Jason VanWees - SVP, Strategy & M&A Robert Mehrabian - Chairman, President & CEO Al Pichelli - COO Sue Main - SVP & CFO Melanie Cibik - SVP, General Counsel, Chief Compliance Officer & Secretary.

Greg Konrad - Jefferies Jim Ricchiuti - Needham and Company George Godfrey - CLK Ben Klieve - Noble Capital Markets.

Ladies and gentlemen, thank you for standing by. Welcome to the Teledyne Technologies Fourth Quarter Earnings Conference Call. At this time, your telephone lines are in a listen-only mode. Later, there will be an opportunity for questions-and-answers with instructions given at that time. [Operator Instructions].

And as a reminder, today's conference call is being recorded. I would now like to turn the conference call over to your host, Jason VanWees. Please go ahead..

Good morning, everyone. This is Jason VanWees, Senior Vice President Strategy and M&A at Teledyne. And I would like to welcome everyone to Teledyne's fourth quarter and full year 2016 earnings release conference call. We released our earnings earlier this morning before the market opened.

Joining me are Teledyne's Chairman, President and CEO, Robert Mehrabian; COO, Al Pichelli; Senior Vice President and CFO, Sue Main; and Senior Vice President, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibik. After remarks by Robert and Sue, we'll 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 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's Robert..

Thank you, Jason, and good morning everyone. We ended 2016 with our best quarter of the year. The majority of our commercial businesses that is imaging for Machine Vision and life sciences, environmental and electronic test and measurement instrumentation, and commercial aerospace avionics all increased organically from last year.

Sales of marine instrumentation declined as expected, but comparisons are also expected to ease significantly in 2017. Orders across our government businesses continued to be strong and continue to year-end overall backlog which was approximately $120 million greater than last years.

GAAP earnings per share from continued operations were $1.49, excluding $0.16 of charges related to the pending acquisition of e2v, earnings were $1.65. I should note that our fourth quarter earnings outlook of $1.32 to $1.37 issued on November 3, 2016, did not include charges related to the e2v transaction which was announced on December 12, 2016.

Finally, full-year cash from operations and free cash flow were all time record each increasing over 50% from last year. Before I commenting on our business segment, I want to emphasize that sales and comparisons reflect the fact that the fourth quarter and full-year 2016 contained 13 and 52 weeks respectively versus 14 and 53 weeks last year.

So we had one less week this year in both the fourth quarter and the full-year to ship products. In the instrumentation segment, fourth quarter sales decreased 15.7% from last years. Sales of marine instrumentation decreased 33.2% due to lower sales of interconnect systems and other marine sensors for energy exploration and production.

Throughout the last two years sales at marine instrumentation to defense markets have helped mitigate the decline due to energy. The long-term outlook for our products for U.S. submarine programs as well as our autonomous underwater vehicles remain very attractive.

In the environmental domain, sales increased 5.7% and operating margin and operating profit also increased largely as a result of continued growth in our pollution and particulate monitoring instrumentation. Sales of electronic test and measurement systems increased 14.5% overall.

Sales of protocol analyzers used by engineers to troubleshoot data communication system and test interoperability continued to be very healthy. While GAAP segment operating profit declined, and operating margin decreased, this was solely due to lower sales and margins within the marine instrumentation.

Margins for both our environmental and electronic test and measurement instrumentation product lines were at record levels. Turning to digital imaging segment, fourth quarter sales increased 8.6% and operating margin increased 253 basis points.

The increase in sales primarily reflected greater sales of machine vision; cameras for industrial and semiconductor application, X-ray detectors for life sciences, microelectromechanical systems or MEMS and geospatial software and laser based mapping systems.

Sales of infrared sensors and government funded research decreased slightly year-over-year but orders were very strong with our government based backlog increasing over 45% in this segment.

In the aerospace and defense electronics segment, fourth quarter sales increased 2.2% organically from last year primarily as a result of increased sales of commercial avionics. Segment operating margin increased 410 basis points from last year to 19.2%.

In the engineered systems segment, fourth quarter revenue decreased 15.6% and operating margin improved 389 basis points. The lower revenue resulted from a difficult comparison and the timing of deliveries from certain marine manufacturing programs which were partially offset by increased sales of cruise missile engines.

In conclusion, I am most excited compared to anytime in our history about our current business portfolio and the overall outlook for our end markets.

Over the last few years, with endured cuts to the defense spending, followed by severe decline in offshore energy markets, nevertheless, we have responded aggressively by reducing our costs, and in 2016, we achieved record operating margin in the third quarter, we generated record full-year cash flow, and we were largely able to maintain GAAP earnings even including e2v acquisition-related charges.

We are a much leaner company today for the first time in years. There is no obvious storm on the horizon for Teledyne or our largest end market. In addition, I'm personally also very excited about the pending acquisition of e2v.

From industrial machine vision to space-based imaging, microwave devices spanning radar to radiography -- radiotherapy and specialty semiconductors to microelectromechanical system, our combined market capabilities, and engineering centric cultures are truly a great hit. Our smaller acquisitions in 2016 were also significant.

We enhanced our software capabilities and our participation in life sciences markets. We also added key product lines to some of our best performing businesses. Finally we divested a lower margin bill to print business; we inherited in our spinoff 17 years ago.

Looking forward, and excluding e2v, we currently expect modest overall revenue growth in 2017. We believe most of our commercial businesses will grow, sales of marine instrumentation comparison will be relatively stable, and our government businesses will see a recovery as we deliver on our improved backlog. I will now turn the call over to Sue..

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 first quarter and full-year 2017 outlook. In the fourth quarter, cash flow from operating activities was $63.9 million compared with cash flow of $61.1 million for the same period of 2015.

The higher cash provided by operating activities in the fourth quarter of 2016 primarily reflected lower income tax payments, partially offset by higher working capital.

Including a facility purchase with the use of restricted cash pursuant to a 1031 like-kind exchange, free cash flow that is cash from operating activities less capital expenditures was $40.7 million in the fourth quarter of 2016 compared with $45.7 million in 2015.

Capital expenditures excluding the facility purchase was $16.7 million in the fourth quarter compared to $15.4 million for the same period of 2015. Depreciation and amortization expense was $22.1 million in the fourth quarter compared to $22.2 million for the same period of 2015.

We ended the quarter with $519.2 million of net debt that is $617.8 million of debt and capital leases less cash of $98.6 million for a net debt to capital ratio of 25.0%.

Regarding taxes, while the fourth quarter of 2016 contained discrete tax benefits of $9.4 million or $0.26 per share, the fourth quarter of 2015 also contained discrete tax benefits as well as the retroactive adoption of full-year 2015 R&D tax credits which collectively contributed $7.2 million or $0.20 per share last year.

Turning to pension and stock compensation expense, in the fourth quarter of 2016, pension income was $0.6 million compared with pension expense of $1.1 million and for reference our pension which is primarily for legacy retirees remains fully funded.

Stock option compensation expense was $2.8 million in the fourth quarter of 2016 compared with $2.5 million in the fourth quarter of 2015.

Finally turning to our outlook, management currently believes that GAAP earnings per share from continuing operations in the first quarter of 2017 will be in the range of $1.15 to $1.17 per share and for the full-year 2017 our earnings per share outlook is $5.40 to $5.50.

The 2017 full-year effective tax rate excluding any discrete items is expected to be 28.0%. Please note that our current outlook excludes e2v and corresponding transactional related expenses. I will now pass the call back to Robert..

Thank you, Sue. We would now like to take your questions. Alan, if you're ready to proceed with the questions-and-answers, please go ahead..

Absolutely. [Operator Instructions]. We will go first to the line of Greg Konrad with Jefferies. Go ahead..

Good morning. You had in digital imaging you had mentioned that backlog was up and you expected better volumes for DOD going into 2017.

Can you maybe discuss what drove that backlog increase and maybe the cadence of some of that backlog turning to revenues?.

Good morning, Greg. Thank you. There are really two areas. The first one is as you may recall we make laser spectacles for laser eye protection and we have a fairly large program with the Air Force on that which we announced last year.

The second one, the second area which is of great interest to us is in the national space or what we refer to as classified programs. Historically we have not participated very strongly in that domain and we have made some really very good strides in introducing new infrared sensors and detectors in that -- in those businesses.

So those two are the primary drivers. We also have of course significant other programs but in terms of new increases, those would be the ones..

Thank you.

And then just in oil and gas, the comps obviously are better in 2017, what are you seeing in terms of order activity and is it too early to call the bottom and may be modest growth or flat going from here?.

I think right now if you listen to everyone, people think that at least in the oil and gas domain, we probably have been or close to have or have hit bottom. And for example, the number of subsidiaries that are used in exploration and production especially production, they were at the lowest level in 2016 and are expected to grow somewhat in 2017.

Our overall book-to-bill in the marine business was about 0.96 for the year.

So we still think there might be a little difficulty in the comps but nothing like we experienced this past year because -- partially because what has happened to our marine businesses is oil and gas back in 2014 used to be 60% of those businesses and science, construction, defense, security, and other businesses that we have underwater were 40%.

With the serious declines that we've seen in the last two years that has flipped over, so oil and gas is more like 40% and the remainder of our marine businesses are 60%. And as I mentioned in my earlier comments, our defense businesses in the marine domain are improving and we have really long-term contract.

So I think the comparisons are going to be easier obviously. We might see a little downside but everybody is predicting a pickup in late 2017..

Thank you.

And then just quick housekeeping sorry if I missed this but what is your assumption for pension income in 2017 versus 2016? And then also do you have any restructuring included in the 2017 numbers?.

I think in the pension we anticipate that discount rate will go down but we know it's going to go down so much. So overall I would say the 30 or 40 basis points will drive our pension income down by about a nickel. On the second part of the question I don't -- we don't have any restructuring charges.

Greg, as you know in our history, we've always have been a GAAP company, GAAP, everything has been GAAP; we've always kind of swallowed our one-time charges, restructuring charges, and also acquisition charges.

The only thing I anticipate in 2017 is significant from our perspective, significant charges related to acquisition of e2v and that could be significant for us, it could be as much as $30 million which we probably cannot totally absorb as we have with our previous [indiscernible] acquisitions..

We'll go next to line of Jim Ricchiuti with Needham and Company. Please go ahead..

Hi, good morning.

Couple of questions Robert I'd be interested in your perspective on e2v acquisition, what is it that really excites you about the business and given that there is a similar portfolio of businesses of e2v, how should we think about the speed with which this business can be integrated?.

Let me start by saying that while the businesses are similar they're very complimentary. For example, Jim, in the sensor domain our focus historically has been and our strength have been in infrared sensors. For example we practically or the major player in infrared sensors, both sensors, both for space imaging as well as drawn based astronomy.

e2v is exactly the mirror image of us expect they are in the visible imaging domain, actually the seven or eight programs that currently aware of that we acted in, we provide the infrared images, sensors, detectors, and they provide the visible detectors. The same is true in a number of other businesses including machine vision.

We're strong in certain areas of machine vision especially in CCDs and some CMOS but they're much stronger in complementary metal oxide semiconductors, and more importantly, they are very strong in two dimensional imaging which is larger market for machine vision. And then, finally in the medical arena, our strength are in detectors.

We need to reduce CMOS detectors that are the most sensitive detectors that reduce the amount of X-ray exposure to the patient and are much more sensitive in terms of the quality of the pictures that you get.

They on the other hand are the leading providers of magnetrons which are essentially electronic accelerators or microwave accelerators by traveling wave tubes, except they impinge on a constant substrate and produce x-rays that are used for cancer treatment. So in that area we have probably a lot of common customers.

When you do radiography, you also want to do complementary imaging to make sure that you are not damaging surrounding pieces. So those are some observations about the complementary nature of our businesses. In terms of integration, I feel very comfortable about that for the following reasons.

First, they're a public company so they have a very well documented financial and other processes.

And second, we have already acquired two fairly large companies LeCroy and Dalsa in the last five years and we've been able to integrate those very successfully relatively quickly and the margins in both of those large acquisitions have more than doubled in the interim period.

So I think we would integrate this acquisition assuming we're successful, we have some more hurdles to pass in terms of regulatory hurdles. I think we will integrate this successfully in 2017..

Thanks. That's helpful. And just with respect to the existing business, Robert, can you give us a perhaps feel for how we might think about the growth across the four business units.

I think you've given us some color as to how we should think about marine instrumentation but digital imaging and showed decent growth in Q4 I'm not sure what was organic in that and you also saw good growth in the electronic test and measurement business but again I don't know how much of that was organic.

Can you give us feel as to how we might think about growth broadly in across some of the business units?.

Of course, let me actually just go down the list for you, if I may organically overall in the instrument businesses which would include environmental test and measurement and marine, I would say in 2017 organically the growth would be about 3%. In digital imaging, it should be higher perhaps as much as 4% to 5%.

In aerospace and defense, it could be closer to instruments 3% to 3.5% and we have a really good backlog in our engineered systems and I expect that in there -- in that domain our upside can be closer to five. When you roll all of that, I think the overall organically, we should have 3% to 4%.

We do have some acquisitions from 2016 that we should enjoy a little the full-year benefits of those, those may add another percent. So when you do the math, Jim, I think we're talking about 4% to 5% all in, that's excluding e2v..

Okay and that's really helpful. So the optimism that you have entering 2017 has really based it sounds like on both what you are seeing in both the commercial and government business, I think that's kind of what you've been saying as well.

So it sounds like on the commercial side perhaps a little bit more positive but you are seeing I guess fairly good order intake in the engineered systems business..

Yes, we do. We have a good backlog there. We have stronger expect, strong we know exactly how many missile engines we're going to be making in 2017, it's going to be one of our better years in recent history.

We have good backlog in our shallow water and underwater vehicles for our special operations and we feel good and this is as good as we've felt about our overall business portfolio in a very, very long time..

We will go now to the line of George Godfrey with CLK. Go ahead please..

Thank you. I just want to follow-up on the organic growth and thank you Robert for the commentary outlook on how it looks for 2017.

Can you just run through over the full-year 2016 organic growth figures by those four product lines?.

I think mainly in 2016, if I had to -- let me start with marine because that was obviously the big negative for us right. We were down almost 32% from 2015 to 2016 for a hefty $196 million. If you look at our overall decline year-over-year in revenue, it was actually less than that.

So marine declined significantly everything else together actually grew a little bit maybe $20 million, $25 million. Our environmental businesses were relatively flat; we had ups and downs as I'd say overall it was a wash. Our test and measurement was up about 2%, 2.5%, digital imaging I'm talking organic only. Digital imaging was up about 2.5%.

If you throw in our acquisitions and it was higher than that. Our engineered systems was down about 5%, 5%, 6% but I'm not concerned about that only as I mentioned because we had really strong -- we've had really strong orders, it's just I know everybody talked about timing but in this case I can assure you it was timing.

So aerospace and defense electronics was a really strong performer, it was up about 5%, with our avionics business up about almost 18% which this is the business that provides data acquisition on commercial aircraft and that's been a very strong performer, almost made up for the decline that we had in terms of earnings in our marine businesses.

I hope that's helpful..

Yes that's great, Robert. Thank you very much for that detail. And then the last question, just looking at the free cash flow conversion this year based on net income was 131%, 83% last year.

So what do you target for free cash flow conversion in 2017 as it relates to net income?.

About even, about same as this year little -- about little less from a percentage point of view..

[Operator Instructions]. We will go next to line of Ben Klieve with Noble Capital Markets. Go ahead..

All right, thanks for taking my questions. Just got a couple follow-up questions.

First of all regarding your commentary earlier on the energy sector, I'm curious when you think that business may shift from stabilization to growth, is that going to require, in your estimate, further increases in oil prices or do you think just for long stability in the energy market could facilitate growth as you look right into 2017 or 2018 and beyond?.

Ben, if I'm correct, if I'm going to go to oil and gas specifically, I think what's happened is the declines have been very significant and the prognosis right now is that everything is stabilizing.

With oil price prices hovering in the 50-plus-dollar range close to $53 on West Texas intermediate, what that does is it helps really the first 11 days fracking businesses which have breakeven prices of about $50 a barrel and we're seeing already recurrence go up, we do have some land based products there, so we're enjoying some of that.

When you go to the ocean, then the breakeven prices there shallow water is closer to 60 bucks a barrel, deepwater which is between 1,000 to 5,000 feet is about 65-plus-dollars per barrel or actually maybe $70, $75 per barrel. It's the very deepwater interestingly, it's better; it's closer to 65% because the reservoirs are larger.

And the breakeven is lower than deepwater. So having said all of that, a lot of our products going to deepwater and ultra deepwater which would be over 5,000 feet, and we think that source CapEx will probably not improve until later in 2017 or 2018. We're seeing some pick up but nothing like we had in prior years.

And so I think you summed it up correctly the future we think is going to be for us in deepwater and ultra deepwater. The only other thing I will add is that we don't supply directly to the final customers like Shell or BP. We supply to intermediate customers that provide for example trees on the water, Christmas trees for oil production et cetera.

And we have frame agreements now develop with those customers to be able enjoy 70% to 75% of their businesses going forward. Those frame agreements are of course are based on the fact that we have unique capabilities in products. So I think when it does come back we're going to be really good posture. I hope that answers your questions there..

Yes, very much thank you for commentary. One other quick question I know regarding the e2v acquisition given the regulatory issue that you can't really comment too much but you said that integration would hopefully occur in 2017.

I'm wondering if you think its regarding the timing of that I mean are you expecting that in the near to near term or do you think that could be more second half event, can you give any kind of context regarding timing?.

I think right now we expect to close in the first half of the year. But I'm hopeful that we would be able to do it in the first quarter. The regulatory hurdles are really they've already had the general shareholder meeting that both have be successfully achieved. We do have summit Botox cut [indiscernible] in this country.

They have some German, French and U.K authorities that have to clear it. And then finally of course we have to have a court hearing in the UK. I'm very hopeful that we can -- we will be able to close this by the end of the first quarter but we certainly expect if everything goes right that we would be able to do this by in the first six months.

We don't really know what the outcomes of this various questions that were getting are going to be..

Perfect. Thank you very much for the time. I'll jump back in queue..

Thank you. [Operator Instructions]..

Alan, thank you. I think we exhausted that if it's okay then what I would like to do is turn the call over Jason to conclude our conference call..

Thanks, Robert, and again thanks everyone for joining us today. If you do have a follow-up questions, please feel free to call me at the number on the earnings release. All our news release are available on our website teledyne.com. I want to conclude the call to get the replay information we would appreciate it. Thanks everyone..

Ladies and gentlemen, this conference will be made available for replay beginning at 10:00 AM Pacific Standard Time today February 2, 2017, until March 2, 2017, at 11.59 PM.

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