Ladies and gentlemen, thank you for your patience in holding. And welcome to the Teledyne Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later on, we will be conducting a question-and-answer session. Instructions will be given at that time. [Operator Instructions]. I would now like to turn the call over to your host, Jason VanWees. Please go ahead.

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

Thank you, Jason. Good morning and thank you for joining our earnings call. Before discussing our results, I want to emphasize that all of our worldwide manufacturing sites, as well as our corporate office and research laboratory have been and remain operational. However because our priority remains the health and safety of our employees, we're continuing social distancing, enhanced cleaning protocols, the usage of facemasks, and Personal Protective Equipment. I shall now make a few comments about our performance in the current environment and our outlook for the remainder of 2020. Despite record economic contraction, and a challenging operating environment for manufacturers, Teledyne performed extremely well in the second quarter. Our results reflect aggressive cost control and disciplined execution. In fact, although sales decreased approximately 5% compared to both last year and the first quarter of 2020, overall GAAP operating margin increased sequentially 150 basis points. Teledyne's business portfolio remains exceptionally well balanced across end-markets and geographies. Also, our mix of line cycle and short cycle business provides a reasonable level of credit predictability, and helped us -- give us the confidence to provide our outlook in April. Looking back at the second quarter, the overall market and demand outlook played out as we had envisioned. In April, we predicted second quarter sales to decrease 5% year-over-year versus the actual results of negative 4.9%. That said demand for instrumentation was better than forecast, due to continued demand for test and measurement, protocol analyzers, and a record quarter for OakGate business, which was acquired in January. These product lines serve technology markets related to solid state storage and cloud networking, where capital spending remains relatively robust. On the other hand, digital imaging sales were slightly lower than forecast, not only in dental healthcare markets where weakness due to COVID-19 was expected,…

Thank you, Robert. In our Instrumentation segment, overall second quarter sales were flat versus last year. Sales in marine instrumentation decreased 1.3% in the quarter. However, operating profit improved due to business simplification initiatives and improved pricing and procurement activities. As a reminder, while our marine includes products sold to the energy industry, we expect this market to directly account for just over a third of total marine sales in 2020 or approximately $150 million as annual revenue compared to almost $400 million in 2014. In the environmental domain, sales increased 7.9% as a result of our acquisition of the Gas and Flame Detection business. While sales of certain products such as medical grade oxygen sensors increased during the quarter, this could not offset declines in general and industrial markets, such as stack gas emissions monitoring and wastewater flow and sampling. Sales of the electronic test and measurement systems decreased 9.8%. While there was strength in our Protocol Solutions Group, sales of general purpose oscilloscopes declined year-over-year, especially in Europe and the U.S. Nevertheless, order trends and sales leads in Asia and Europe have improved in recent weeks. Overall, Instrumentation segment operating profit and margin were flat with last year despite $2.8 million in higher severance and facility consolidation costs. Turning to Digital Imaging segment, second quarter sales decreased 4.3% and primarily reflected lower sales for x-ray detectors for dental and medical applications, partially offset by greater sales of infrared detectors for the defense market. Sales of industrial vision systems were largely flat with last year. Our strength in semiconductor inspection end markets in Asia largely offset some weakness in Europe and North America. GAAP segment operating margin of 19.7% was the second highest quarterly margin ever achieved, but was 108 basis points below last year's all-time record of 20.8%. In the aerospace and defense electronics segment, second quarter sales declined 18.7% as greater defense sales were more than offset by a 49% decline in sales of commercial aerospace products as well as lower commercial space sales related to OneWeb. GAAP segment operating margin decreased due to lower sales but also over 340 basis points of charges for severance and facility consolidation. In the Engineered Systems segment, second quarter revenue increased 6.4% primarily due to greater sales from marine, nuclear and other manufacturing programs, as well as electronic manufacturing services. Segment operating profits increased 20% with margin of 123 basis points. I will now turn the call to Sue who will offer some additional commentary regarding the second quarter and our 2020 outlook.

