the protocol businesses, we had really good growth this quarter, about 15%. And primarily that's driven by our increased emphasis on serving the cloud computing industry and we're -- we developed our next-generation of PCI Express which are protocols. And the growth in cloud computing and connectivity of Internet of Things to the cloud are helping us a lot and we're continually developing new products. On the scope side, we've had reasonably good growth and we anticipate for the year though not to be as robust as we indicated in the second quarter, but still we should have a growth in excess of perhaps 5.5% in overall test and measurement. So, we like that area and frankly, we're putting a lot of money -- R&D money in that area. On the average across Teledyne, we spend about 6.1% of our sales in R&D and then we get 2% to 3% from outside. When you come to T&M especially, we spend over 18% in R&D and I think that's what's driving the new product, which are helping us gain market share.

Got it. That's helpful. Rob, do you think we're seeing a bottom yet in your industrial machine vision business?

I don't think so. I think it's difficult to predict. Some of it depends of course on what happens between us and China. I think you have to look at our machine business as different areas that we endeavor in. In the flat-panel displays which is about $50 million of our overall machine businesses, Digital Imaging businesses, that area is being hit hard. To offset that though, as you know, we have a whole bunch of other things that we do in Digital Imaging from x-rays and so on. But even in that specific segment, we are trying to move into and we have moved into adjacent market such as line scan sensors for food inspection, we're looking at intelligent traffic systems, we have some sales there and we're seeing some interest in our cameras in vehicle batteries and consumer electronic batteries. And then as you know, we did acquire the scientific camera businesses from Roper and those are kind of immune to that part of the market. So, yes, I don't expect much recovery. I'm not counting on any recovery at this time that's why we're a little conservative in our machine vision businesses, our Digital Imaging businesses. Having said all of that, excluding acquisitions, we still expect somewhere between 2.5% to 3% of organic growth in that segment of Digital Imaging, plus we'll get another 8% or 9% -- 9.5% maybe as high as 9.5% from the acquisition. So, in this market where everybody is kind of negative on overall Digital Imaging, we expect to end the year at over 12% growth in that segment.

Got it. Thanks. Congratulations on the quarter. Thank you, very much.

Next we'll go to the line of Andrew DeGasperi with Berenberg.

Yes. Thank you. I guess my first question would be on your partnership with Viasat for connected flight deck services. I know that they plan or they service about 1,300 aircraft today I think close to 2,000 by the end of the year. How big of an opportunity is this for you?

I think it's a good opportunity for us, but I have to tell you Andrew, it's a little early for me to quantify that. We're delighted to be partnering with them, but on the flip side, it's a little early for me to estimate how successful and how robust it's going to be. There is -- it's a new area as you know streaming data from flight over satcom. We're familiar with that domain. We have other customers in the satcom domain. So we hope more, but it's a little early to estimate what -- how robust that would be.

Thanks. And maybe on the Marine side, I know your comps are getting easier going into the second half. Do you expect sort of growth to return at that -- at this stage?

Yes. The answer is yes. We expect that for the year that we will have approximately a little over 4% maybe as high as 4.3% growth in the Marine domain. As you know we had contraction in the second quarter. But as Al mentioned, we have -- our orders are very robust. They were over 1.2%. And the other thing that's happening is both offshore production and exploration are picking up the data that indicate the exploration and production numbers -- growth numbers would be somewhere between 7% and 9%. And so we're kind of tracking that. There are some good orders coming in Christmas trees, the number of Christmas trees projected for this year are the highest that we've seen in the last three years. So we do expect growth of over 4%.

Got it. And maybe lastly 3M's gas and flame detection business, I was just wondering do you have an idea of how that's been growing? Or what do you expect it to do once you absorb it?

Yes. So it's a low single-digit growth business. We think that it should be a little better than that for us, primarily because the market that they play in while they're very different from us, the underlying technologies are very complementary, and there is synergy between the area of the world that they serve in and the areas of the world that we serve in in our environmental products. We think we'll be able to piggyback some of their products into ours. So I think single-digit right now, low single-digit, but we think that that should improve us by the way it did the scientific camera businesses after we acquired it. So right now we're hopeful that we can improve on what they're doing.

Great. Thanks, Robert.

Thank you, Andrew.

Next we have a question from Joe Giordano with Cowen.

Hey, Good afternoon guys. Good morning for you.

Good morning Joe.

Hey. So I wanted to start on Instrumentation margins. You've got a lot of different businesses within there, but I think margins came in obviously much higher than most people are modeling ,but I think also a lot higher than you guys were anticipating as well. So what kind of have happened in the quarter there? Was it just mix? Was there something else that came through that you weren't expecting or cost savings coming too faster? Can you maybe talk us through that a little bit?

