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

Jim Ricchiuti - Needham & Company Chris Quilty - Raymond James George Godfrey - CLK Howard Rubel - Jefferies.

Ladies and gentlemen, thank you for standing-by. And welcome to the Teledyne’s First Quarter Earnings Conference 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].

And also as a reminder, today’s teleconference call is being recorded. At this time, we'll turn the conference over to your host, Mr. Jason VanWees. Please go ahead, sir..

Thank you, Tony, and 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 2016 earnings release conference call. We released our earnings earlier this morning.

Joining me today are Teledyne’s Chairman, President and CEO, Robert Mehrabian; Chief Operating Office, 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 this earnings release and our periodic SEC filings, and of course actual results may differ materially.

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

Thank you, Jason, and good morning, everyone. We started 2016 with record orders, with a book-to-bill of over 1.2, driven by strong bookings across the majority of our government businesses. While some industrial sectors, especially energy, remain weak, those markets appear to be stabilizing.

For example, total book-to-bill for our instrumentation segment was just less than 1 or 0.98. Nevertheless, we are maintaining our emphasis on cost control and strong operating discipline and we are currently implementing in significant additional cost reduction actions, especially within marine instrumentation.

Specifically, in the second quarter, we will exit approximately 2,000 square feet of facilities or roughly 4% of our total footprint. These actions and the boundary [ph] initiatives we took, starting in 2013 through 2015 largely within our aerospace and defense businesses and together we'll eliminate collectively approximately 11% of our footprint.

By maintaining our reduced footprint and manpower, while the defense market improves, we were able to report record operating margin in our aerospace and defense electronics segment. I should note that while we are reducing manufacturing costs, we have not wavered on our commitment to innovation and new product development.

In fact, internally funded R&D as a percentage of sales was nearly a record in the first quarter, coupled with relevant externally funded R&D, we spend approximately 11% of our revenues on new technologies and product.

Finally, we generated record free cash flow for any first quarter, allowing us to complete three acquisitions early in the second quarter with a minimal increase in net debt compared to year end 2015. As we have noted in the past, our balanced business portfolio is not dependent on any single product or market.

For example, one year ago, our aerospace and defense businesses comprised less than 35% of sales. In the first quarter of 2016 that represents more than 44% of our total sales. In the first quarter of 2015, marine instrumentation accounted for 28% of total sales with nearly two-thirds of marine sales coming from oil and gas market.

A year later total marine instrumentation represented 21% of sales in the first quarter of 2016, with approximately half or just 10% of our total sales from oil and gas exploration and production.

In summary, over the last three years, we have been able to successfully manage change, while at least one part of our business portfolio was under severe pressure. We have been able to reasonably manage revenue and GAAP earnings as well as permanently reduced our cost structure and acquire complementary businesses.

In the years, following the 2008 financial crisis, we are generally able to maintain revenue, margins and earnings. Once market stabilized, we experienced strong growth in sales and earnings, as well as greater pace of M&A activity from 2011 through 2014. I now believe that the period of U.S.

government sequestration and its consequences has concluded and the worst of the declines in the energy market have dissipated. Thus by early 2017, we should again be able to enter another period of multi-year growth. Turning back to the quarterly results. GAAP earnings per share of $1.10 decreased from last year’s $1.20.

The $0.10 decline largely resulted from the 6.1% decrease in revenue and a modest decline of 41 basis points in operating margin and some foreign currency headwinds partially offset by a reduced headcount.

Sales to international customers decreased, but this was almost solely due to lower sales of marine instrumentation related to oil and gas exploration and production and the decline was partially offset by increased overseas sales of environmental and electronic test and measurement instruments as well as avionics.

I will now briefly comment on our business segments 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 2016.

First quarter sales in our instrumentation segment decreased 17.2% from last year, sales of marine instrumentation decreased almost 29%, due to lower sales of interconnect systems and other marine sensors and systems for energy exploration and production. This was partially offset by higher sales of interconnect and marine systems for U.S.

government application. Year-over-year comparisons for the marine instrumentation will also be especially difficult in the second quarter, but will then ease in the second half of 2016. In the environmental domain, sales increased 1.6% and it reflected a continued growth International sales of ambient air analyzers used in pollution control.

Sales of electronic test and measurement systems declined $1 million where International sales increased slightly but were offset by lower domestic volumes. Early in the second quarter we completed two strategic acquisitions for Teledyne LeCroy’s Telecom Solutions Group.

Protocol analyzers are used by engineers to troubleshoot data communication systems and test interoperability compliance and interference among electronic devices such as smartphones, PC video cards and automotive infotainment system.

Specifically, Teledyne LeCroy was already the market leader in protocol testers for serial data centers like universal serial box or USB and peripheral component interconnect express or PCI express and show quantum [ph] data and front line our two new acquisitions we will provide leading products for high-definition multimedia interface or HDMI, Bluetooth and Wi-Fi.

Turning to digital imaging segment, first quarter sales were essentially flat with last year, while GAAP operating margin declined about 17 basis points, primarily due to lower revenue of traditional space based infrared sensors. Revenue and margin both increased in our core Teledyne DALSA business.

Yesterday, we announced that we closed the acquisition of CARIS, the leading developer of geospatial software designed for hydrographic and the marine community.

While CARIS will work closely with our marine instrumentation businesses, its capabilities in software development and its operating locations more closely aligned with our imaging group in Canada.

Turning to aerospace and defense electronics segment, first quarter sales increased 8.1% organically from last year as both US defense sales and commercial sales globally increased during the quarter. In addition, bookings were strong in both major end markets with a book-to-bill of 1.15.

As mentioned earlier, segment operating margin was a record increasing 205 basis points from last year. In addition, in our earnings this morning, we announced the pending divestiture of a non-core business from this segment. While Paradigm printed circuits has been part of Teledyne for over 15 [ph] years.

The planned divestiture is consistent with our ongoing evolution and focus on high technology, high margin proprietary engineered product. Turning to the engineered system segment, first quarter revenue increased 1.9% and operating margin increased to 182 basis points.

Sales increased from nuclear and environmental programs that will partially offset by lower shipment of hydrogen generators and cruise diesel engines. In summary, before turning the call over to Sue, I did want to add some color regarding the second quarter and the remainder of 2016.

Over the next few quarters, but especially in Q2, we will be incurring significant severance and lease termination costs as well as M&A transaction expense for the recent three acquisitions and the divestitures announced this morning.

Our outlook does include these charges on a GAAP basis, but the outlook also assumes a gain on the sale of a real estate no longer needed, especially as a result of our prior [ph] facility consolidation.

Thus, the Q2 income statement would likely be a bit complex with severance, lease termination and M&A costs spread among our segments and with the potential of real estate sales appearing in other income. 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 2016 outlook. In the first quarter, cash from operating activities was $69.1 million, compared with cash flow of $16.7 million for the same period of 2015.

The higher cash provided by operating activities in the first quarter of 2016 primarily reflected lower annual bonus payments and lower income tax payments partially offset by lower net income.

Free cash flow that is cash from operating activities less capital expenditures was $54.9 million in the first quarter of 2016 compared with $9 million in 2015. Capital expenditures were $14.2 million in the first quarter compared to $7.7 million for the same period of 2016.

Depreciation and amortization expense was $21.1 million in the first quarter compared to $23.2 million for the same period of 2015. We ended the quarter with $636.3 million of net debt that is $719.5 million of debt and capital leases, plus cash of $83.2 million for a net debt-to-capital ratio of 30.8%.

In April, we acquired three businesses for initial purchase price of approximately $60 million. Turning to pension and stock compensation expense.

In the first quarter of 2016, gross GAAP pension income was $0.5 million compared with gross pension income of $0.2 million, which included a one-time gain related to a partial pension fees in the same period of 2015. For reference, our pension, which is primarily for legacy retirees remains fully funded.

Stock option compensation expenses was $3.3 million in the first quarter of 2016, compared with $3.8 million in the first quarter of 2015.

Finally, turning to our outlook, management currently believes that GAAP earnings per share in the second quarter of 2015 will be in the range of $1.20 to $1.26 per share and we are an affirming our full year 2016 earnings per share outlook of $5.05 to $5.15.

As Robert mentioned, the second quarter and full year outlook includes severance, lease termination and other facility consolidation costs expected to be offset by a gain on the sale of real estate, no longer needed as a result of facility consolidation. The 2016 full year effective tax rate excluding any discrete items is expected to be 28.8%.

I will now pass the call back to Robert..

Thank you, Sue. We would now like to take your questions. Tony, we are ready to proceed..

Thank you very much. [Operator Instructions]. Our first question will come from Jim Ricchiuti with Needham & Company. Please go ahead..

Good morning.

I am wondering, if you can perhaps, if you are in a position to size the gain that you anticipate on the sale of the real estate?.

I think, it might be somewhere between 12 million to 15 million, because it depends on the taxes that we have to pay there and we know what the cost basis is, but the taxes are going to be higher than our normal taxes that we have for the company, because it is a real estate gain..

Okay. And Robert, I wonder if just in light of the - what you are seeing from a booking standpoint, can you give us some sense as to how you are viewing the business by segment over the balance of the year, even directionally how we should think about it? Thanks..

Sure, Jim. I think instruments will be down in the second quarter versus last year as it was in the first quarter primarily due to oil and gas and then it will flat in the remainder of the year. The bottom-line if you go to digital imaging we think we’ll get a little uptick for the remainder of the year we could be up in the single-digit.

A&D which is our aerospace and defense for the full year should again be in the single-digit probably about 7%. Engineer systems I think will be flat, but instruments could be down for the whole year as much as 10%. So we’ll end the year may be a little down year-over-year, may be a percent or two..

Okay, that’s helpful. I'll jump back in the queue. Thank you..

Thanks, Jim..

Thank you. [Operator Instructions]. Next in queue is Chris Quilty with Raymond James. Please go ahead..

Robert, just as a follow-up to the revenue outlook, any significant changes in the margin and I guess I would say excluding the severance or maybe we should just use the severance since you stick with GAAP?.

I think overall our margins are going to be relatively flat for the year maybe we’ll get a little uptick, it could be as high as lets us say 50 basis points, but it is going to be pretty complex year if you see our segment margins that would be different from operating margin for the whole company, because in the segments, we'll take the charges and then in the operating of the whole company reflect the gain.

So, I would say flat to 50 basis points in the bottom-line..

Got you. On the aerospace and defense business, I guess focusing specifically on the government DOD side.

Are there any particular areas that you’re seeing strength, is it a particular technology or programs or a service branch that you’re seeing the most gains from?.

I think in general we have in our communication businesses especially in electronic warfare we’re seeing some strength both in the US government, but also foreign governments. For example, we do have a fairly sizeable program with the South Koreans for their missile defense systems.

Also as you know we have the program, this SWSC's ph] program for the shallow water combat system that is coming along really well and we're entering production now. And then finally, I would say in some of our satellite communication programs and some of our other programs related to space, we’re seeing some increases.

Logistics agencies really have begun increasing their procurement, so that’s helping that..

A clarification is the shallow water combat I thought that at least originated in the engineered systems..

It is, but it also draws some products from other segments as well, including marine for example.

But also we’ll probably be providing some other sensors for that system from all of our segments as we do most of the engineered systems, Chris use this product from other groups such as we have this letter from combat ship frontline interrogation using our gliders while the sales brought up engineered systems, the gliders are made in our marine program.

They have the system integrators for a lot of this product..

Got you.

And years ago, you kind of dialed back your focus on the DOD market correctly, assessing that we were going to hit a bit of an air bubble in terms of budget and demand and downturns, what’s your prospects here looking out over the next three to five years, is this an area where you now think you might invest more or do you have a right portfolio as it stands?.

That’s a good question Jim. I think the defense market has stabilized. I don’t see a big upside at this time. On the other hand, we are switching a lot of our products from other businesses into defense to give you one specific example, we’re suffering in our interconnect technologies in oil and gas.

We have the prime position on how penetrators for electric and optic communication for example in submarines both Virginia class and the next set that will become a long Ohio class.

And so in those areas we might increase some content by making the acquisitions, but by and large, I think our defense portfolio is fairly well-balanced at this time, is somewhat I see..

Okay.

And switching over to the aerospace side, where does the portfolio stand there, you’ve made a couple of small acquisitions in the last several years, but again, is it more internally or M&A focused?.

In the aerospace side, I think we track between the predominant position in the areas that we play in specifically in data acquisitions and then ability to wirelessly send the data to operating centers of the airlines. There are and then many acquisitions in the domain for us. The couple of people that compete with us are larger companies.

And I don't think they would want to divest this. And so I think Chris, if we find something obviously we buy, but right now we don't see an opportunity for acquisitions Chris in that domain..

Great and I missed the very earliest part of the call, so maybe this is redundant.

But, Robert's view on the oil and gas bottom and where it's happen, whether it's happen?.

As you tell this one. Everything that I know says that the bottom we pretty much in the bottom. I think from a Teledyne's perspective, year-over-year comparisons with the low. We don't see some negative comps in Q2. But do - that for we should flat enough.

All the people that discuss oil and gas are saying in 2017 prices should be somewhere between $50 and $60.If that were to happened, then I think we'll get some uptake in our business as, because concurrent with that there is some increase in subsea Christmas Tree which grow on top of well heads and amount of pool.

Also there will be some land based investment in oil and gas and all of those would help us greatly. What has happened in the industry because of the downturn people have really lowered their prices operating and production and drilling expenses.

And a lot of the areas that we are familiar with whether it's land based whether it's offshore midwater or Deepwater. All of the breakeven prices have come significantly down. And we think in those kinds of price ranges things will start picking up slowly, but they'll pick up..

Got you. And did you feel any impact from the Halliburton, Baker Hughes..

Not directly, but you saw Halliburton's earnings yes they're they. And of course their land based services business are done and overall drilling in the past year and half has gone from we have the - I think about 1900 range out there mostly land based that down to 400.

So the effect for us is been indirect, so the combination would not have affected this that I know..

Great. Thank you..

Thank you, Chris..

Thank you very much. [Operator Instructions]. And you have a question coming from George Godfrey with CLK. Please go ahead..

Thank you. Good morning, gentlemen. Wanted to ask Robert, I don't want to put words in your mouth, but if I look at the book-to-bill of 1.2 easier comps and growth, and hurt the growth outlook on the revenue segment business. You really feel like this could be a bottom here across each of the segment maybe instrumentations will weak.

But as I look at the aerospace I mean 8% growth year-over-year. I mean as far as I can see that I think that's largest year-over-year growth and at least 3 years..

So, you're right, George. I think it's a healthy book-to-bill, but remember this is better than anyone. When you have a book-to-bill you measuring it against current billings. And our current billings as you see are not that vibrant. So in aerospace and defense you're very correct.

I think in some of this is the longer-term, but nevertheless having said that once, we get through Q2, I think we're going to seeing some uptake in everything in our company..

Okay. And you talked about the price oil getting back to $50 and $60 and how that helps the breakeven. And talking adjacent and when you brought some of these instrumentation business as the price of oil was closer to $35. So if have to be in this 40-ish range call it not over 50.

And that still be a profitable growing business moving away from '16 into '17..

I believe so it's profitable now, our oil and gas business is our profitable..

Not - of words, I mean growing..

Yeah growing. I think we can grow, what's happening is that we are fortunate in that we have been investing in our product and what does happen is that, because people are reducing cost and we have reduced cost for example in Q2 how we reduced that cost very significantly in that area.

Yes, as markets we see, we have increased content, we have new product and we think that that will improve we have programs that have to do with high reliability underwater program. We also have last year we have this year more but last year we have $15 million of sponsored research on our oil and gas customers for underwater product development.

So, we think we can enjoy that. If we can do okay at oil at the $40 plus. The other thing is this not going to move the needle for the company as much anymore because as I indicated before oil and gas now is only about 10% of our portfolio.

Where we'll then gain share is introducing products from our connectors and other things in oil and gas in our defense market. So we didn't expect..

And last question, recognizing that Q2 will have a lot of moving parts and hoping to reduce some little complexity. Guidance for the quarterly EPS and then for the full year. What are you assuming on the share count? I noticed the share count down about $500,000 here from Q4 to Q1 with no buybacks according to the press release..

I think the share count will go up a little bit maybe a little over 35, maybe 35.3 for the full year. Right now we are not planning, at this time any share buyback. Because we have a fairly nice channel of acquisitions [indiscernible] acquisitions. Our preference always is George to buy businesses.

And our stock is higher - when we last time we brought our stock it was in the $72 to $74 range. And now it's closer to what about $92 and I haven't look at it really. But so the gain you get from the share buybacks is decreased.

If we spend a $100 million at the stock plus that they certainly buy or so it would benefit to $0.60 in earnings today that would benefit to $0.11 in earnings. So it's also diminishing business plus as I said our preference is to buy business.

So I think share count will up a little bit partially because now some of our options will also be kicking in..

Understood. Thank you very much for the commentary..

Thank you..

Thank you. [Operator Instructions]. Next in queue is Howard Rubel with Jefferies. Please go ahead..

Thank you. Good morning..

Good morning, Howard..

Robert after not doing deals for a while all of a sudden you've stepped in and you've done some and you’ve done in markets other than oil and gas.

What do you see that's different or how did you come across these that were as complementary as you think that can be?.

Well, Mark has a lot to do with this Howard. It's some of this like the CARIS acquisition we've been at that point for over two years. And it's a perfect - it's not oil and gas. It's hydrographic survey that people used them to make charts for all commercial as well as military open water travel.

But on the other the protocols we would like you to that they came along and we have that optionality from LeCroy. We have others in the hopper, the problem is Howard that as you will know some of these businesses that we buy actually all the ones that we brought a private business.

And it has a lot to do with the individuals at start of the business and growing it whether it's time for them to take some chips off the table. I'm hoping that this will continue, but we have a lot in the hopper, but I don't know it will close; part of it is what we willing to pay and. and as you well known you've known this for a long time.

We are not likely to pay our [indiscernible] amount for acquisitions. Because they would not be accretive. So I think luck has a lot to do with it..

The just to follow on that though. I mean even though the debt is up the reality is the cost of money is still very attractive. So is there any thought in terms of where you would like to take I mean are the same balance sheet metrics that applied in the past is still appropriate for you today..

I think our balance sheet is in really good shape right now. Right now we're below 2 in that EBITDA. And if we don't do anything that will go out by themselves. I think we can move up to 2.5, Howard that's kind of our internal matrices that we've setup. And the other thing is some of our debt is of course not line of credit.

It comes to over certain period. And we've been fortunate enough to spread that over many years. So none of it comes to at once. So I think we have a lot of dry powder. I would say $500 million $600 million if we have to use it we would..

I hear you. Thank you very much for your time..

Thank you, Howard..

Thank you. [Operator Instructions]. We do have a follow up from Chris Quilty with Raymond James. Please go ahead..

Actually my question was answered but something else I was thinking about. With the engineered systems business, it was very heavily service centric and you put a lot of effort in recent years into leveraging some of the manufacturing capability there.

Would you consider bidding on the opportunity to build President Trump's wall?.

I know you're putting beyond that..

All right, well my question was answered. Thanks..

Thank you. Thank you, Tony. I would now ask Jason to conclude our conference call. Jason..

Thanks Robert and again thanks everyone for joining us and if you have follow up questions certainly feel free to call me it's the number on the earnings release. Tony, if you could give the replay information and conclude the call, we'd appreciate it. Thanks, everyone..

Thank you, ladies and gentlemen. This conference will be available for replay after 10 AM Pacific time today running through June 5 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 387044. International participants may dial 320-365-3844.

Once again those telephone numbers are 800-475-6701 and 320-365-3844 using the access code of 387044. And now it does conclude your conference call for today. We do thank you for your participation and for using AT&T executive teleconference. You may now disconnect..