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 2020 outlook. In the second quarter, cash flow from operating activities was $155.8 million compared with cash flow of $83.2 million for the same period of 2019. The cash provided by operating activities in the second quarter of 2020 reflected improved collection of accounts receivable and $33.4 million of deferred tax payments partially offset by lower operating income. Free cash flow that is cash from operating activities, less capital expenditures was $139.2 million in the second quarter of 2020 compared with $65.1 million in 2019. Capital expenditures were $16.6 million in the second quarter compared to $18.1 million for the same period of 2019. Depreciation and amortization expense was $29.0 million in the second quarter compared to $27.1 million for the same period of 2019. We ended the quarter with $468.6 million of net debt that is $851.4 million of debt less cash of $382.8 million for a net debt to capital ratio of 14.0%. Stock option compensation expense was $5.7 million in the second quarter of 2020 compared with $5.8 million in the second quarter of 2019. Turning to our outlook, management currently believes that GAAP earnings per share in the third quarter of 2020 will be in the range of $2.25 to $2.45 per share. And for the full-year 2020, our GAAP earnings per share outlook is $9.45 to $10 compared with the prior outlook of $9.30 to $10. The 2020 full-year estimated tax rate excluding discrete items is expected to be 22.8%, a 220 basis point increase compared to full-year 2019 due in part to less R&D tax credits. In addition, we currently expect less discrete tax items in 2020 compared with 2019. Please note that the estimates for third quarter and full-year 2020 GAAP diluted earnings per share exclude any potential charge related to Airbus OneWeb Satellites. I will now pass the call back to Robert.

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

[Operator Instructions]. And our first question comes from Greg Konrad from Jefferies. Please go ahead.

Just to start on margins, I mean it seems like you maybe took down the organic growth outlook a little bit in Q3, EPS are kind of flat. I mean should we think about similar margins in Q3 and then a ramp in Q4 and then what type of assumptions have you made in terms of one-timers in H2 whether it's restructuring or anything embedded in the margins?

Sure, Greg. First, let's go back to Q2. The margin was 14.8%, the operating margin. We think in Q3, the margin is going to go up to -- up to about 15.4%. And we think in Q4 it'll go up further, so we should end the year at around 15% considering the first quarter was pretty low at 13.3%. So, we expect to have continuous improvement in margin. And forgive me, the second part of your question, had to do with?

Just have you embedded any additional restructuring, you kind of called into?

Yes, I think Greg, sorry about that. We have about $19 million year-to-date. We are still reducing our workforce, we -- by the end of the second quarter we were down about 660 people. We expect by the end of the year to be down about a 1,000 out of 11,800 that's 8.5%, so it will be below 11,000 when the year ends. Consequently we think we'll have maybe another $4 million to $5 million of charges in Q3 and Q4 collectively; let's just say $5 million.

And then you kind of called out digital imaging maybe being a little bit worse than expected, but Instrumentation a little bit better and kind of a ramp into Q4. I mean when we think about toward the end of the year is digital imaging maybe where there's the most opportunity to kind of see increases kind of as we exit the year?

Yes. Let me -- the surprise in digital imaging was the following: the -- we expected that the dental market for our sensors to be down because people are not going to dentist in the current circumstances. What was a little surprising to us was that down slope in radiotherapy that cancer treatment and equipment services that we provide upgrades. What we found out was that in the cancer therapy, really most of the downside was because of people that would be tested for cancer or colon cancer or various types and that shrank quite a bit. Now, having said that we think that Q3 would be relatively flat with Q2 and we think that we'll have in others, maybe upwards of $20 million in Q4, primarily in digital imaging, as well as, I should say in Instrumentation. So collectively we expect those to do much better in Q4 than they did in Q2.

And then just last one for me, I mean, free cash flows kind of running ahead of expectations, where you we kind of laid out last quarter. Any update there? And then kind of tied to that, you had mentioned M&A I mean, any change in terms of your near-term appetite and kind of what you're seeing in terms of opportunities?

Let me start with the cash. I think in April, Greg, I mentioned that we expect that cash to be at the order of $375 million -- free cash flow to be at the order of $375 million for the year. I'm going to up that now to probably about $400 million, maybe a little more, but let's just say round numbers $400 million of free cash flow. In the current circumstances that would be a record for us. Last year, we had $394 million. So if we can exceed that that would be a record. Now, going back, as I mentioned in my comments, we have the capacity to buy things excluding acquired EBITDA of the order of $1.2 billion. Anything we buy is going to obviously have some EBITDA associated with it. So it could be higher depending on what we buy. I'm going to hazard a guess by the end of the year we may have as much as capacity as $1.5 billion. Having said that, there is the one acquisition that's been sitting out there for Photonis [ph] which the situation is still undecided. That would take up about $550 million, maybe a little more because of the change in the currency. And then we have appetite for other acquisitions. I hope significant ones in this environment just like we did with DALSA in 2010 and e2v in 2016. And in those economic conditions those businesses were not performing very well and we were able to acquire them at a reasonable price. So our appetite I think will improve with time as our cash position improves with time also.

And our next question comes from Jim Ricchiuti from Needham and Company. Please go ahead.

Hi. Thank you. Maybe just to follow up on that comment, Robert, if you look at that M&A pipeline, are there areas in the business where you would like to focus more of the M&A activity, is in digital imaging or are there still opportunities for you to look at Instrumentation acquisitions as well?

You're right on Jim, both areas. I think digital imaging, obviously Photonis would be a complementary acquisition, a really good complementary acquisition if were able to make it to Digital Imaging. On the other hand in the Instrumentation area, that's our second high margin business, and we would like to make acquisitions there too. So those are the two main areas as you noted.

Okay. And maybe just in general terms how were these -- the booking trends in the quarter? Can you give us any color as to the book-to-bill and I assume there's been some variability in the book-to-bill in the different segments.

Yes. Let me start again -- let me go back to Q1, we had a really good book-to-bill in Q1. We were about 1.09% in Q1. In Q2, things went south. We dropped to about 0.85% so collectively we think we'll end the year just below 1%. Q3 should improve over Q2 and Q4 should be a little over 1%. We think we'll end the year by maybe 0.98% of that order. That includes pretty lumpy quarters especially in our Engineered Systems. So I think -- I think you have to take into consideration that our Aerospace business, the book-to-bill is pretty low because of the decline in that whole domain. In T&M and Instruments, I think Instruments in general in Q2, we're just a little north of 1% and we think Q3 would be 1% and Q4 would be 1%, so we should be okay there. Digital imaging, we should end up a little over 1%. With Aerospace and Defense, Defense will pick up, so we should be just under 1% when we end the year even with Aerospace being down and Engineered Systems is lumpy. So, I think it doesn't matter. It's going to be around 1% in the end.

Okay. That's helpful. And Robert, maybe as a final question, just in light of the economic environment, you obviously have less visibility on the short cycle business, you do have line of sight in some of the other businesses. But as you look at the portfolio where is there potentially more uncertainty relative to that full year kind of revenue -- sales decline of 3% that we need to at least be mindful of?

Well, I think you hit it on the head. We think that the declines would be most pronounced in Aerospace and Defense as has been. We think in Q3 for example that would be down about 20% and for the year it could be as much as 14.5%. I think where we have some risks is in the environmental instruments and some of our Test and Measurement so even though the protocol analyzers are doing really well. We're seeing some encouraging signs in early July as Al alluded to. It's early to tell, but I'm hopeful that some of the environmental and T&M as is beginning pick up in China will also pick up in Europe and subsequently in the U.S. But the danger really is has to do with environmental. Digital I think would be okay, because we've got a very diverse portfolio. We think throughout the year for the full-year we might be down a percent which is to me is acceptable especially since as we go along we're also improving margins in digital imaging. We think that by the end of the year the margin there will improve 130 basis points or so, so 1% decline is acceptable.

