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

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

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

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

Thank you and good morning, everyone. This is Jason VanWees, Senior Vice President, Strategy and M&A at Teledyne. Now I’d like to welcome everyone to Teledyne’s third quarter 2014 earnings release conference call. We released our earnings earlier this morning before the market opened.

Joining me 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 our periodic SEC filings, and of course, actual results could 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. Record sales of $601.1 million increased 5.2% compared to last year with reasonable organic growth of 3.4%. Third quarter GAAP earnings per share of $1.47 was also a record, increasing 19.5% compared to last year. I should note that earnings, both this year and last related by discrete tax items.

Nevertheless, excluding these tax benefits and unusual charges such as restructuring and legal charges, earnings still increase at a healthy double-digit rate year-over-year. Operating margin of almost 12.4% also increased considerably and was nearly a record.

Our results continued to demonstrate the successful transformation of Teledyne into a higher margin industrial technology company, committed to operational excellence. Overall sales growth was driven by strong organic growth in the U.S. of about 7% and continuing gains in international markets and some small acquisitions.

While our government businesses now represented on just 25% of our total sales, we were nevertheless pleased to report modest organic growth in government sales in the quarter. In our commercial businesses, we achieved growth in all major global regions.

Growth in sales in the Americas was relatively broad but particularly strong among marine instrumentation and commercial aerospace. Commercial sales in the EMEA region and Africa including Africa collectively increased slightly due in part to demand of our marine and environmental instrumentation.

Finally, Asia Pacific sales continued to grow across most of our businesses but especially in avionics, electronics, relays, and test and measurement instrumentation, and digital imaging.

I will now comment on our business segments after which Sue Main will give you some of the financials in more detail and provide an earnings outlook for the fourth quarter and full year 2014. Turning to our Instrumentation segment, third quarter sales increased 9.3% to $280.4 million with organic growth of 5.4%.

Sales of marine instrumentation increased 10.4% with organic growth of 7.5%, primarily due to continued growth in sales of interconnect systems used in offshore energy production as well as greater sales related to land-based shale projects. In addition, sales of our underwater autonomous vehicles or AUVs also increased nicely.

In the environmental domain, sales increased 15.7% with organic growth of 5.7%. Most product categories spanning the process and air quality and laboratory and field instrumentation reported sales growth, both domestically and internationally. Sales of electronic test and measurement systems decreased slightly by less than $1 million.

Nevertheless, we’re very encouraged with the improved orders year-over-year and more importantly, the improved operating margins in this business.

GAAP operating profit in this segment increased and operating margin improved 118 basis points due to higher sales and improved operating performance, especially at companies acquired within the last two years.

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. Third quarter sales in Digital Imaging decreased 9.1% compared to last year. This was largely a result of lower sales of infrared imaging devices to the U.S.

and foreign government. Sales of sensors and cameras for commercial machine-vision applications increased driven by greater sales for semiconductor and electronic inspection. Production of [main] devices also improved.

GAAP segment operating profit decreased primarily due to lower sales, but also a greater mix in the quarter of lower margin [COGS] plus as opposed to fixed price program in our government businesses and lower margins in our laser-based imaging. Turning to the aerospace and defense electronics segment. Third quarter sales increased 6.1% organically.

Each product category achieved growth, but our commercial avionics business performed very well as it has always. Growth in the microwave and interconnect businesses primarily resulted from increased international and commercial sales. Operating profit more than doubled and operating margin increased 770 basis points.

Even excluding significant charges in 2013 as a result of cost reduction, margins still improve over a 150 basis points. Turning to the Engineered Systems segment, third quarter revenue increased 9.9% and operating profit more than tripled with record margin of 11.6%.

Both sales and margin benefited from a greater mix of marine and stage manufacturing program as opposed to defense and space engineering services program. Also we have increases in commercial hydrogen generator sales. In conclusion, our commercial businesses are growing and becoming more profitable.

Our government businesses have stabilized and operate with a lower cost structure. We have a significant pending acquisition which we hope to close in the fourth quarter. We have repurchased 1.4 million shares of our stock in the first nine months of 2014.

Also, due to our balance business mix, record of consistent improvement in profitability and strong cash generation, the credit markets regards us positively as reflected in our unsecured notes offering at an average fix rate of just under 3%. And finally, we expect to deliver our 13th consecutive year of GAAP earnings per share growth in 2014.

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

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 fourth quarter and full year 2014 outlook.

Regarding earnings per share, the third quarter of 2014 included pre-tax charges of $2.3 million related to asset write-downs and legal matters, offset by net discrete tax benefits of $6.1 million.

The third quarter of 2013 included pre-tax charges of $14.3 million primarily related to severance and facility consolidations, offset by $11.6 million of net discrete tax benefits. Turning to cash flow, in the third quarter, cash from operating activities was $79.2 million compared with the cash flow of $49.5 million for the same period of 2013.

The higher cash provided by operating activities in the third quarter of 2014 primarily reflected the impact of higher net income, the timing of accounts receivable collections, lower payments related to severance and facility consolidations partially offset by higher income tax payments.

Free cash flow that is, cash from operating activities less capital expenditures was $70.1 million in the third quarter of 2014 compared with $31.8 million in 2013. In September, we priced $125 million of senior unsecured notes with an average fixed rate of 2.97%. And we expect the notes to be issued in December of this year.

Also in September, we entered into an accelerated share repurchase agreement. Pursuant to this agreement and some open market transactions, we repurchased approximately 1.026 million shares in the third quarter and 1.4 million shares year-to-date.

Capital expenditures were $9.1 million in the third quarter compared to $17.7 million for the same period of 2013. Depreciation and amortization expense was $23.5 million in the quarter compared with $23.1 million last year.

We ended the quarter with $452 million of net debt that is $577.8 million of debt and capital leases less cash of $125.8 million for a net debt to capital ratio of 22.7%.

Turning to our pension and stock compensation expense, in the third 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 $3.9 million in the third quarter of 2014 compared with $3 million in the third quarter of 2013.

Finally, turning to our outlook, management currently believes that GAAP earnings per share from continuing operations in the fourth quarter of 2014 will be in the range of $1.35 to $1.39 per share. We expect full year 2014 earnings per share of approximately $5.49 to $5.53.

The 2014 full year effective tax rate is expected to be 28.5% excluding discrete items, such as non-recurring tax benefits or adjustments. I will now pass the call back to Robert..

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

(Operator Instructions). And we do have a question from the line of Jim Ricchiuti. Please go ahead..

Thanks, good morning. Robert, I wonder if you could spend a few moments on the pending acquisition of Bolt Technology. I wonder if you could talk a little bit about how this expands or strengthens your position in this market. And then I just have a follow-up question on the marine instrumentation business. Thanks..

Sure Jim. Good morning to you. First, just a little progress on both the waiting period for Hart-Scott-Rodino was October 16 and it passed. They have a shareholders meeting scheduled for November 17 and we expect, anticipate to close on November 18.

In terms of the product and their fit to our businesses, they make acoustic energy sources as you know and we make essentially streamer cables. And those are very complimentary to our products. They also make some high reliability underwater cables and connectors for the same type of systems.

And so that is very complementary to our oil exploration businesses. And on the other side of the ledger, they have a very strong miniature underwater remotely operated vehicle or ROVs used in maritime security search and rescue and other applications. And that complements our underwater vehicles, both tethered ROVs and untethered AUVs.

And this will kind of really enhance our overall capabilities for underwater vehicles..

So, it sounds like there is good customer overlap but not -- certainly not that much product overlap at all or virtually not..

You are absolutely correct. There is some customer overlap. They actually would broaden our customer base in that domain and there is no product overlap that we know of..

And just if I may, one final question on -- you touched a little bit on the energy market, the exploration market, just in light of the volatility and oil prices.

At what point do prices get to levels where it could begin to negatively impact this part of your business, which has been going very well as we’ve seen from some of the recent orders?.

I think, if you kind of take a ballpark number like $80 a barrel for oil, then on the exploration side, we are already seeing some weakness in there. I would say it could be as much as 15% to 20% in the exploration side. Right now, we have not seen any effect on our production businesses.

Most of the production businesses that we’re involved in, at least the offshore ones, are deep or offshore deepwater productions with very long life. And the $80 doesn’t seem to affect those significantly. If it goes below 80, we may see some effect in the shorter term. But right now, we’re not seeing that.

And I think for the next year, based on especially some of the recent wins that we’ve announced, we should be okay..

Got it. Thanks very much..

Thank you..

Our next question comes from the line of Greg Konrad. Please go ahead..

Good morning..

Good morning, Greg..

I was hoping to just start with engineered systems. You had both good top and bottom-line growth.

Does a lot of this growth from programs that you’ve won over the past two years? And do you kind of view this rate sustainable as we go forward?.

Thank you. That’s a great question. I think fundamentally, we have as you know we’re priming now some programs. So, the best I can say about that business is it’s kind of stabilized. I know we had significant growth this quarter. We might even have a little growth next quarter.

But what we have done is we have a number of [prime] programs and the Launch Vehicle Stage Adapter is one that has helped us with increased revenue. Some of our manufacturing specialty gun mounts for literal combat ship, that’s a little lumpy. So, we had some gains here because we shipped more than last year, but that was kind of normalized next year.

I think the best I can say about this business, Greg is that we expect year-over-year especially going forward into next year that this business is stabilized.

We used to be heavily dependent on just missile defense and -- now we have broadened our base into manufacturing, as well as underwater vehicles like the shallow water combat vehicle and of course the glider programs that we have in our other marine businesses that are being managed from a system’s perspective by this segment.

So, we’re happy with the business. It’s stable now and we think it will just go along as it has been..

And then just a quick question on pension, I know you guys are fully funded, but when I think about half done in that 21, does that change your cash flow at all, pension-related as we go through the next couple of years?.

I am going to ask Susan to answer that question..

Yes. No, those changes don’t impact us..

Okay, thanks. That’s all I’ve got and thanks for your time..

Thank you..

We have the next question from the line of Michael Ciarmoli. Please go ahead..

Hey good morning guys. Thanks for taking my questions..

Good morning..

Robert, just to maybe stay on the topic of energy and we’ll get back to that topic of energy and oil prices.

You guys had your Analyst Day earlier in the year, a lot of focus on oil and gas, a lot of focus on -- what sort of drivers would power your business whether it’s production or orders for trees? I mean what should we be watching for as the biggest driver? I know you said exploration has been weak, production holding, but I mean are you guys really tracking industry wide CapEx to get a gauge on how this business performs or should we just watch overall tree awards that are out there? I mean, can you give us a maybe a sense of what the biggest drivers are that we should be watching?.

Yes. First and foremost, the marine portfolio that we have is relatively diversified. You mentioned obviously oil exploration that’s probably this year going to be about 17% to 18% of that business. Then if you flip over to oil production that I would say is maybe 30% to 35% of the business. So, let’s just say, double the oil exploration.

Interestingly, now we also have onshore land oil production especially offering cables and systems for shale oil production and that maybe somewhere between 7% and 8% of the business. Then interestingly again, underwater and construction transportation hydrography in the oceans, that’s about 25% of our business.

Then defense, security and other things are 14%. So, when you look at a portfolio that’s about $600 million, it’s really diversified.

So, while we don’t really think the oil production is going to change significantly for us and while we believe oil exploration will go down somewhat because of the diversity of the portfolio and because of acquisitions that we’re making, we think that this is a fairly stable portfolio. And frankly it’s our highest margin set of businesses..

Okay. That’s helpful. And then maybe just shifting last one I had, how should we be thinking about the digital imaging margins given the contract mix there maybe some of the more kind of cyclically sensitive industrial markets out there, European exposure I mean.

Should we think you can snap these margins back up to a low double-digit rate or kind of what’s the expectation that you guys are looking out there?.

the Teledyne Scientific & Imaging, which is a mixture of our science laboratories, R&D labs which about $50 million in revenue, where we take no profit at all. Every dollar is reinvested in that business to help get new products to the best of the company.

The imaging business there is a mixture of primarily government but now starting to get some commercial businesses and it may have margins up about 10%. But when you combine the two where you take one-third of the business that you take no profit from, then margin starts creeping down.

If you go to the other part of our imaging business that’s primarily in Canada and that’s DALSA. The machine-vision business is doing relatively well and we expect that to do well and with improved margins going forward. We also have x-ray business that while it’s going a little slower than we had hoped, it does enjoy good margin.

Where in that business where we’ve suffered a little bit is on our laser-based imaging businesses. And that I hope will come back. So overall, I think in the next quarter maybe margins would go up slightly versus this quarter.

But I think in the DALSA businesses, I expect margins to improve next year in the scientific laboratories and imaging businesses in this country which are the high end market businesses. I expect those to stay around where they are. So overall I think this businesses while may not improve very much next quarter, they will be better next year..

Okay, perfect. That’s helpful. I’ll jump back in the queue here..

Thanks a lot..

We do have a question from the line of Mark Jordan. Please go ahead..

Thank you. Good morning, Robert.

Obviously excellent operating margins for the instrumentation business of 16.7% which is a high watermark as far as my recent history at least; adding I guess Bolt and if you look at Bolt I think add back the contingent liability expenses that will pass through the P&L that would normally have operating margin in the 20% to 23% range.

With the addition of Bolt, could we assume that the positive impact of that should keep on an annual basis the instrumentation margin in a low 16% range?.

I think about that yes with the intangible amortization, I think you’re right. Yes..

Okay.

Secondly, could you talk a little bit about how you’re structuring your balance sheet now and moving forward relative to the desired size of fixed rate in the term of fixed rate deck and what role that would play moving forward in your debt structure?.

I think Mark, the fixed rate is -- right now most of our debt is fixed rate. We’ll have a little maturity next year. I would say by the end of this year, our fixed rate would after the acquisitions, assuming the acquisition is successful; our fixed rate would be about 65%.

Interestingly enough, when you add all of our revolver and other funds availability, we will still have about over $700 million of available cash for acquisitions.

If you fast forward to next year and you say okay we basically don’t buy anything because we can’t assume right now what might be available or what we may be able to buy, if we don’t buy anything, our fixed rate then will go over 80% to 85% or so and our flexibility will improve from $700 million to $850 million in terms of cash available to do things, and our debt to EBITDA ratio will drop to about 1.2..

Thank you. Final question if I may, I think you’ve changed management up in DALSA about four months ago.

With that change, has there been any initiation of any major initiatives in terms of changing the operational structure or your strategy up there, as a result of a new, fresh look of the new management team?.

First, probably we’ve been at the high-end of the machine-vision market through at -- I’m very successful at it. But we’ve kind of not paid as much attention to the mid market and other people have been enjoying the mid market. So, it’s kind of on a focus both on higher end and mid market.

Second, a lot of our products there have been a line scan and CCD-based, but now we’re increasing significantly our efforts in CMOS-based sensors and also trying to increase our emphasis from line scan to area scan. And then finally, there are two major initiatives in the DALSA business, both in Canada and the Netherland.

And those in the joint Canada Netherland is the CMOS X-ray business which is coming along, it’s really one of the future drivers for that business. And the second one is of course the uncooled infrared initiative that we have in our Bromont men’s foundries. And those are coming along really well.

And we hope that by next year we will have wafer leveled package infrared, uncooled infrared devices available to the market. So, those are the kinds of shifts that Rex is initiating..

Okay. Thank you very much..

Thank you..

We do have a question from the line of Steve Levenson. Please go ahead..

Thanks. Good morning, everybody..

Good morning, Steve..

Back to oil prices and does this open up acquisition opportunities for you and do you think the lower oil price helps you on the negotiating side in terms of price?.

I hope you’re right on both count. Anything that has to do with oil exploration, people’s expectations are so high. I hope this will moderate those expectations somewhat and give us an opportunity. I think that may happen. On the flip side, everybody knows that this might be just a timing issue.

All the studies that we look show that per capita energy consumption and oil consumption is going to go significantly up when you compare what we’re using in the countries like the U.S. versus what is being used in China and the level of development that’s happening. So, everything that we look at points to increased demand for energy.

And so, I hope you’re right, the temporary setbacks in the price of the oil will give us some opportunities, but I’m not sure..

Okay, thanks.

Question on the avionics side, does the switch over to some of the new re-engine airplane models change or content at all or do you pretty much hold your work statement where it is?.

I think we’re going to do fine I believe especially with our very large contract and agreements with Boeing. The Next Generation 737 and the 737 MAX, we’ll have our aircraft data acquisition systems on them. And our information management system is also going to be on the Next Generation 737 and 737 MAX and 747-8 production aircraft.

And we’re holding our own with Airbus. We think overall that business is one of our healthier businesses especially considering the backlog that both Airbus and Boeing are enjoying..

Okay, thanks. And last one was the pending acquisition of Bolt; I know that you’ve been really good at reducing footprint and cutting overhead.

Do you think there are some opportunities to do that including some of your legacy businesses?.

one is San Diego where they make their small inspection of class ROVs; they have an operation in Houston and they have an operation in Connecticut. We have other operations in the Houston area which would probably help us with potentially consolidating.

But more importantly, I think in the Houston area they have a very attractive production facility and machining facility that will help us reduce the amount of investment we have to make because of our own oil productions are growing so fast. So, the advantage there would be for early reducing some of our going forward CapEx requirement..

Thanks for all the detail..

Thank you..

We do have a question from the line of Jim Ricchiuti. Please go ahead..

Robert, I wondered if you could comment on the electronic test and measurement portion of the business. It looks like revenues were down $1 million or so at Teledyne LeCroy.

Can you talk a little bit about what you’re seeing in that market?.

Let me start by saying we really like that business. For this group year-over-year, even though sales were down slightly, sales and orders increased modestly, sequentially but most importantly to us several things have happened in that business. First, their margins have improved significantly in the last year, and I expect that to continue.

When you have large acquisitions, for us large like LeCroy and large acquisitions like DALSA, and when their margins start improving, that has a very positive effect on our earnings. We are also introducing some very nice products there.

We introduced two products just a few months ago in July, WaveSurfer 3000 which has had a very strong market acceptance, and a high definition oscilloscope, a channel with 12-bit scope which obviously increases the resolution. It’s outselling our expectations significantly.

So, we expect to have success in this business; and also introduced new product laded on for other applications and the ones that we’ve been in.

And then lastly but just as significantly for me is that the acquisition has brought some very seasoned management to Teledyne including of course Tom Reslewic who is not only running LeCroy but he is also heading up our environmental businesses which is very helpful..

Got it.

So, a combination with the strength in bookings the new products and potentially some newer products that could be hitting in the next couple of quarters; it sounds like you see this showing growth over the next several quarters, is that fair to say?.

I would say modest growth, but more importantly because of the change in the product mix and kind of in some ways modest ways Teledynizing the business, we expect that margins would improve significantly which is just to me that’s very important..

Fair enough. Thanks very much. That’s very helpful..

(Operator Instructions). And there are no additional questions at this time..

Thank you, operator. I will now ask Jason to conclude the conference call..

Thanks Robert. And again, thanks everyone for joining us this morning. And if you have any follow-up questions, please call me at the number listed on the earnings release. And again, all our news releases are available on our website teledyne.com. Operator if you could conclude today’s conference call and provide the replay details that would be ideal.

Thank you everyone..

Ladies and gentlemen, this conference will be available for replay after 10 am Pacific today through November 23rd. You may access the AT&T Executive replay system at any time by dialing 800-475-6701 and entering the access code 332979. International participants dial 320-365-3844.

Once again those numbers are 800-475-6701 and 320-365-3844 with access code 332979. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect..