Ladies and gentlemen, thank you for standing by. And welcome to the Teledyne Second Quarter Earnings Call. [Operator instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Mr. Jason VanWees. Please go ahead.

Thank you, Rachel, and good morning, everyone. This is Jason VanWees, Vice President, Corporate Development and Investor Relations at Teledyne. And I’d like to welcome everyone to Teledyne Technologies’ second quarter 2012 earnings release conference call. We released our earnings earlier this morning before the market opened. Joining me this morning are Teledyne’s Chairman, President and CEO, Robert Mehrabian; Senior Vice President and CFO, Dale Schnittjer; and Executive Vice President, General Counsel and Secretary, John Kuelbs. After remarks by Robert and Dale, we will ask for your questions. However, 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 this 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, and good morning, everyone. Second quarter sales of $518.5 million was an all-time record for Teledyne and GAAP earnings per share of $1.06 was also an all-time record, despite $1.3 million of non-recurring acquisition charges in the quarter. In the second quarter, backlog increased $28 million to a record $1.02 billion and overall book-to-bill was $1.05. Through both internal R&D investments, as well as our recently-announced acquisitions, we continue our emphasis on higher margin industrial growth for markets. We also continue to increase our global presence and like always, continue to drive improvements in our operations. Our current portfolio of high technology businesses provide proprietary, highly engineered products and serve markets, such as energy exploration and production, global infrastructure, factory automation, transportation and communication. In order to drive growth and gain market share in challenging economic environments, we continue to invest in R&D for new and improved products. Our internal R&D expense in the second quarter increased 7%, compared to last year, for approximately $29 million or $116 million annualized. Please also note that we receive an additional $100 million-plus in relevant R&D funding collectively from our government and commercial customers. Our commercial businesses performed well in the quarter with organic sales growth of 6.4% in our electronic instrumentation segment, record orders and sales at Teledyne DALSA and 9% organic growth in sales of avionics and other commercial electronics in our aerospace and defense electronics segment. Our government -- government businesses declined year-over-year, nonetheless, government sales increased 6.5% compared to the first quarter and we were also awarded several new contracts, including a very significant award by a foreign customer for software-based microwave radio system and an $18.5 million award from NASA to develop a space-based imaging system to be deployed and operated by Teledyne on the…

Thank you, Robert and good morning. I will first discuss some additional financials for the quarter not covered by Robert and then I will discuss our 2012 outlook. On cash flow, in the second quarter cash provided from operating activities from continuing operations was $69 million, compared with $80.2 million for the same period of 2011. The lower cash from operating activities reflected the impact of higher income tax payments and the timing of accounts receivable collections. Free cash flow was $51.9 million in the second quarter of 2012. Capital expenditures were $17.1 million in the second quarter, compared to $11.4 million for the same period of 2011. Depreciation and amortization expense was $18.1 million in the quarter, compared with $16.8 million last year. We expect to invest approximately $70 million in capital expenditures in 2012. Also for the full year of 2012, we expect depreciation and amortization expense to be approximately $80 million, with the amortization expense portion at approximately $30 million or $0.55 per share. We ended the quarter with $306.1 million of net debt, that is $332.2 million of debt and capital leases less cash of $26.1 million for a net debt-to-capital ratio of 21.3%. Following the closing of LeCroy, which we expect to occur on August 3rd, net debt is estimated to be approximately $625 million at the end of the third quarter. Next, on pension, in the second quarter of 2012 gross pension expense was $1.6 million, compared with gross pension expense of $0.9 million in the same period of 2011. The increase in pension expense for the second quarter of 2012, compared with the second quarter of 2011, was primarily due to a change in the discount rate used to measure the benefit obligation. Net pension income after recovery of allowable costs pursuant to…

Thank you, Dale. We would now like to take your questions. Rachel, if you’re ready to proceed with the questions-and-answers, please go ahead.

[Operator instructions] And your first question comes from the line of Tyler Hojo of Sidoti & Company.

First question, I was just hoping that you could perhaps update the guidance just by end market, commercial and then government?

Generally, I think, our growth is going -- it has been in the Q2, about 7% in the commercial market, a 7% decline in our government businesses for a net plus growth of about 3%. I think going forward, with the acquisition of LeCroy, we expect that the growth in the commercial markets will increase, while the government programs would probably hold where they are.