And our next question comes from Joe Giordano from Cowen & Company. Please go ahead.

Hey, guys. How you are doing?

Good morning, Joe.

Can you talk about cost savings in the quarter and how you kind of characterize them? And how much was more structural in nature versus how much was more due to volume declines and temporary savings that may have to come back, back into the business as things start to pick up?

Yes. The primary savings, Joe, come from people. We spent approximately $1.2 billion; $1.3 billion are people expense. What happened there is that we have turnover, so we haven't been replacing those folks except where we have really good strong orders and then we've cut folks. And so the big change for the year is in people and I think that savings rolling forward net of charges that we take could be as much as $40 million to $50 million. Now having said that, it is our sole intention to keep that low cost structure into next year as we've done previously. The other area of cost savings is we have very strong initiatives in procurement and we have a target of saving over $25 million in procurement this year and that is not savings because we're buying [indiscernible] savings because we're buying them at a lower cost here, because we're signing contracts with our favored suppliers. If we can get that done that will save us another $20 million. In terms of the 1,000 people that I mentioned, I'd say half of it was maybe because the market demand going down like at controls where market tanked to 50% of what it was. And the other half is really proactive on our part in reducing complexity in our operations and we intend to keep that and we've done that in prior years. We've kept our lower cost as we move forward. I hope that answers your question.

It does. Thank you. I also wanted to ask on China. You said you're seeing some of the better signs there over the last couple of months. How would you characterize that as a -- how much of that is like a restock off of low levels versus actual pull through of real demand?

I think its demand driven. It's not -- it's not as good as it was last year. But it's improved over the first two quarters. I think they -- the upside is that they have increased their back-to-work efforts. Having said that, China as a whole is only 8% of our total sales. So there's also improved demand beyond China, in Asia, overall, in Taiwan, in Korea, other places. So we see a continuing improvement in demand there and we're kind of projecting that will pick some that up in Europe first and then finally in the Americas.

Great. And then maybe last for me. It sounds like you're looking pretty actively on M&A and you talked about what you are able to close on in prior downturns. I guess what color can you give us here? This is a weird downturn where economics of companies have gone down dramatically but prices of the businesses have not. So what are you seeing in terms of valuation and how people are thinking about selling their companies and what price they deserve?

Well, that's an excellent question. Everybody looks in the rearview mirror, right, even though prices have not gone down as much as some of the piece have expanded over time. Those that have gone down, let's say by 30%, 40%, people keep looking back in the rearview mirror and say, that's the price that they deserve. Having said that, it's an opportune time; most of these companies have shareholders and shareholders have various degrees of patience and they're going to look in the rearview mirror as much as the management and the boards do. So I think there are going to be opportunities for us. There are opportunities for us. We may not be able to get something at the market price that it's trading at, but we're certainly not going to pay what they were a year ago. So we'll -- we're kind of searching our way through that opportunity list to see what's possible.

[Operator Instructions].

Lori, if there's nobody else asking a question, what I'd like to do is I'd like to end the call and ask Jason to conclude the conference call, please.

Thanks. Thanks Robert, and again thanks everyone for joining us today. Of course if you have follow-up questions please feel free to call me at the number listed on the earnings release. Lori, if you'd give the replay information and close the call, we would appreciate it greatly. Thank you.

And ladies and gentlemen your replay is available through August 22, 2020, until 11:59 PM Pacific Daylight Time and USA callers may dial 866-207-1041 and enter the access code 3245794. International callers may dial 402-970-0847 using the same code, the access code is 3245794. And once again those numbers are USA callers may dial 866-207-1041, international callers 402-970-0847 and enter the access code of 3245794. And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.