Yeah. I would say Joe the best thing that happened in the instrumentation area from a margin perspective was the improvement in our margins in our Marine businesses. There we had -- we've been kind of suffering from reorganization cutting our workforce reducing our footprint, but I think now things are getting colder and our margins improved significantly there. The others -- the surprised part of it is really in the test and measurement area. We acquired LeCroy about 2012. And when we look back at what's happened to their margins during this span of time, we've had a 500 basis points improvement in margin and that helped us. So because revenues were higher than we anticipated in both protocols and oscilloscopes, our margins were significant -- or surprisingly significant in the second quarter. So, overall instruments margin as you know in Q2 was about 18.6% versus 15.6% in the first quarter. We expect that we won't probably stay at 18.6%, but for the full year, we'll go at 17.3%, which is still pretty good compared to 2018. So, that's a 280 basis points improvement over the 14.4% that we had in 2018.

Can you just scale for me? So you mentioned marine margin, so that was up and I assume up nicely year-on-year on a quarter where marine revenues were down. Can you scale how far below segment average is marine currently?

Let me see. The marine margins right now are approximately 15%, 15.5%, whereas the segment, as I just noted, was over 18%. Having said that, the improvement in marine is hopefully sustainable because of the cost-out that we have had, and also because we expect the second half to pickup in revenue and end the year in marine organic growth over 4%, which would be very nice for us.

And I'm -- it’s right to say that when this business was really humming back a couple of years ago that business was higher than segment average, correct?

A couple of years ago, it was 18% to 20%. It wasn't a couple of years ago. It was 2015, 2014. I would say, it was 18%, 19%. It's been as high as 20%, but let's just say on the average of 18% to 19%. So we're slowly climbing up to that plateau.

Okay. And then last for me on free cash flow a little bit lighter in the quarter. The commentary sounds somewhat temporary with some working capital and some receivables, but can you maybe talk us through how that reconciles throughout the rest of the year?

We think it'll improve in the second half. We think it improved significantly. We think for the year, we should end up somewhere between $370 million to $400 million. My CFO is looking at me saying you told them too big a number.

They prefer less and more challenging, it’s fine.

Why you got it do.

Thanks, guys.

Thank you.

[Operator Instructions] We'll go to the line of George Godfrey with CL King.

Thank you. Good morning, Robert.

Good morning, George.

As always, excellent job on the execution. My question relates to acquisitions and perhaps adding another leg out of the stool. Do you see the company remaining in these four areas? Or could you see a fifth area outside of the Instrumentation Digital Imaging, A&D and Engineered Systems being added? And then, looking at Engineered System, the operating margin is pretty well below what the other three businesses are. Do you see divestitures perhaps in that segment? Thanks.

Yeah. Good question. The fifth leg of that stool maybe just think about that one, right now I don't think so. George, it's a tough goal to go outside of what we know, recognizing the fact that our segment will have a broad portfolio of products and markets. For example, if you look at our Digital Imaging segment, we serve about the third of it is in machine vision we talked about that. We have about a quarter of that in health care, then we have another quarter, that's in Aerospace and Defense, and then we have of course the MEMS and then we have LiDARs and geospatial, et cetera. So it's a broad portfolio of businesses. It'll be easier if we were to add to those, because we're more knowledgeable about that and we're also in the medical domain. There are lot of other things that just x-rays and the stuff that we do for medical devices for cancer treatments radiation. Having said that, we think we can move away from some of those areas like we did in scientific cameras from Roper. So, I don't think we need to go to a fifth lap, because we have a nice balanced portfolio of businesses. Regarding the second part of your question about divestiture, yeah, our Engineered Systems segment, the margin is approximately 10%, sometimes goes as far as 11%. I don't think we would divest those businesses. The reason being very simple there is a -- it's a very little assets in that business and it kicks off about $20 million to $25 million in IBT, which adds $0.50 to $0.60 of earnings. And I just don't see how we can make that up by divesting and paying taxes and try to make that cash though the $0.50, $0.60 that we're getting from that business. The final area there is we do have a lot of engineering talent there, as they are helping us move into systems in other fields that we would have a problem going by ourselves. For example, we sell gliders to the Navy. For example, Navy deployed 140 of our gliders in one of single operations this year, and that kind of a system's capability we have it only in our Engineered Systems. So, a lot of our gliders' sales and developments are coming there and, of course, as you know, we have a very big program, very strong program in underwater shallow water combat vehicles for our Navy SEAL. So, the answer is not likely that we would sell that, because things like the shallow water combat vehicles use a lot of instruments from our Marine instruments whether they are images, whether they are sonars for detecting mines or detecting shores. So, I don't see that. It first doesn't make sense. Secondly, it's a nice platform for us to get into systems businesses without other businesses.

Understood, Robert. Thank you for taking my question.

You bet. Thank you, George.

At this time, there are no further questions in queue.

Well, thank you, Nick. I would ask Jason to now conclude our conference call please.

Thanks, Robert and again, thanks everyone for joining us this morning. If you have follow-up questions, of course, please feel free to call me at the number in the earnings release and other news releases are on our website, as well as the replays on teledyne.com. Nick, if you could conclude the call, and give the replay information for everyone we'd appreciate it. Thank you.

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