Jason VanWees - SVP, Strategy and Mergers & Acquisitions Robert Mehrabian - Chairman, President, and CEO Susan Main - SVP and CFO.

Greg Konrad - Jefferies & Company, Inc. James Ricchiuti - Needham & Company, Inc. Michael Ciarmoli - KeyBanc Capital Markets Mark Jordan - Noble Financial Stephen Levenson - Stifel, Nicolaus & Co., Inc..

Ladies and gentlemen thank you for standing by. And welcome to Teledyne Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only-mode. Later we will conduct the question-and-answer session and instructions will be given at that time. [Operator Instructions]. Also as a reminder today’s teleconference is being recorded.

And at this time, I’ll turn the conference call over to your host Mr. Jason VanWees. Please go ahead sir. .

Thank you, 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 second quarter earnings release conference call. We released our earnings earlier this morning before the market open.

Joining us this morning 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 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 the earnings release and of 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. Following the first quarter of 2015, I mentioned that we were confident that Teledyne would achieve sequential improvement in earnings. In the second quarter, earnings per share increased 12% sequentially and revenue increase in all of our four business segments, even with greater currency headwind.

GAAP earnings per share of $1.34 decreased from last year’s $1.47. However, I should note that greater non-operating diesel settlements received last year versus this year accounted for $5.3 million or $0.10 per share of year-over-year variance.

Second quarter sales were $577.7 million and reflected the strong US dollar and negative currency translation, as well as expected declines in certain energy related markets. While these impacts were most concentrated in our instrumented segments.

This segment’s operating profit increased and segment operating margin increased to 102 basis points compared to last year due to strong operating discipline. I want to emphasize that while oil exploration related revenue decline year-over-year as expected. Our businesses related to offshore energy production increased and reported near record sales.

Backlog also remained relatively healthy, with overall book-to-bill of approximately 0.9 across all of our marine instrumentation products. We continue to benefit from our balanced business portfolio, not just in our instrumentation segment, but across Teledyne due to the strength and diversity of our highly engineered products.

While sales to some commercial markets declined, total U.S. government sales increased in the quarter. More broadly, after two years of contraction following the sequestration process and budget cuts, we believe we’ve reached an inflection point in our government businesses, which represent approximately 25% of total sales.

In the second quarter our defense electronics businesses had the highest orders in two years, with strength in all major product categories. So despite lower sales in the first half, we expect growth in the second half.

Furthermore, our engineered systems segment is growing and while there are more difficult comparisons in the second half, we expect to grow year-over-year even though we expect full year revenue this year from one of our flagship programs.

The Shallow Water Combat Submersible vehicle to decrease slightly as we transition from engineering development to production in 2016. Foreign currency translation primarily impacted our instrumentation and digital imaging segments, but acquisitions helped medicate these declines.

Sales to international customers primarily decreased due to currency translation, specifically while sales to Europe held the well despite currency we did note a decline in sales to Asia and South America across a number of our product lines. Finally, we remained nimble aggressively managing our cost structure and deploying capital judiciously.

For example, we have reduced total headcount by 4.3% in the first half of 2015 in response to declines in some markets. At the same time we’ve completed approximately $200 million worth of acquisitions and shares repurchases year-to-date and our acquisition pipeline remains robust.

I will now comment on our business segment, after which our CFO, Su Main will review some of the financials in more detail and provide an earnings outlook for the third quarter and full year 2015. Turning to the instrumentation segment, second quarter sales decreased 1.9% from last year.

Sales of marine instrumentation increased 1% despite a significant expected year-over-year decline in sales of the geophysical sensors used for offshore energy exploration and the negative impact of foreign currency, which particularly impacted this group of businesses.

As I mentioned previously sales to the offshore energy production industry remained very strong, a reasonable orders continued resulting stable backlog in businesses primarily serving this market.

In the environmental domain, sales decreased 2.4% and reflected decreased sales of laboratory and field instrumentation offset by sales of air monitoring and process gas analyzers. Sales in electronic test and measurement systems declined with roughly half of the decline due to foreign currency translation.

GAAP operating profit increased in the segment and operating margin as I mentioned improved 101 basis points, despite lower sales due to improved operating performance and strong cost control, across each major product category.

Turning to the digital imaging segment, second quarter sales decreased 12.4% compared to last year, primarily due to lower sales from government, U.S. Government research and development contract and reduced sales of specialty cameras for semiconductor and electronic inspection.

These were partially offset by increased sales of machine vision cameras for general industrial applications and x-ray sensors for medical imaging. As in the first quarter the year-over-year decline in government research was largely caused by gaps in a number of governmental programs.

That said, we believe we’ve hit the bottom of the trough, as an example the U.S. air force made a notification on June 25th on its intend to award Teledyne a sole source contract valued at approximately $30 million for additional air crew, laser eye protection spectacles.

The prior phase of this program had ended in 2014 and we will be glad to resume full production later this year. Segment operating margin decreased and was 159 basis points lower than last year. Turning to our aerospace and defense electronics segment, second quarter sales decreased 3.4% while U.S.

Government sales declined our commercial avionic business continue to perform very well. Operating profit declined to lower sales and lower margins in a number of defense electronics businesses.

However, due to cost reduction efforts and strong bookings we expect continued sequential improvement in both sales and margins in this segment in the balance of the year.

Turning to the Engineered Systems segment, second quarter revenue increased 6.2%, but operating profit decreased, sales benefited from a great mix of marine and space manufacturing programs as well as higher sales of energy system products, such as commercial hydrogen generators.

However, lower sales of fixed priced turbine engines and pension expense impacted margins. We also continue to invest in the development of a commercial space based imaging business based on our multiuser system for earth sensing or also knows as MUSES, earth observation platform.

We currently expect MUSES to be operational on the international space station in 2016, with hyperspectral imagery beginning in 2017. And we were recently awarded a $15 million advance data purchase contract by NASA, which we resolved in some near-term cash flow as well as future revenue once our space base images become available.

In summary, when we are faced with events that we cannot control like government sequestration, currency headwinds, lower oil prices or weakness in certain economies we immediately reduce variable cost to get ahead of the curve and we also permanently reduce fixed cost wherever necessary.

Since 2012 on the sequestration challenges we have continuously reduced cost through consolidation and operational discipline. For example we’ve reduced our manufacturing footprint by 7% and our workforce by approximately 1,500 or over 15% at a total cost to Teledyne of almost $30 million.

Prior to this year most of the permanent reductions in our cost structure were made within our government businesses. Now that we see the cycle improving, we expect additional margin improvement beyond that achieved over the last two years.

Our response to the current market challenges is consistent with the past, but with the majority of 2015 cost actions centered in our instrumentation segment. As in all cases, we have refrained from the temptation to march down the slippery slope of non-GAAP so called onetime accounting invoke today.

At the same time we are offering new products through R&D and expanding our markets through acquisitions outside the United States where we can use the strong dollars to our advantages.

Finally we have the necessary discipline, the unique technologies, the manufacturing knowhow, a good cash flow and a strong balance sheet to deliver outstanding GAAP earnings now and maintain our lower cost structure during future growth. I will now turn the call over to Su 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 third quarter and full year 2015 outlook. In the second quarter, cash flow from operating activities was $59 million compared with cash flow of $95 million for the same period of 2014.

The lower cash provided by operating activities in the second quarter of 2015 primarily reflected lower net income $5.8 million and expected change in control severance payments and higher income tax payment.

Free cash flow that is cash from operating activities less capital expenditures was $45.4 million in the second quarter of 2015, compared with $86.1 million in the same period of 2014. Capital expenditures were $13.6 million in the second quarter, compared to $8.9 million for the same period of 2014.

Depreciation and amortization expense was $22.8 million in the second quarter, compared to $23.4 million for the same period of 2014. We ended the quarter with $704 million of net debt, that is $765.3 million of debt and capital leases less cash of $61.3 million for a net debt-to-capital ratio of 33.5%.

Turning to our pension and stock compensation expense, in the second quarter of 2015 growth GAAP pension expense was $1.1 million, compared with growth pension income of $0.4 million in the same period of 2014. Stock option compensation expense was $3.3 million in the second quarter of 2015, compared with $3.6 million in the second quarter of 2014.

Finally turning to our outlook. Management currently believe that GAAP earnings per share in the third quarter of 2015 will be in the range of $1.45 to $1.48 per share. We are maintaining full year 2015 earnings per share of approximately $5.60 to $5.65. The 2015 full year effective tax rate excluding discrete items is expected to be 29.5%.

I do want to emphasize a few items regarding our 2015 outlook compared to 2014. First, our pension assumptions include a discount rate decrease of 90 basis points and changes in mortality assumptions, which will increase non-cash pension expense in 2015.

Second, 2014 results benefited from greater net legal settlements, significant discrete tax items and the 2014 R&D tax credit, which is not currently effective for 2015, as well as a slightly lower tax rate.

While our current 2015 outlook include some estimated discrete tax items in the third quarter, we expect these to be partially offset by additional reduction enforce and facilities relocation cost. I will now pass the call back to Robert. .

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

Thank you, sir. [Operator Instructions] Our first question will come from Greg Konrad with Jefferies. Please go ahead. .

Good morning..

Good morning, Greg. .

Just looking at the outlook, just by my calculation, it looks like you have about 150 basis point margin improvement in the second half of the year relative to the first, and you kind of went over some of the moving pieces.

I was hoping if you could just give a little bit more of an outlook and where some of those improvements come from?.

I think you’re essentially correct, maybe that some of that the big chunk of that is going to come in our aerospace and defense electronics.

As I indicated, we have significant improvements in our defense electronics orders and we expect that those -- and with the concurrent cost reductions that we did in the past few years to enable us to improve margins. The second segment that I think margin improvement would be effective is -- affected would be in our digital imaging.

We’re right now in the process of decreasing further cost reductions in that segment and we expect sequential margin improvement as we go through the rest of the year. So I would emphasize those are the two primary segments that we expect the margin improvements..

Thank you.

And then just on the turbine engines, was there a contract that rolled off or is that just a temporary alignment in shipments?.

Primarily it’s the same contract, they go in lots and it depends on whether the customer has the need for the engines and whether the final customer, which is the government is pulling the missiles up. It’s a gap in not a huge gap, but it’s nevertheless a slowdown in our shipments.

We ship both JASSM engines, which are joint air to surface missile engines and we also ship harpoon engines that primarily now go to our military sales and both of those have some gaps and we think that’s also going to be weaker in Q3 and perhaps improve next year..

Thanks.

And then just last in terms of -- you mentioned the restructuring and the headcount reductions, what was the cost in the quarter and the full year?.

In the full year to-date the cost is approximately $3 million and we think it will go up probably to over $5 million the rest of the year for the full year, because we are still doing restructuring as I mentioned in two of our segments, both instruments and digital imaging. Last year the cost reduction was about the same.

This is just for the reduction in people. So I think the facility consolidation is an addition to that..

Thank you..

Thank you, Greg..

Thank you. Our next question in queue will come from Jim Ricchiuti from Needham & Company. Please go ahead..

Hi, thank you. You gave some color on how we should think about growth in the defense portion of the business aerospace and defense portion. I think also you are expecting, I guess some modest growth in engineered systems, If I heard you correctly.

I wonder if you could talk a little bit about how we might think about the instrumentation and digital imaging business in the second half?.

I got to look at the second half numbers. Let me start with the full year for a second if I may Jim..

Sure..

I think for the full year right now we expect instrumentation to be down about a 1%. I think digital imaging would follow between 1% to 1.2%. I think aerospace and defense electronics should be up about 1% and perhaps the engineered system by about a couple of percent for the year.

And so in total I think if you look at our sales outlook organically at least we should be relatively flat for the year..

Got it, that’s helpful.

You mentioned a decline in the electronic instrumentation business, how much was the LeCroy business was down?.

It was down just over 10%, half of it is certainly currency related and half of it is just a sales decline and we think that we are going to see pressure in that domain anyways as we go forward. I think some of our competitors that we know one of them that we’re aware of has project a 13.5% decline in their revenue in Q3.

The more important part is that we’re focusing on the higher margin niche products that and we’ve improved the bottom-line by about 7% in our test and measurement or 180 basis points from last year.

By the way Jim, just on addendum it might be worth noting the same has happened in our digital imaging in Canada DALSA we’ve seen strong bottom-line improvements and expect those to continue..

Got it.

And lastly Robert if you could, to the extent you are able to, you mentioned fairly robust pipeline, is there any sense as to areas that you might be more focused on?.

So Jim, one area that we’re keen on is being able to take a lot of data from our marine instrumentation and related businesses and develop that into set of data and image reader would available in the marketplace and this would be primarily non-oil and gas related.

The other area that we like, as we kind of going back to some of our environmental businesses and looking at those businesses again. Really we started our acquisitions very aggressively in that domain, but they got very, very expensive.

But now I think now some of that has moderated specially in the smaller companies that we’re interested in so we’re going to go back to those and we see some opportunities there Jim..

Okay, thanks very much. .

Thank you. .

Thank you. Our next question in queue will come from Michael Ciarmoli with KeyBanc Capital Markets. Please go ahead. .

Hey, good morning guys, thanks for taking my questions.

Robert just may be to stand on that theme of the second half, I mean, so it sounds like you’ve got better visibility into the defense electronic side, but operating income roughly flat first quarter to second quarter I mean there is a pretty big jump needed to get to that full year EPS number, I mean you’re going to have EPS growth 22% over the first half, I mean are there any other onetime items lower tax or anything else that you see adding to that.

I mean any other end markets that you see strengthen that might offset some of the weakening markets that we’re seeing?.

I think we’re going to have a little bit of upside in discrete tax items this year, the second half. Nothing like we did last year except if the R&D tax passes, but we’ve not baked that into our projection. But we do have a little tax there, but mostly it’s margin improvement in areas where we’ve taken serious cost out.

Some that we took out last two years like defense electronics some that we took out in the first half of the year and some that we are doing even now and expect to continue the rest of the year. So it’s a combination mostly it’s because of the market and cost reduction..

Got it. And then just lastly on that you guys sound really confident in that defense electronics and seeing may be a trough in that market in general, is there any risk at all around kind of the budget being delayed going into a continuing resolution.

It seems like you guys have pretty good line of side into those revenue streams?.

Yeah. There is always the danger with anything that relates to the government. Having said that, some of our orders that we have, for example in Traveling Wave Tubes which is one of our main state product our split between the U.S.

Government and overseas government and our commercial aviation of course is a different story, but I think some of our programs have legs on and we feel okay about that, the government obviously anything can happen in the government.

There is another part of our government businesses that we are kind of bullish about maybe not so much this year, but going forward and that’s in our engineered systems where we have some really good programs in the government domain..

Got it, thank you very much guys..

Thank you..

Thank you. Our next question in queue will come from Mark Jordan with Noble Financial. Please go ahead. .

Good morning, Robert..

Good morning..

Question to the oil industry, obviously the exploration segment of the industry is immediately impacted by precipitous decline in oil prices, whereby the development work is more longer-term in nature, what visibility do you have as how win those the lower energy prices potentially impact your development spending?.

Okay, great question Mark. As you said the seismic which is the discovery is done I am going to say over 30% and the other part of it land oil and gas that we play, which is production is down over 40%, but there we primarily supply cables and some connectors, in the water and also just energy in general, first we have good orders early this year.

So we expect to be able to hold our own the remainder of this year we think the production may go down a little more than it already has, but we are in a way very fortunate in that we are gaining share, we’ve very aggressively reduced our cost in oil production, both in terms of supply chain and in terms of our own engineering and production cost.

And lastly, we are bringing new products both in optical connectors, Ethernet connectivity as well as high pressure, high temperature connectors and since we own a lot of that market specially the optical connectivity market and have a pretty strong position probably over 50% in the electrical everybody to reduce cost the oil companies are striving for standardization and we will become then the factor standard in that domain.

And there we also has processing the bottom of the ocean becomes much more robust they need more of our products, it’s a long of saying I think we will be okay in ‘15 in ‘16 probably we might go down a little bit everybody is projecting that ‘17 oil process will pick up as will production, but we are not counting on that right now we are reducing cost and hunkering down..

Okay.

Could you have any comments as to what your customers are saying in the semiconductor and electronics marketplace? I mean everything I guess read over the last couple of months is that there has been under performance vis-à-vis expectations in the first half, any sense on what your customer base is looking for in the second half?.

At least for us where, if we look at our for example, our DALSA cameras that serve that market. We had a slow first half in the electronic inspection market we expect to have some pick up in that domain because -- primarily because we’ve introduced new line scan products, which are coming out.

The only other part of so called semiconductor market that we participate in Mark is really our MEMS foundries in Bromont, Canada and there our business is really good, because we produce a lot of censors for a variety of applications including stability applications, microphones in your iPads et cetera, et cetera.

So as far as we are concerned we are doing okay there, also we do have some protocol test solutions for mobile devices, which are doing okay. So my visibility to the semiconductor market comes from those TWO different angles..

Okay, thank you very much..

Thanks, Mark..

Thank you. Our next question in queue will come from George Guttery with CLK [ph]. Please go ahead..

Thank you for taking my question, and good morning..

Good morning, George..

Good morning, Robert.

First question, just thinking about the instrumentation business as we look forward to 2016, if I look at 2013 the average quarterly run rate was $255 million in Q1 of 2014 the instrumentation revenue was $260 million and then this quarter $271 million if I back out $9.5 million incremental sales on the acquisition that gets me around $260 million, is that the right way to think about the base line level and instrumentation being roughly $255 to $260 million looking forward assuming no more shocks in the system currency or otherwise?.

I think George that’s pretty good. I couldn’t have said it better, that’s pretty good. Of course we’d always praying for positive shocks..

Yes..

But we have to say that also assumes George no new acquisitions in that domain..

Yeah, absolutely.

And then my second question is have you thought about what the Orion [ph] deal means for your business or had any feedback from the customers that you served both the ratification or acceptance of that deal means to your businesses?.

The immediate effect is going to be obvious, there is going to be more oil coming onto the market. They are going to pump as hard and as fast as they can. Having said that, I think that’s going to be a short-term effect for two reasons. In the long-term energy consumption is expected to grow by 30% in the next 20 years, driven by developing world.

Second, as you look at wells and oil specifically there is a continuing decline in the amount of oil that people are able to pump from the wells that decline is estimated to be between 5% and 7%, if you take somewhere in between that 5 million barrels of oil per day per year.

That’s just because oil wells, the productivity of the wells goes down, in fracking if not go down over the first two years by 50% or more in deep oil ocean it might go down over a five year period. But down that it goes there is no question about that.

So when you combine those two facts and when you look at Saudi’s oil is 90% of their government revenue and they are burning through their foreign reserves since October I think it’s been close to $50 billion.

What’s going to happen is there is other factors that are going to drive the price of oil up other than just on short-term uranium oil production..

Got it, thank you. And then just lastly on the EPS guidance.

Do you baked in any assumptions for share buyback in Q3 and Q4 with that guidance?.

No..

Great, thanks. Nice job on the management..

Thanks, George..

Thank you. [Operator Instructions] Next in queue is Steve Levenson with Stifel. Please go ahead..

Thank you. Good morning, everybody..

Good morning, Steve..

I know there is a lot of talk about M&A, but in the past you’ve considered selling units that may have matured and I’m just wondering if I know you probably don’t want to say what. But are there any things you are considering for sale now and what if so what do you think the proceeds might come in for? With the amount of the proceeds..

Thanks, Steve. Right now I don’t think I am in a selling mood I want to keep our revenue and spread our fixed cost across as much businesses as we can. There might come a day that we might to sell something, but right now I don't think so. I mean I am more of a buying mood Steve. .

Okay, that sounds good. You were talking about the laser eye protection. What sort of commercial market or even within business jet market is there for that? I know there have been a number of incidence recently and we don’t hear much about that product for the commercial market..

Yeah that product is Steve is a hugely sophisticated product, without violating anything you can have as many as 150 deposition layers of different kinds. And it’s totally under ITAR control. So I don’t think we can do that for any commercial markets plus it’s very expensive process.

There is cheaper processes for that other people can use for the commercial market. But we don’t know if anyone really using anything right now, because nothing bad has happened as far as I know recently..

Okay, thanks. And just going back to M&A side again, given that the values might not be so good for selling does that mean there are some opportunities for you to fill some holes.

Are there any holes that you feel you need to fill in some of the instrumentation product lines particularly?.

Yes Steve, I think there are opportunities in the -- in some environmental instrumentation that some sample preparations, sample also obviously analysis, that’s a very big field multiple types of processes. We own a significant chunk of that market, but there are significant number of other things that we are looking at.

That would be if I had my druthers that would be one of our primary areas, but this whole area of being able to take consolidated look at all the imagery that we get and being able to develop and deliver that especially marine imagery. That’s another interesting area for us..

Okay, last one I guess this one would be for Su; I hope I didn’t miss that. You often say how much total liquidity you have available. Did you mention that or if not could you mention that please. .

No I didn't mentioned it we have at least $500 million to $700 million of already available..

Got it, thank you very much. .

Thanks, Steve. .

Thank you. At this time there is no additional questions in queue. Please continue. .

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

Thank you, Robert. And again thanks everyone for joining us this morning. If you have follow up questions of course please feel free to call me the number listed in the earnings release and all our news releases are available on our website Teledyne.com as well is the webcast.

Operator if you could conclude toady’s conference and provide the replay information we’d appreciated..

Thank you very much. And ladies and gentlemen this conference will be available for replay after 10 AM Pacific Time today running through August 30th at midnight. You may access the AT&T executive playback service at any time by dialing 800-475-6701 and entering the access code of 359796. International participants may dial 320-365-3844.

Once again those phone numbers are 800-475-6701 and 320-365-3844 using the access code of 359796. That does conclude your conference call for today. We do thank you for your participation and for using AT&T’s executive teleconference. You may disconnect..