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

Greg Konrad - Jefferies Mark Jordan - Noble Financial Group Jim Ricchiuti - Needham & Company Steve Levenson - Stifel Nicolaus & Company Michael Ciarmoli - KeyBanc Capital Markets George Guthrie - C.L. King & Associates.

Ladies and gentlemen, thank you for standing by, and 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, today's conference is being recorded.

Now I would like to turn the conference over to 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, and I want to welcome everyone to Teledyne's third quarter earnings release conference call. We released our earnings earlier this morning before the market-open.

Joining me today are Teledyne's Chairman, President, and CEO, Robert Mehrabian; Executive Vice President and COO, Al Pichelli; 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.

Of course, before we get started, our attorneys have reminded me to tell you that all forward-looking statements made this morning are subject to various assumptions, risks and caveats as noted in the earnings release and our periodic SEC filings. And, yes, actual results may differ materially.

In order to avoid potential selective disclosures, this call is simultaneously being webcast, and the replay both via webcast and dial-in will be available for approximately one month. Here is Robert..

Thank you, Jason, and good morning, everyone. Before commenting on the results, I would like to say a few words about the adjustment to our earnings outlook that we made earlier this month. At the time of our last earnings call on July 30, monthly sales were healthy and orders were reasonable, with a book to bill of just over one in July.

As the quarter progressed, August sales were seasonally weak, which was not a surprise. However, while September improved from August, sales of marine and electronic and personal measurement instrumentation did not recover as planned and were lower than previously forecast.

While we expected and achieved a sequential increases in sales of digital imaging systems and aerospace and defense electronics, contraction in the aforementioned instrumentation businesses consumed more than the incremental profit. Hence, we should revise our outlook.

Despite weaker revenue and increased cost reduction charges, GAAP -- and I emphasize GAAP -- operating margin improved from last year and was the highest level so far in 2015. GAAP earnings per share of $1.34 decreased from last year's $1.47.

However, I should note that greater severance charges, pension expense and taxes, netted against the reduced share count, collectively accounted for approximately $0.06 per share of year-over-year headwind.

Third-quarter sales of $555.4 million declined 7.6% compared to last year primarily due to lower sales in our instrumentation segment as well as timing of certain deliveries in our engineered systems segment.

Foreign currency translation primarily impacted our instrumentation and digital imaging segment, but acquisitions helped more than offset this decline. Sales to international customers decreased due to lower demand for marine and test and measurement instrumentation as well as foreign currency translation.

However, total sales to Asia increased modestly, given strong sales of its environmental instrumentation and aerospace and defense electronics. We are continuing to take aggressive cost-reduction measures, and we have reduced total headcount by 5.4%, or by 531 employees year to date, in response to some challenging markets.

Furthermore, the Company's full-year 2015 outlook includes estimated pre-tax severance charges totaling approximately $8 million.

At the same time, we have completed approximately $200 million worth of acquisition and share repurchases through the mid-third quarter, and we announced this morning another planned share repurchase of approximately $100 million.

I will now comment on our business segment, after which Sue Maine will review some of the financials in more detail and provide an earnings outlook for the fourth quarter and full year 2015. Turning to our instrumentation segment, third-quarter sales decreased 13.3% from last year's.

Sales of marine instrumentation decreased 18.5% due to a significant and expected year-over-year decline in sales of geophysical sensors used for offshore energy exploration as well as interconnect systems, or land-based energy applications, and some marine sensors and systems.

Sales of interconnect systems to the offshore energy production industry remain relatively resilient.

In the environmental domain, sales increased about 2% and reflected strong demand for ambient air gas analyzers and emission monitoring systems used in pollution control applications, partially offset by decreased sales of some laboratory instrumentation.

Sales of electronic test and measurement systems declined 16.2%, where sales to Europe, excluding currency, performed reasonably well. But Asia, especially China, witnessed the greatest decline. However, margins for these products continue to improve as they have done in the past, increasing year over year despite the lower revenue.

GAAP segment operating profit declined, and operating margin decreased 85 basis points due to lower sales as well as cost-reduction charges.

Turning to digital imaging segment, third-quarter sales increased slightly compared to last year primarily due to greater sales on commercial digital imaging systems, including machine vision cameras, x-ray sensors and sources, and laser-based mapping systems.

These were largely offset by lower sales of infrared imaging systems and from US government RFP contracts. GAAP operating profit increased 31.6% and operating margin increased 260 basis points. Turning to the aerospace and defense electronics segment, third-quarter sales decreased slightly from last year but increased sequentially as expected.

While U.S. Government sales declined year over year, our commercial avionics business continues to perform very well. GAAP operating profit increased 8.8%, and operating margin was 130 basis points higher than last year. Due to our cost-reduction effort, we expect to maintain the improved margins in the balance of the year.

Turning to the engineered systems segment, third-quarter revenue decreased 11.1%, and operating profit decreased 255 basis points. Sales reflected lower revenue from marine manufacturing programs due in part to timing, which we expect to recover in the fourth quarter.

In addition, lower sales of fixed-price energy system products such as commercial hydrogen generators and turbine engines impacted margins, as did additional pension expense. In summary, Teledyne continues to benefit from our balanced business portfolio and ongoing emphasis on cost control and strong operating discipline.

Over the last three years, we have reduced our manufacturing footprint by approximately 8% and our workforce by over 1,600, or over 16%, at a cost to Teledyne of over $30 million. Until this year, most of the permanent reductions in our cost structure were made in our government businesses.

As a result, and in combination with strong performance in the commercial aerospace market, we reported record operating margin in our aerospace and defense electronics segments. And we expect margins to improve further as the defense market begins to recover.

Our response to the current market challenges is consistent with the past -- stabilize revenue and consolidate facilities and businesses to improved margins. At the same time, we will leverage our unique technology and scale in key markets to develop new products and gain market share.

We also remain focused on acquisitions, which is a core competency of Teledyne. However, we have balanced capital deployment which share repurchases, especially at times when Teledyne's valuation is attractive. 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 fourth-quarter and full-year 2015 outlook. In the third quarter, cash flow from operating activities was $73.5 million, compared with cash flow of $80.2 million for the same period of 2014.

The lower cash provided by operating activities in the third quarter of 2015 primarily reflected lower net income and higher income tax payments. Free cash flow -- that is, cash from operating activities less capital expenditures -- was $63.2 million in the third quarter of 2015, compared with $71.1 million in 2014.

Capital expenditures were $10.3 million in the third quarter, compared to $9.1 million for the same period of 2014. Depreciation and amortization expense was $21.9 million in the third quarter, compared to $23.5 million for the same period of 2014.

We ended the quarter with $641.2 million of net debt; that is, $712.7 million of debt and capital leases, less cash of $71.5 million, for a net debt-to-capital ratio of 31.1%. On August 27, we priced $125 million of senior unsecured notes at a weighted average fixed rate of 3.19%. The notes will be issued on November 5.

Furthermore, as Robert mentioned, we plan to enter into a new accelerated share repurchase agreement of approximately $100 million pursuant to our current share repurchase authorization, of which 1.4 million shares remain.

In the third quarter of 2015, gross GAAP pension expense was $1 million, compared with gross pension income of $0.3 million in the same period of 2014. Stock-option compensation expense was $2.6 million in the third quarter of 2015, compared with $3.9 million in the third quarter of 2014.

Finally, turning to our outlook, management currently believes that GAAP earnings per share in the fourth quarter of 2015 will be in the range of $1.25 to $1.30 per share. We are increasing our full-year 2015 earnings-per-share outlook to $5.13 to $5.18 from a prior outlook of $5.10 to $5.17.

The 2015 full-year effective tax rate, excluding discrete items, is expected to be 30.8%. I do want to emphasize a few items regarding our current 2015 outlook compared to 2014.

First, greater pension expense due to a discount rate decrease of 90 basis points and changes in mortality assumptions, as well as increased severance cost, collectively impacted 2015 by approximately $0.15 per share.

Second, 2014 results benefited from significant discrete tax items and the 2014 R&D tax credit, which is not currently effective for 2015, as well as the lower tax rate. Collectively, these items generate approximately $0.30 per share of headwind for 2015 compared to 2014. I will now pass the call back to Robert..

Thank you, Sue. Before we start the questions-and-answers period, I wanted to note that I have personally 35,000 options that will expire in January 2016. I intend to exercise these options and use the net after-tax proceeds to buy and hold underlying shares. We would now like to take your questions.

Paul, if you are ready to proceed with the questions and answers, please go ahead..

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

Good morning..

Good morning, Greg..

Just wanted to start out with a two-part question. You mentioned the balanced capital deployment approach. I guess the first question tied to that is how should we think about your current capacity given leverage going forward.

And then as a follow-up to that, have you seen any change to the M&A market given the weakness you saw in September?.

Thanks, Greg. First, let me speak to the stock repurchase and the capacity. I would just note that our preference is always acquisitions. We -- after exercising the $100 million exonerated repurchase that we have, our debt to EBITDA will be about 2.1. On the other hand, by the end of the year we expect that to drop to 1.9.

So the $100 million that we're going to use now is really slightly less than two quarters of our cash flow. So we have a lot of capacity since our debt-to-EBITDA covenants don't kick in until 3.25. We will not probably never go that high.

But, having said that, we do have capacity to borrow anywhere between $600 million and $700 million with our current line of credit. So let me put that one and answer the second question. We have a group of companies that we're looking at -- smaller companies.

We have also, as I mentioned last time -- we looked at some larger companies at the same time. Unfortunately, what we're finding is that the larger companies have -- the ones that at least we have studied have a lot of problems. And it would increase our revenue, but it would not be accretive to our earnings for a reasonably long time.

So we are a little cautious with that. On the smaller company side, you have to have patience because a lot of these companies are run by entrepreneurs that have built up the companies, and it takes a reasonably long time of reporting before we are successful.

But I expect that we will keep buying bolt-on acquisitions while we at the same time look at some larger acquisitions. I hope that answers your question, Greg..

It was great and just one more. Admiral Caldwell, in his speech, he mentioned the importance for the Navy investing in undersea drones. Just wondering where you see the opportunities in that market and maybe some of the progress you've made..

Let me start with, first, the manned undersea vehicles for the Navy. As you know, we have a newest underwater, shallow-water combat vehicle for our special forces in development at Teledyne. We have a fairly large program for that. The first boat, which is the engineering model boat, is complete and it's undergoing sea trials at this time.

Very successful sea trials, I should note. So, building on our various undersea vehicles, both tethered and untethered, we've been successful in developing a new vehicle for the special forces which will have a long duration of a first low-rate initial production and then others increased productions.

We also have underwater sole-source drones, vehicles called gliders, for the Navy. These are the literal battle space glider program, LBS program, and that is -- records the Navy uses it to measure water temperature, depth to enable to do -- in salinity enable to accurately measure sound velocity.

And we have a lot of our sensor contents in all of the vehicles I just mentioned. Finally, there is a very large program -- Navy program that will probably be an RFT that will be issued, and that's a larger underwater vehicle -- a manned underwater vehicle. And we anticipate that we would be a participant in applying for that program..

Thank you..

Question from Mark Jordan with Noble Financial. Please go ahead..

Good morning, Robert. Question relative to the marine instruments segment. You obviously saw a decline in Q3 versus Q2.

When do you think that segment of the business will stabilize?.

I think -- because the segment has different parts to it, let me see if I can address the different parts. Overall, I would say it's fairly stable. I expect some declines in that segment next year primarily because of the effect of energy and the fact that almost most of our exploration businesses would go away.

So I think it's pretty much, Mark, stabilized because while we expect decreases in our energy -- assuming production as well as exploration, I think we expect some other pickups in the instrumentation business.

One of the facts that we haven't talked about too much is that in our instrumentation business, especially in the marine domain, we have been able to shift a lot of our work into the defense arena. For example, we have one small company, DGO, in New Hampshire that has revenues of about $45 million.

They lost about 40% of their energy products, which are penetrators, or metal glass seal penetrators, for oil wells at the bottom of the ocean. They lost a lot of that business, but they made it all up in their business in penetrators using submarines. So they are stable year over year.

And we have a whole bunch of other things going on we have within our gliders being used by the United Kingdom Ministry of Defense. As I mentioned, of course, our own. And we're using some of our [indiscernible] that are used for energy exploration for the U.S. Navy, who are obviously looking for sonar sounds.

So, overall, I think we're going to have some expected decrease in our energy marine businesses. But I think we will pick it up some other places.

I think we might see some modest declines in instrumentation, but I think we are -- we think we've fairly well stabilized that business for now and next year, and hopefully we will be well-set for significant growth as oil prices begin to recover..

Okay. Second question relative to severance, you mentioned in aggregate about an $8 million expenditure in 2015. I was wondering looking into 2016, do you have any meaningful strategic moves and consolidations? Like I guess in the past, you moved some of your defense business out of California and centralized it in a lower-cost environment.

Do you have any significant shifts planned for 2016, or should we expect that severance number to come down in 2016?.

I think the severance number itself will come down. We do expect further consolidation, especially in our marine businesses. We have now put all 23 of our products and businesses in marine under one umbrella, led by Mike Read, who leads our oil and gas businesses.

And we expect to do some more facility manufacturing consolidation there in areas like in Houston, Texas, and in Aberdeen in the UK. So we're going to continue facility consolidation, but I don't expect that this from what we know that there is a lot of future reductions in force..

Okay. Final question from me.

The notes that you are placing in early November, is that to fund a $100 million buyback and therefore we should assume that all of that occurs in the first half of November?.

The notes are really -- those were planned earlier. Those were part of our long-term plan of spreading our debt that -- our term debt. Spread them out over many years, and they don't suddenly mature. We paid off a certain amount in September, so this new one can kind of replace that. The money for the repurchase really comes from our line of credit.

And that one, we use for stock repurchase. And as we make cash -- as we generate cash. As I said, we generate more than $100 million in two quarters. Then we just pay down the debt, because that one you can draw and pay down readily, whereas fixed-term debt is something that matures over time..

Should we take, therefore, the stock out of our calculations, say, as of mid-November?.

I think that would be accurate, Mark..

Thank you..

Question from Jim Ricchiuti with Needham and Company. Please go ahead..

Thank you. Good morning. I wanted to just ask you about the digital imaging business, the sequential improvement that you showed, which I guess came more from commercial applications. And I just think that's kind of interesting just given the overall economic environment.

What's the outlook, Robert, for this business as you look out over the next couple of quarters?.

I think it's pretty good, Jim. The reason is that we have been introducing new products there. And we -- as you know from prior discussions with you, we have a brand-new set of products in our x-ray businesses.

Our CMOS products are very well received in the marketplace, and both in the operating domain as well as in the central domain, and so we're making some progress there. Now, also, you may recall we did purchase a small company that produces portable x-ray generators to go with our sensors, and that has helped. So I think it's a group of products.

And then some of our work in the laser, pulse laser, LIDAR imaging, accurate three-dimensional imaging -- some of those, we have introduced new products, and they are picking up. And so I would say x-ray, new CMOS cameras, as well as some LIDAR products are continuing.

And I'm hoping that in the future, our uncooled products would also have a positive impact. So I'm pretty positive. Just as importantly, Jim, what we really worked very hard to do is improve the margins, which is our Canadian operations. And those margins have been continuously improving.

The same, as I said, in test and measurement, the same things happening there, too..

And Robert, just on the topic of operating margins, looking at engineered systems, should we assume now that -- it sounds like you are expecting a little bit of a pickup in revenues in that area maybe related to timing of projects.

But should we assume that the operating margins in engineered systems start picking up and potentially get back into the double digits?.

I think in Q4 I expect we would -- our margins would pick up. They might even get close to double-digit. But, overall, the business that we have in engineered systems over time, it's a government business. Those are government products that -- primarily that we make. And I think the margins are going to be less than 10%.

That's just the nature of the business. On the other hand, we do have some really nice, stable, long-term programs like the shallow-water combat vehicle that I mentioned. We have NASA programs. We also have the upcoming multi-user, space-based -- international space-based camera devices.

So over the long term, I think we would have fairly stable revenue, but not exceptionally high margins..

Okay. Thank you..

Thank you..

Question from Steve Levenson with Stifel. Please go ahead..

Thanks. Good morning, everybody..

Good morning, Steve..

Robert, you mentioned that you would reduce footprint and headcount at a cost of $30 million.

But what are the annual savings resulting from those costs?.

For 2015 -- well, the actions we have taken in 2015, which is not all of what you just mentioned, that goes back three years. For 2015, I think our annual savings are -- approximate -- the annualized going forward of the order of $25 million or so.

Frankly, Steve, that's why with reduced revenue -- declined revenue -- we said over 7% this quarter versus last year -- our margins have actually moved up a little bit. As you know, to get revenue done, you have fixed costs. If you don't introduce cost savings, the margins are obviously going to decline.

We have actually been able to improve margins year over year, and this is the highest operating margin for 2015. That was the result of those cost savings..

Got it, thank you.

Second of all, on some of the reduced sales in Asia, if I understood that correctly, does some of that have to do with actual lower demand, or do you think some of it relates to the directed spending from governments over there?.

I don't know. There is lower demand, and then there's some funky things that happen like suddenly you get the Chinese government devalue the currency in the middle of the quarter. And so I don't know whether it's because of the change in the foreign exchange rate or whether it's a basic demand reduction.

I do know that in certain areas, like environmental instruments, especially the air quality, we've had gains in China. In other areas such as oscilloscopes test and measurement instrument, we have suffered because of the valuation. So it's a mixture. But I think demand in China is not what it used to be..

So it's more than just a timing difference; it's a little bit lower demand..

I think so..

Okay. Thank you very much..

And we have a question from Michael Ciarmoli with KeyBanc Capital Markets. Please go ahead..

Hey good morning, guys. Thanks for taking my question. Robert, just within the energy market's instrumentation, can you talk about what you are seeing in the pricing environment? And I think you have said you are not really expecting much out of that business.

But as we look at some of the big customers out there, the bookings really trending down, how much further down should we expect that offshore business to go next year?.

I think -- let me just correct you. You said I'm not expecting much. I'm actually expecting a lot from that area once the energy prices change. But in the short term -- I'll take your question for the short term. I think the exploration area is the hardest hit, and it's going to remain so. I think that's the last area that will come back.

We were down in our exploration business over 50% quarter to quarter this year versus last year. I expect that we did not do a whole bunch of that except for replacement of our streamers that are being used primarily because our customers are stacking their boats -- the exploration boats.

On the production side, we've seen that some moderation in demand, and some of our customers are actually experiencing some upside in that demand. In response to that, we've done a couple of things to stabilize our business. I think we're going to see some pressure on the business, but we also stabilize that business by doing three things.

First, we will cut costs. Very important. Because every oil production for service company is having to cut costs, and they're asking their suppliers to do the same. So that's the first thing. Second, with an increasing content, for example, we used to have on a given Christmas tree at the bottom of the ocean, our content was around $300,000.

Nowadays, our content has gone up to almost $1 million. So we were taking market share. And lastly, we're introducing not only new products in the optical and electrical connections but also high-powered, high-pressure connectors. But also we're standardizing our products.

I think what's happening in the industry is that there is a drive toward standardization of connectors -- undersea connectors, and we are the leaders in that area and we are doing that. So when you combine all of that, Mike, we're going to have some pressure from our production.

I think our book to bill is not going to be one -- it may be 0.9 -- but I don't expect it to go down as drastically as exploration has. Having said all of that, listening to people who understand oil a lot better than I do, oil demand internationally is increasing somewhere between 1 billion to 1.5 billion barrels per day per year.

Oil production is declining because of depletion of existing sources, but anywhere between 4 billion and 6 billion barrels per year. When you balance those two together, there has to be new oil production. The question is when.

Is it going to be improving late 2016 or early 2017, or is it going to be later than that? Most people say it should start recovering in 2017. So we're kind of sizing our business and waiting until that happens. In the meantime, we are enjoying some good margins in those businesses..

Got it. Thank you very much. That's all I had, guys..

Sure Mike..

We've a question from George Guthrie with CL King. Please go ahead..

Thank you.

Just a clarification, on the guidance for the Q4, the $1.25 to $1.30 in EPS, what are you using for a share count there?.

Right now, our share count is 36.2. I think we are counting about that, maybe a little less than that, because of these repurchase because the exonerated repurchase won't go into effect until it happens. You won't cover the whole quarter. We are already a month into the quarter, as you know.

So I'm thinking 36, maybe a little less, but not the whole repurchase..

Okay, so that's the follow-on.

So the whole repurchase is completed sometime by the end of the first quarter of next year?.

Oh, no. I think we will do the repurchase this November. It's just that….

The whole $100 million?.

Well, it's a whole $100 million. You realize 90% of it, so it depends on the stock price. You realize 90% of what you buy immediately; the rest of it trickles in later on. Having said that, if the stock price is, let's say, $90, then you get the -- a little over 1 million shares.

Having said that, when you do your model, you should keep in mind, George, one very important fact. This year, we did not issue any stock options to our people. Anyone at Teledyne. It's our intention -- we can't keep doing that. It's our intention to issue stock options -- at least, the Board's intention to allow us to issue stock options in January.

And that will use the significant amount of the share repurchase that we are doing -- we are going to do soon. So the shares will not go down as much as you model the future because we have issued probably over 500,000 shares of options..

Got it. Okay. Thank you..

[Operator Instructions].

All right operator, Paul. Thank you very much, everyone. I will now ask Jason to conclude our conference call..

Thanks, Robert. And, again, thanks, everyone, for joining. And certainly if you have follow-up questions, please feel free to call me at the number listed on earnings release. Again, all of our news releases are available on our website. Operator, if you could end the conference call and provide the replay details for everyone, we would appreciate it.

Thank you, and goodbye..

Ladies and gentlemen, this conference will be available for replay after 10 AM Pacific time today through November 29 at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code 366309. International participants dial 320-365-3844.

And those numbers are 1-800-475-6701 and 320-365-3844, access code 366309. That does conclude our conference for today. Thank you for your participation and for using AT&T teleconference services. You may now disconnect..