Jason VanWees - Senior Vice President, Strategy and M&A Robert Mehrabian - Chairman, President and CEO Sue Main - Senior Vice President and CFO Melanie Cibik - Senior Vice President, General Counsel and Secretary.

Greg Konrad - Jefferies Mark Jordan - Noble Financial Jim Ricchiuti - Needham & Company Chris Quilty - Raymond James Michael Ciarmoli - KeyBanc Capital Markets Steve Levenson - Stifel.

Ladies and gentlemen, thank you for standing by. Welcome to the Teledyne First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.

I would now like to turn the conference over to our host, Mr. Jason VanWees. Please go ahead..

Good morning, everyone. This is Jason VanWees, Senior Vice President, Strategy and M&A at Teledyne. And I'd like to welcome everyone to Teledyne's first quarter 2014 earnings release conference call. We released our earnings earlier this morning before the market opened.

Joining us today are Teledyne's Chairman, President and CEO, Robert Mehrabian; Senior Vice President and CFO, Sue Main; and Senior Vice President, General Counsel and Secretary, Melanie Cibik. After remarks by Robert and Sue, we will answer 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 the earnings release and 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. Teledyne started 2014 with record quarterly sales and earnings per share. Sales were $573.5 million and earnings per share was $1.20, which increased 12.1%, compared to last year.

With the significant cost reduction actions taken in 2013, the higher margin commercial sales mix and a well-funded pension, we were able to generate margin improvement of 116 basis points.

As a reminder, in the last two years, we reduced our workforce by 8.8% and during 2013, we consolidated operations across 15 sites with a reduction of over 375,000 square feet or approximately 7% of our total footprint. While total revenue increased only modestly, organic growth in the U.S.

and international commercial markets and small -- some small acquisitions more than offset a decline in sales to the U.S. government and an expected decline in sales resulting from completion of a software-based radio program with a foreign government which impacted both the first and the second quarter’s of 2013.

This quarter orders were generally strong across the company with the total book-to-bill ratio of 1.07 with robust orders in our marine oil and gas instrumentation businesses contributing significantly. In the first quarter, sales to international and domestic commercial customers comprised approximately 75% of our total revenue.

Furthermore, given the greater profitability, these businesses contributed over 80% of our profit. I will now comment on our business segment after which Sue Main will review some of the financials in more detail and provide an earnings outlook for the second quarter and full year 2014.

Turning to our instrumentation segment, first quarter sales increased 11.3% to $258.9 million with international sales representing over 55% of this revenue.

Sales of marine instrumentation increased 18.5%, with organic of 8% primarily due to continued growth in sales of interconnect systems used in offshore energy production, as well as an increased sales of system used for current and wave measurement and inertial sensors for Remotely Operated Underwater Vehicles or ROVs.

Orders were also strong with a book-to-bill ratio of 1.13. In the environmental domain, sales of process and air monitoring equipment increased 3.1%, driven by renewed growth in domestic market. Laboratory and field instrumentation sales increased slightly due to the acquisition of CETAC, the provider of automated sampling systems.

Sales of electronic test and measurement systems also increased $1.5 million. This represented an organic growth of 3.4%. GAAP segment operating profit increased but margins declined slightly due in part to resent acquisitions and $900,000 reserve taken in the quarter.

Excluding the impact of recent acquisitions, margin improvement within marine instrumentation and electronic test and measurement increased but were partially offset by declines within the environmental group. Finally, in this segment we completed a small acquisition Photon Machines at the beginning of the second quarter.

There will be minimal impact on sales because Teledyne CETAC already distributes Photon Machines primary products. However, the key technology of laser oblation for sample preparation in elemental script -- spectroscopy now resides within Teledyne.

Turning to the Digital Imaging segment, this segment provides a broad portfolio of visible light, laser-based, infrared, X-ray and ultraviolet sensors, cameras and software. First quarter sales in Digital Imaging decreased slightly compared to last year.

Sales of sensors and cameras for commercial machine vision applications increased very nicely, driven by greater sales to the general industrial, as well as semiconductor and electronic inspection markets. However, this gain was offset by lower sales of infrared imaging sensors and systems to the U.S. government.

GAAP segment operating profit increased substantially in this segment with margin improvement of 444 basis points greater than last year, partially due to our cost structure, coupled with the high-margin commercial sales mix. Turning to the Aerospace and Defense Electronics segment. First quarter sales decreased $9.8 million.

However, I want to emphasize that the first and second quarters of 2013 each included approximately $20 million in sales related with specific software-based radio program for foreign government, which is now complete.