Okay. Understood. And I mean, you mentioned LeCroy, I’m actually curious, I mean, you gave us some pretty good detail in regards to how the non-recurring expenses are going to flow through the back half of the year. But just wondering, I mean, what kind of accretion are you expecting from LeCroy, Optech and BlueView in this kind of reaffirmed GAAP guidance range?

In 2012, I think with the expenses that we detailed in mine, as well as Dale’s, we expect the acquisitions to be essentially neutral and we are not really guiding for 2013 yet, but obviously, since some of these non-recurring charges will be behind us, there should be accretion from those acquisitions.

Okay. That sounds good. And just lastly for me, Robert, you mentioned in your prepared remarks the space-based Digital Imaging capability that you’re developing for the ISS. I was hoping that maybe you could provide some details in regards to what the potential growth outlook is for that. It seems pretty interesting.

Yes. We’re very excited about that, Tyler. It’s a multi-user system that's designed for Earth Sensing and Earth Imaging. It will have ability to host for -- up to 4 instruments and obviously we would have one, maybe more instruments ourselves. And we would have partners hopefully, other commercial partners to share the rest of the platform with us. The system will not probably be operational until 2.5 years hence. And it’s very difficult for me to say what the revenue from that system would be at this time. But I can tell you that it uses a lot of the capabilities across all of Teledyne’s digital systems, as well as obviously Brown Engineering’s long and illustrious programs in servicing space, including the International Space Station. I think as we get closer to it, we will have better outlook numbers. But right now, I can’t tell you how much that’s going to bring in revenues. But it’s going to be a very important thing for us, especially as we partner with other companies.

And the next question is from the line of Mark Jordan of Noble Financial.

Robert, I was wondering if you could go back and talk a little bit about both the instrumentation and the aerospace and defense segments, and give us a rough percentage breakdown as to the major components in those, for example, with instrumentation, marine versus environmental. And then, secondly, with aerospace, defense, just the aerospace products defense, electronics manufacturing services and relays sort of how those groups breakdown roughly in a percentage basis to the major components.

Okay. I can try and do that, Mark. I’ve got to get a little help here from my colleagues. Marine is about 2/3. The rest is environmental, is about -- well environmental includes our process. So I would say if you count it that way, marine is about 2/3 and the other is about 40% -- 60% and 40%, the breakdown between marine and environmental. If you go to aerospace and defense, basically the commercial businesses are about 64% and the government businesses are about 36%. And the avionics and so when you look at the total aerospace and defense, it’s about 32% of the total -- 32.6% of the total. Instrumentation is 31% of the total. And just to summarize it, digital imaging is about 21.5% and engineer systems is about 15% of the total.

Okay. With the acquisition or if you go back over the years, the acquisition process seem to have evolved, where you would make a series of acquisitions in a concentration; you’d make it in the marine sensor area and in the environmental area, you made a number of acquisitions to tuck in. Is LeCroy a platform to allow you to effectively go on an M&A process of doing a series of tuck-ins that could fit into that and you would be developing sort of a third area of concentration in the instrumentation business?

Yes. I think you’ve hit that very accurately. While we have instrumentation, as you know in process and environmental, process analyzer for example, we don’t really have a platform in test and measurement. And our plan is -- and of course, LeCroy’s management has been looking at opportunities within that domain. And our plan is, with their help and processes that they’ll develop, to make acquisitions in test and measurement and expand that platform.

Okay. Do you have any rough guess as to what the purchase amortization charge relative to LeCroy might be?

I think the amortization probably is going to be about $10 million a year. As you know, Mark, we’ve got to go through a process with our accountants to kind of do that accurately because we have to get their concurrence. And but roughly when everything is said and done, we will have about $0.52 of amortization expense next year in total, including LeCroy.

Yes. That's -- that’s an after-tax number?

That’s $0.52 EPS impact.

And the next question comes from the line of Michael Ciarmoli of KeyBanc Capital Markets.

Just maybe some house-keeping ones first, just on the orders and the backlog, how much of the backlog growth came from the recent acquisitions or what was the contribution there?

About $27 million came from recent acquisitions but we also had some increase in our backlog, especially in our defense programs. The big program that I mentioned with the foreign customer was one. Another one was from our classified space programs, which are doing really well in that domain and our revenues in that domain have increased from essentially $1 million or $2 million to what we expect would be in the future up to $20 million a year. So the backlog came from both acquisitions as well as internal programs.

Okay. And then did I hear correctly the tax rate for 2012 now to be 30.5%?

I’ll let Dale answer that.

Yes, you did. That’s our current estimate, is 30.5%.

Okay. So that -- and I’m just trying to reconcile the guidance for the year. You’ve got the $8 million charge but I guess you’re picking up 200 basis points on tax. Is that essentially the kind of help washing out the, the -- that kind of expense pressure in the second half of the year?

Yes. That’s accurate.

Okay. And then just lastly, if we can look at maybe some of the trends here on margins, what should we be thinking with some of the elevated R&D on the instrumentation business? Those margins I guess now at 17%, even when you adjust for maybe some of the amortization, those are really, I guess at multi-year lows. How should we be thinking about those margins going forward?

I think on that, Mike, north of 19% would be more accurate. This quarter, we took some margin contraction in instrumentation in 3 areas. First, about $800,000 of acquisition expenses, $1.5 million that we spent on our ocean bottom reservoir monitoring, which was a very important program for us. And the big changes in Q3, Q4 will probably, excluding LeCroy, should increase the margins to about 19-plus percent.

Okay. Okay. And then lastly, maybe if you could just give us an update on some of the real-time trends you’re seeing in the shorter cycle businesses. I think you made some comments. Obviously, you’re seeing some pressures in Europe, but obviously you’ve got confidence in the back half of the year and maybe if you can kind of give us a sense of what’s giving you that confidence given some slowdown in the Asia-Pacific region as well as the lingering uncertainty in Europe.

Thank you, Mike. It's -- obviously, we have a lot of pressure in Europe, just like everybody else. We also have some pressure in the United States. The uncertainty with both the government programs and defense programs sequestration as well as the tax increases, the upcoming tax increases have kind of put a lot of people on a holding pattern. We are getting reduced revenue from municipalities for some of our water pollution products for measuring water pollution and other things. But on the other hand, this is balanced -- this is balanced with an increase in Asia-Pacific for some of our visioning -- digital visioning cameras, some new plants that are being built for flat panel displays in China. Also, we have really good growth in our underwater connectors and sonar programs. As example, if you look at underwater investments -- capital investments in deepwater hardware, the expectation is that growth in the next 5 years would be very strong. In the last -- past 5 years, underwater expenditures in total have been about $77 billion for equipment. In the next 5 years, they’re going to be $135 billion and most of that -- the majority of that or 57% is going to be deepwater, which is where we play. We’re also seeing increased emphasis on remotely operated vehicles as well as complete autonomous vehicles and gliders, which is our bread and butter in that domain. So all in all, expect Europe down maybe 5%, expect Asia-Pacific to hold. On the other hand, in oil and gas, we might expect upwards of 15%, 10% growth in our portfolio. That’s the beauty of having a portfolio like the one we have, which balances out between government and commercial, and balances out between domestic commercial and international commercial. Right now, our international commercial businesses are ahead of our domestic commercial businesses by 5 percentage of our revenue. So I hope that helps.

And the next question is from the line of Steve Levenson of Stifel.

Away from the things you just mentioned in relation to LeCroy, are there any gaps in the product portfolio you’re still looking to fill?

Well, you know, Steve, we bought 11 marine businesses. We just obviously bought the BlueView, which is the sonar company. We would like to pick up some more businesses in that domain. We obviously have Optech, the majority interest in Optech right now, which is the LIDAR company that can take 3-dimensional surveys of not only the waterfront but the shallow ocean coupled with BlueView for the deeper water, we can see the whole shoreline. We have to get to the majority of Optech. So that’s part of our acquisition plan, but in general I think we will look more -- for more acquisitions in the marine domain. And I don’t want to repeat the LeCroy issue because we talked about it, but we have a test and measurement platform hopefully. We’re not finding a lot of environmental acquisitions right now. We would like to make some acquisitions for digital imaging, especially for our DALSA product line. We’re interested in expanding in our camera market. We’re interested in expanding in our CMOS capability. So there’s a lot out there that we’re looking at.

Okay. And I may have missed this, but does the $8.3 million of expenses, one-time non-recurring items. Does that all come in the third quarter or is it split between the third and fourth quarter?

It was -- let me just elaborate. It was $200,000 in the first quarter, $1.3 million in the second quarter, $5 million in the third quarter and $1.8 million in the fourth quarter, to a total of $8.3 million. Please recognize that some of these are estimates right now because we haven’t -- we don’t have a detailed look at what we have to write up in inventories at LeCroy. And we don’t have all the other expenses yet figured out but that’s a reasonably good estimate.

[Operator instructions] You have a question from the line of Jeremy Devaney of BB&T Marketing.

Robert, if I just could start with the guidance, decent size deed [ph] in the quarter relative to consensus and also relative to your prior quarterly guidance. And you held the full year constant and the Q3 is lower than the Q2. Is there anything we should read into your back half conservatism or if you just could elaborate on some of your thinking on what’s directing that guidance?

Sure. First, Jeremy, please let me note that everything we do is GAAP. If I wanted to do a non-GAAP forward-looking guidance, we would certainly meet the Street and probably exceed the Street’s expectations on a non-GAAP basis. But we don’t do adjusted GAAP reporting. Others do, we don’t. So third quarter guidance is lower because we have about $0.10 of non-recurring charges. There’s nothing else that you can read into that. If we didn’t have the charges going forward, we would have increased our guidance for the full year probably by about $0.10 to $0.12. If you did it on adjusted GAAP a la whoever.

All right. That’s helpful. Second, on the LeCroy acquisition, you’re adding a decent chunk of debt there. When I’m looking at the macro markets, there’s a bit of a slowdown and we’re taking the leverage up significantly into some pretty steady macro market headwinds. Where are you comfortable with debt on a net debt-to-EBITDA ratio or a net debt-to-total capital ratio? It looks like you’re going to be up around 1.8x post the transaction.

Yes. Probably closer to 1.9 to 2, but we expect to finish the year because we generate a healthy level of cash. We expect to generate the year lower than that, probably closer to 1.7. And then next year, depending on how much pension contribution we decide to make, we could go up a little bit and then come down again. But I can tell you it’s going to stay below 2 and then it’s going to go down presuming we don’t make acquisitions. And our covenants are at 3.25. So we are very comfortable with where we are. We generate a lot of cash and we have to deploy the cash to benefit our shareholders.

And lastly, in the quarter, towards the tail end of the quarter, we saw a lot of volatility in oil prices. I know historically you’ve said $90 is sort of the break point for some really aggressive demand action from your supply chain and then below $60 is where you see softening. Could you give us some color around what you’re seeing and hearing from your customers and what you’re thinking in terms of how the volatility is impacting your customer demand?

Well, one of our major customers that does oil exploration just came out with -- raised their guidance. So they’re pretty bullish on what’s happening. In the second half, we expect our sales to increase because our backlogs are up. Oil is today at about $89 to $90, $89. All the projections seem to indicate that because you do longer term capital commitments, at least in the deepwater arena, they’re going to have significant growth, 14% growth a year in capital expenditures. So we don’t see any weakness. I think FMC, who is one of our partners had a very strong growth in orders yesterday. So we’re comfortable where things are. They have to go down substantially before it affects our businesses.

And there are no further questions in queue. Back to you, gentlemen.

Thank you, Operator. I’ll now ask Jason to conclude the conference call.

Thanks, Robert. And again, thanks, everyone, for joining us this morning. If any of you have follow-up questions, please feel free to call me at the number on the earnings release. And of course all news releases are on our website, teledyne.com. Rachel, if you could please give the dial-in information and conclude the call, we’d appreciate it. Thanks again.

Ladies and gentlemen, this conference will be made available for replay after 10 o’clock a.m. today through August 26th at midnight. You may access AT&T Executive Replay System at any time by dialing 1-800-475-6701, entering the access code 247034. International participants dial 320-365-3844 and again that access code is 247034. 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.