Besides this negative comparison, the segment performed well with good growth in our commercial avionics and satellite communication businesses and even a modest growth in our U.S. government sales. Despite the reduction in sales, operating profit increased 314 basis points primarily as a result of cost reduction actions throughout 2013.

Turning to the Engineering Systems segment. First quarter revenue declined from last year as a result of lower U.S. government sales. However, orders were strong with segment to book-to-bill ratio of 1.28 due in part to five years $60 million NASA contract award for the Launch Vehicle Stage Adapter which will be used in the Space Launch System.

Segment operating profit decreased slightly as a result of lower sales but margins improved 128 basis point, primarily due to the reversal of gross FAS 87 pension expense in the prior year to a modest pension income this year. In conclusion, sales from our commercial industrial businesses continues to grow across the company.

The performance of marine instrumentation was very strong and there were solid gains in commercial machine vision as well as avionics and satellite communication. Furthermore, our substantial cost reduction efforts throughout 2013 coupled to prudent management of our pension liabilities have begun to deliver meaningful margin improvement.

I will now turn the call over to Sue Main..

Thank you, Robert and good morning everyone. I will first discuss some additional financials for the quarter not covered by Robert and then I will discuss our second quarter and full year 2014 outlook.

Regarding earnings per share while the first quarter of 2014 included $2.3 million of discrete tax benefits, the first quarter of 2013 included $2.7 million of tax benefits. Turning to cash flow. In the first quarter, cash flow from operating activities was $26.4 million, compared with the cash usage of $56.7 million for the same period of 2013.

The higher cash provided by operating activities in the first quarter of 2014 primarily reflected the absence of pension contributions as well as improved working capital management partially offset by higher income tax payments.

Free cash flow that is cash from operating activities less capital expenditures was $14.7 million in the first quarter of 2014 compared with the usage of $21.6 million after adjusting for pension contributions.

Given our strong cash flow and fully funded pension, the company used $23.6 million in the first quarter of 2014 to repurchase approximately 244,000 shares of its common stock under its stock repurchase program authorized in October of 2011.

Capital expenditures were $11.7 million in the first quarter compared to $16.3 million for the same period of 2013. Depreciation and amortization expense was $23.2 million in the quarter compared with $21.9 million last year.

We ended the quarter with $486.2 million of net debt that is $559.9 million of debt and capital leases, less cash of $73.7 million for a net debt-to-capital ratio of 23.9%. Turning to pension and stock compensation expense.

In the first quarter of 2014, gross GAAP pension income was $0.3 million, compared with gross pension expense of $4.3 million in the same period of 2013. Stock option compensation expense was $2.7 million in the first quarter of 2014, compared with $1.8 million in the first quarter of 2013.

Finally, turning to our outlook, management currently believes that GAAP earnings per share in the second quarter of 2014 will be in the range of $1.24 to $1.28 per share. We expect full year 2014 earnings per share of approximately $5.10 to $5.14.

The 2014 full year effective tax rate is expected to be 29.5% excluding discrete items such as nonrecurring tax benefits or adjustments. I will now pass the call back to Robert..

Thank you Susan. We would now like to take your question. Trisha, if you're ready to proceed with the question and answers, please go ahead..

(Operator Instructions) And we will open the line of Greg Konrad with Jefferies. Please go ahead..

Good morning..

Good morning, Greg..

I was hoping, so just in terms of capital deployment. This was the first time that you bought shares in probably over two years.

Is there a shift in how we should be thinking about capital deployment and how should we read into that in terms of acquisitions?.

Thank you, Greg. First, we announced earlier this year that we intend to buy some of our shares back. Our intentions so for are to buyback enough shares to offset the dilution from stock compensation awards that are made during the year.

If you look back in the last 10 years, dilution from our stock compensation cumulatively has been about a $1.20 hit to our earnings per share. What we've decided to do is just start buying back our stock to prevent that dilution going forward.

On the flip side, I think we have sufficient capital and a good strong balance sheet to continue on our acquisition patterns, especially if you find things that are attractive and additive to our portfolio..

Thank you. And then just in terms of Aerospace and Defense Electronics margins, that’s the highest number, it maybe ever or at least in the recent past. And if you look at kind of the trends, commercial Aerospace should continue to be favorable. You’ve already done the restructuring and I think in the past you’ve talked about kind of a 14% level.

Should we think that, that 15.5% number is a good number moving forward?.

Yeah. I think that's a good number moving forward, at least as far as we can see for 2014..

Thank you..

Thank you, Greg..

Our next question is from the line of Mark Jordan with Noble Financial. Please go ahead..

Good morning, Robert. I had a question related to portfolio for business strategy. If you look at the company now, you clearly emphasized growing the commercial side of the business that have been occurring down the relative significance of the governmental exposure.

My question is specifically for the engineering systems business, which has been challenged from a topline basis.

Do you feel that over the longer term you have this scale for that business to be one, successful and two, attractive for you?.

Yeah. Thanks Mark. As that business has become a smaller portion of our portfolio, this quarter was about 10.5% of our overall portfolio. The flip side is that the business as I mentioned had a really good book-to-bill ratio of 1.28 this quarter.

The shift that’s happened there that's important to note is that we exited our businesses that had to do with system engineering and technical assistance work, which is the lowest margin work that we have there and we shifted that business in two directions. First, to more manufacturing programs, which is what I said about the space launch adapted.

Second, we are taking the system engineering capabilities and applying them across the company to areas where we can use their overall systems capabilities to get large program such as the one that we got with the Navy program and the glider program and then they're building, of course shallow water underwater vehicle for special operation.

So in some ways, the business, yes, it’s gotten smaller. In another ways, it’s become a much more important part of our portfolio because of their broadest capabilities in putting together large programs..

Thank you very much..

Thanks Mark..

And we will open the line of Jim Ricchiuti with Needham & Company. Please go ahead..

Thank you. Robert, I think in the last quarter you gave some color in terms of how you saw the year unfolding with some of the various businesses. And I'm just wondering if you’ve seen, just given coming out of Q1, any change to that.

For instance, I think on Engineered Systems, you had anticipated that to be flat to up this year and you had a strong bookings quarter but clearly from a revenue standpoint, Q1 was a little weaker.

How do you see the year unfolding there and maybe on the Digital Imaging side as well?.

Thanks. Let me start with Engineered Systems. I think we will pick up as we go through the year. So, I think we'll end the year pretty flat with last year. So, I think the significant decline in the first quarter was probably the low point of the business. We might have a little decline in Q2 vis-à-vis Q2 of last year.

But right now, our plans are to pick up later in the year. So overall, I think we'll end up flat. Moving to instrumentation, I think, organically, we will be in the 3% up range for the year. In Digital Imaging, we should be around the same range, 3% or so, maybe a little less.

And A&D, considering the fact that we are giving up $40 million of, kind of a one-time program for a wager that we had in Europe last year, we will make that up hopefully and end up flat. So our fundamental basic programs are going to be up and we should end the year fairly flat.

And so the rest of the programs, we will have to make up 4% and 5% to make up for that $40 million. So that’s the color..

That’s very helpful. And just going back to digital imaging, it sounds like the commercial portion of that had a very good quarter or good quarter of the sensors camera portion of the business.

Can you say what that, how much that was up, and just in general, how much of the digital imaging business now is commercial? Is it the lion’s share?.

Yes, Dan, but let me start with the latter. The digital imaging business also is the larger part of the business. And even in the imaging that we have within Teledyne Scientific & Imaging, we have some commercial businesses. We make some for example infrared cameras and sensors for commercial applications.

And overall, I think the digital imaging, the DALSA businesses were up I am going to say double digit and the imaging in Scientific was down about 12% primarily because push off of some of our government programs. I think if you look at the whole digital imaging, I would say about 27%, 28% of it is government business that is commercial..

Okay. Great. Thanks very much. I appreciate it..

Thank you..

We will open the line of Chris Quilty with Raymond James. Please go ahead..

Thanks, Robert. I just wanted to follow up on something you said earlier about Engineered Systems and exiting the sort of time and material type contracts. Were these -- there were no divestments in that business. Am I correct? And I think what you’re primarily conveying is you’re just not bidding on new contracts..

Yes, Chris, you are absolutely correct. Fundamentally, first, we have this conflict, organizational conflict that we have to overcome because we are bidding bolt-on contracts and that in some ways you see the work, you’re kind of supervising or helping the contracts. So we got out of that. The other part is just what said, this had low margin business.

The pressure from the government too parcel out big chunks of that to small firms that qualify brings the margins down into 2% to 3% and it’s not something we want to do. Yes, it makes the revenues looks good, but overall it doesn’t help at all..

And it looks like you experienced government weakness both in the engineered systems business as well as actually not on the aerospace defense. It’s somewhat in the instrumentation.

Do you think you have seen the biggest part of the defense headwinds here in the first quarter and they should subside either due to sequestration effects or budget or year-over-year comparables, or are you likely to see continued headwinds through the balance of the year?.

Yes, I think, Chris, in Q2, we will again have that $20 million of headwind from the software -- radio-based -- software-based radio program that we had with the foreign government. But if you put that aside, I think we expect that our defense businesses in the U.S. have stabilized.

We’re actually for a change getting some orders in programs like our traveling wave tubes that we haven’t had for a while. The book-to-bill ratio in our microwave products has improved significantly over 1.

And so, I am going to say that because of some new contract releases from the major clients and also the other thing that’s happening vary that a number of qualified suppliers to the clients have decreased significantly. So, we’ve postured ourselves reasonably well.

So overall, I think the challenges there are behind us with the exception of the one program that it was one shot for last year to a foreign government..

Okay. And shifting back to the Engineered Systems, I know last year you identified several big programs that you’re targeting and I think you won two of the three.

Do you have any similar large opportunities here in 2014?.

No, I think with the most recent award that we got from NASA on their adapter for the space launch system, we don’t expect anything very large. We do expect that some of our programs that you’re very familiar obviously with the shallow water vehicle.

As those come out of their limited rate production, they will pick up in the future years because those are big programs for us.

But right now I don’t see anything out there with the minor exception of, if we do something in our space imaging, if we had some other programs, especially for the hyperspectral cameras that would go into our marquee users platform that we got to put on the international space station..

Got you.

And speaking of underworld vehicles, so you have had any material involvement in what’s going on with Malaysian Air 370.?.

Yes. Actually one of our colleagues Tom Altshuler who is Vice President and Manager of our Benthos and Gavia and Webb facilities, it’s been on CNN continuously. First, historically, Chris, we produced the fingers themselves. We sold that product line last year. It was a small product line.

And so we understand that that whole acoustic business is, whether marine camera and measurements systems are based on. Second, the so-called the detectors or the microphones, those are ours primarily and both does use the same technology as you are familiar with.

You send electrical signal to a ceramic which the electrical signal cause the ceramic to deform, as a deform creates acoustic pulse in the water, you get the same thing at the other end, acoustic pulse arrive, ceramic deforms avail with and it creates an electric signal which we record. We have been heavily involved.

People are using our equipment for the discovery. So we also make a whole bunch of others longer like fingers that fetch but right now we certainly aware and involved in that frequencies, the wavelengths, the dissipation of energy, yeah..

Great.

And final question, I know you gave some guidance on the revenue outlook by segment? Is there any update to the margin guidance that you provided previously?.

Well, our margins went up this quarter as you know. I think they’ll hold in Q2 and I’m hoping that in Q3 and 4 they will pick up a little more. So we’ll end up the year I hope -- by the end of the year I hope we’ll end up higher than Q1..

Great. Thank you very much..

Thanks Chris..

(Operator Instructions) At this time we will open the line of Michael Ciarmoli with KeyBanc Capital Markets. Please go ahead..

Hey. Good morning, guys, and thanks for taking my questions.

Robert, maybe if we -- you have been talking about the margin expansion, I am just trying to reconcile sort of the non-operational items flowing through there, like the pension and it looks like the tailwind in the first quarter was about $4.6 million? Is that going to be kind of a similar run rate through the year, which I guess, sort of implies maybe $0.35 pickup from pension? And then just as I reconcile, it seems like the tax rate came down a bit, which probably a little bit more to the bottom line, same thing with the share buyback, probably not going to buy ton like you said just to offset the creek? But maybe if you can sort of parse out the margin expansion that's maybe purely cost cutting operational versus some of the pension and non-operational events..

Yeah. I want to say, let me start in the bigger picture and let’s say from the 120 basis point improvement in margins, perhaps 80 of it might be pension and other stuff. The pension, for the whole year over last year, we are talking about $0.26 to $0.28 improvement in that range..

Okay..

In terms of taxes, if you look at this year, we have some discreet tax events that have happened. This year we had a discreet tax event in the first quarter of $0.06. Last year, first quarter, we had $0.07.

But to put things in prospective, we really don’t expect a lot of other discreet tax awards this year or discrete tax benefit this year except if Congress passes the R&D tax credit, if passed the senate committee and it has to be acted by the senate and the house. If that happens, we might get another maybe $0.10 to $0.12 pickup.

Now, last year on the other hand, if you look at all the discrete tax credit that we got last year throughout the year, they added up to over $0.55. And we were fortunate because against that we had approximately $0.47 of restructuring cost that we took. So it kind of balance that out.

Net-net we ended up with may be $0.07, $0.08, $0.09 of tax benefit involved the restructuring last year. And this year, except for the R&D tax benefit, we are going to be at about the same place.

We are going to have about $0.07 of tax benefit, maybe a couple of more pennies here and there but -- so it’s a wash year-over-year if you look at it that way..

Okay. That's helpful. And then may just shifting, can you give us some color on why you bought photon.

What was the driver behind brining them in-house?.

It is very simple. We do have a spectroscopic capabilities which we actually manufactured a very interesting machine from our Lehman labs for spectroscopy. It is a coupled plasma device and to do that you need samples. And CETAC also has a line of machines and they were using the photon machines laser ablation.

What is permitted to do as you use very strong pulse laser in a nanosecond range and you ablate the sample. So we were already using this stuff, partially out of CETAC. And we decided its better to bring a man and have the complete line of Teledyne line.

And major ablation actually works really well where you have very small amounts of samples on the surface and you want to lift them up and be able to look at the composition of the sample. So it was kind of rounding up our portfolio, bringing it in-house. Yeah..

Got it. And then just last one from me, what kind of activities did you guys see from the new oil and gas technology development centre, I think you were talking about the attempts to gain share via customer attachment as a result of shared R&D.

Maybe if you can give us kind of status update?.

Yeah. That’s turned out to be a really good thing for us because as you know, we do have a very strong scientific capability here at our science center at Teledyne in Thousand Oaks.

What that new center enables us to do is to co-locate some of our people from here to there and so they work along side the production people, introducing new predictive materials, new ceramic features for high power. That’s turned out to be a really good program for us.

And the flip side of it is, also our customers can come and spend time with us there. And the flip side is we’ve also build some facilities in our customer’s plant, for example, at LC plant in Brazil. And so all-in-all, that’s a great business for us and we’re introducing new products. And we think that business has really good legs on it..

Got it. Perfect. That’s all I had. Thank you, guys..

Thank you..

And we’ll open the line of Steve Levenson with Stifel. Please go ahead..

Thanks. Good morning, everybody..

Good morning, Steve..

I think you have answered most of the questions.

But just on the push out on, DALSA, is that partly related to contracting officers being on furlough during sequestration? Just waiting for the contract or was it actually something beyond that?.

Yeah. I think, I may have misled you but I think what we were talking about the push out of contracts in our imaging business here in California, which is the infrared…..

Okay..

…as well as imaging for primarily for space and a lot of classified programs. It wasn’t so much the upon sequestration affect. It was earlier but right now it’s just delay in getting some of the lost contracts, especially classified program.

We anticipate with time those things would straighten themselves out because as you probably are aware, we’re one of two companies in the nation that can produce really high-end (indiscernible) Teledyne for space with pretty much owned space program for the astronomy domain and we shared the program with another company for other military and classified applications.

So we anticipate that over the long-term that will stabilize..

Okay, thanks. And then the way your strategy has been working, the balance of business and where profits are generated has changed and obviously it’s phased favorably.

But do you feel a need to change the strategy at all, are you looking to expand into other areas, and if so, what might those be?.

Well, our strategy has always been kind of consistent to buy things or add things that are relevant to what we're already doing. So that extensions are probably big. So we’re always looking for things that are relevant to our existing business. We intend to continue that. We spent a lot of our time.

We’re probably the first company that started buying businesses in the underwater marine domain and have been very successful. We’ve bought about 14 small businesses there. But those prices have gotten way out of hand now, people are paying 15, 16, 17 multiples of EBITDA at three to four times revenue for those businesses.

So we’re back looking at some of the others stuff that maybe a little more harsh. I would say it’s reasonably priced but still are consistent with our portfolio, more focus on commercial, more focus on international..

At 15 to 17 times EBITDA, do you think are selling any?.

That’s a great question, no. Thank you..

Okay. Thanks a lot..

Thanks..

And there are no other questions in queue. Please continue..

Thanks, Trisha. I will now ask Jason to conclude our conference call. Thank you everyone..

Thanks, Robert. And thanks again everyone for joining us this morning. And if you have follow-up questions, please do feel free to call me at the number listed on the earnings release. As always, news releases are available on our website teledyne.com.

Operator, if you could conclude the conference call and provide the replay details over the line, we'd appreciate it..

Ladies and gentlemen, today’s conference will be made available for replay after 10 a.m. this morning until May 23 at midnight. You may access the AT&T Executive Playback Service at anytime by dialing 1-800-475-6701 and entering the access code 318008. International participants may dial 1-320-365-3844. That does conclude your conference for today.

Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect..