Ladies and gentlemen thank you for standing by and welcome to the Teledyne Second Quarter Earnings Call. At this time all lines are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] And we are recording today.

I will now like to turn the conference over to Jason VanWees. Please go ahead sir..

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 Second Quarter 2018 Earnings Release Conference Call. We have released our earnings earlier this morning.

Joining me today is Teledyne's Chairman and CEO, Robert Mehrabian; President and 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 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 and caveats as noted in the earnings release and our periodic SEC filings and 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 and thank you for joining our earnings call. Teledyne Second Quarter results were the best in our history. We achieved all-time record sales, earnings, and operating margin. Total sales increased 9.1% including organic growth of 8.2%.

I should note that for the first time the organic growth included Teledyne e2v which was acquired on March 28, 2017. Our imaging and instrumentation businesses performed exceptionally well while sales and orders of our defense and space electronics also increased significantly compared to last year.

And each of these business groups achieved double-digit organic growth in the second quarter. Furthermore, our results continue to be well-balanced among all of our four segments and within each individual segment. Within digital imaging we'll continue to benefit from industry-wide growth in machine vision and factory automation.

However, the largest year-over-year growth was achieved from our complementary metal-oxide-semiconductor or CMOS-based digital X-ray detectors for medical and dental application. These detectors produce outstanding image resolution using lower than normal X-ray radiation.

Within the instrumentation sales on all three product lines that is environmental, electronic test and measurement, and marine instruments increased year-over-year. Our overall defense businesses are winning large new award and possess record-breaking backlog.

GAAP operating margin of 15.2 % increased 288 basis points from last year with margin increasing in all four business segments and record earnings per share of $2.32 increased 39.8% compared to last year.

Finally, as I mentioned during last quarter's call we're very pleased with our portfolio of businesses, our successful indicate integration of acquired companies and the cooperation among our business and management. Of course, we will continue to invest in our current businesses and acquire new ones.

However, at this point in Teledyne's maturity we also see an opportunity for a robust effort to improve margins by focusing on our largest and most profitable customers and products and simplifying and streamlining all of our business and corporate processes. I will now comment on the performance of our core business segments.

In our instrumentation segment overall second quarter sales increased 12.3% from last year. Sales of marine instruments increased 11% and primarily reflect higher sales of sonar systems and interconnect products. Sales of autonomous underwater vehicles also increased.

In the environmental domain sales increased 11.2% largely as a result of increased sales of laboratory and life science instruments as well as continued growth in pollution monitoring instruments and industrial Ozone analyzers. Sales of electronic test and measurement systems increased 16.9% organically.

Sales were strong across the range of our product lines led by sales of protocol analyzers which were exceptional. Growth in cloud network storage continues to drive demand for Teledyne LeCroy’s market leading protocol test tools.

Overall instrumentation segment operating margin increased 253 basis points to 15.6% and benefited from songs sales as well as favorable product mix. Turning to the digital imaging segment, second quarter sales increased 12.5% which was entirely organic. Sales of our proprietary X-ray detectors increased significantly year-over-year.

In addition, sensors and cameras for industrial machine vision applications also grew considerably. Finally, shipments of microelectromechanical systems or MEMS these products and geospatial hardware and software and infrared detectors increased also. GAAP segment operating margin increased 523 basis points from last year.

While the second quarter of 2017 was impacted by some charges related to e2v acquisition 2018 operating margin even excluding these charges increased 338 basis points. In the aerospace and defense electronic segment second quarter sales increased 7.7% primarily due to organic growth across the majority of our defense electronic businesses.

Segment operating margin increased to 130 basis points to 19.4% primarily due to greater sales as well as improved margins. In the engineering system segment second quarter revenue decreased 6.4% primarily due to top year-over-year comparison with last year's sales being the strongest quarter. Nevertheless, operating margin increased 28 basis points.

To conclude, I want to offer some perspectives on our record quarter performance and our 2018 outlook.

Our performance across the company was exceptional not only in the second quarter but the entire first half of 2018 and given the first half results, we currently believe that organic revenue growth in the full year 2018 will be approximately 5.5% to 6% compared to our projection of 4% in May and 3% in February of this year.

I should mention though while orders were strong, the greatest bookings relative to sales were among our defense businesses with a number of multi-year orders for infrared detectors, electronic warfare and communications of systems, as well as missile defense engineering.

Finally, the product mix in each segment was also unusually favorable in the second quarter. Thus while, we expect year-over-year growth in sales and operating margin to continue in the second half, we do not currently expect the following quarters to be as strong as the second quarter. I will not turn the call over to Susan..

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 2018 outlook. In the second quarter cash flow from operating activities was $107.9 million compared with cash flow of $87 million for the same period of 2017.

The higher cash provided by operating activities in the second quarter of 2018 primarily reflected the impact of higher operating income partially offset by higher income tax payments. Free cash flow that is cash from operating activities less capital expenditures was $80.5 million in the second quarter of 2018 compared with $74.7 million in 2017.

Capital expenditures were $27.4 million in the second quarter compared to $12.3 million for the same period of 2017. Depreciation and amortization expense was $27.6 million in the second quarter compared to $33.2 million for the same period of 2017.

We ended the quarter with $850.6 million of net debt that is $952 million of debt and capital leases less cash of $101.4 million for a net debt to capital ratio of 28.8%.

Our leverage ratio was 2.0 times at the end of the second quarter of 2018 compared to 2.2 times at the end of the first quarter and 3.0 immediately after completing the e2v acquisition last year. Stock option compensation expense was $5.4 million in the second quarter of 2018 compared to $3.7 million in the second quarter of 2017.

As noted in the earnings release the second quarter of 2017 included pre-tax charges of $4.0 million in acquisition cost related to the e2v transaction of which $3.7 million was recorded in the digital imaging segment and $0.3 million was reported to the aerospace and defense segment or approximately $0.08 a share.

Turning to our outlook management currently believes that GAAP earnings per share in the third quarter of 2018 will be in the range of $2.01 to $2.06 per share and for the full year 2018 our GAAP earnings per share outlook is $8.18 to $8.28 compared to our prior outlook of $7.67 to $7.77.

The 2018 four-year estimated tax rate to 21.3% before discrete items which we currently expect to be lower in 2018 and in 2017. I'll now pass the call back to Robert..

Thank you Susan. We would like to take your questions now. [indiscernible] if you're ready to proceed with the questions and answers please go ahead..

[Operator Instructions] We have a question from the line of Gregory Konrad with Jefferies. You're open..

Good morning. Great quarter. You gave us your updated thoughts around organic growth for the rest of the year.

I mean is there any way to parse your expectations around longer cycle businesses versus short cycle and does the forecast for slower back half organic growth represent just a more conservative forecast around some of those shorter cycle businesses..

Good morning Greg. Let me just start with the last question. The last part of your question the answer is yes. We are a little conservative because the comps are pretty tough compared to last year, but having said that let me answer the first part of your question.

We think that I'll do it by segment and if you wish I can go into sub-segments we think engineered system segment is going to be relatively flat year-over-year maybe up 1% - 1.5% for the whole year.

Our aerospace and defense segment which is a little more long cycle as is engineered systems we think will be up for the year maybe 4% - 4.3% or so let's say between 4% and 5%. On the digital imaging recognizing the fact that in Q1 we had acquisition related uptake because of e2v from last year's Q1 we had 10% uptake.

From an organic perspective we think we will be for the whole year about 11% but if you throw in that 10% that we picked up from the e2v acquisition so overall it’ll be 21% about.

Finally, in instruments which is our shortest cycle business specialist in environmental and test and measurement, we believe the organic growth would be of the order of 5% to 5.5%. We have a little bit of acquisition tailwind there about 1.3% to overall about 6.5%.

We have a little bit of tailwind I should go back in our aerospace and defense about 1.8% from again e2v acquisitions. So the 4.3 I gave you included that. Organically, I think will be about 2.5%. I don't know if that answers Greg..

No, that's great I mean and I guess that kind of leads into the margin question.

I mean it seems like every time mix has been favorable and digital imaging I mean sequentially you end up doing you know even better margins with mix favorable again I mean I guess just on the margin outlook for digital imaging how should we think about some of the mixed benefit in Q2 and maybe structurally the margins of that business..

I think overall I would say the first quarter of digital imaging which has margins of about 16.4% that's probably what I would expect to end the year. So this quarter it was up. I think next two quarters it'll be down a bit with the average and they got about 16 to 16 .4 and that's primarily due to mix.

Overall segment operating margin last year we ended with a 14.8% as you know and to honor this year with 14.6% Q2 everything worked in our favor with 17.1%. I think that would moderate as the year goes on closer to 16 to 16.5 we should end the year at 16.1 and if we do that we still gained 130 basis points in segment operating margin year-over-year..

That's really helpful and then just one for me in terms of machine vision and digital imaging I mean it seems like there's a lot of tailwinds for that business and you call that warehouse automation.

I mean any thoughts around the end markets within kind of that machine vision and maybe kind of backlog and visibility as we go forward for that business?.

First let me just break digital imaging down a bit. We have four different areas, five different areas there. Machine visioned is our largest one and on an annualized basis we anticipate that that will have revenues of approximately $275 million and those are mostly sensors and cameras and less than $50 million in flat panel displays.

Healthcare which is our X-ray detectors and our X-ray sources for cancer treatment, radiotherapy those should have annualized revenue of about $225 million.

There we have a little more backlog visibility than we do in sensors and cameras and we get longer-term programs there and we are gaining market share with our CMOS very sensitive high-resolution detectors.

Aerospace and defense again we do have a visibility in our backlog Greg and we think that should end up about $245 million that includes our Teledyne scientific and imaging here in California. And the last two MEMS which is our microelectromechanical systems foundry that's in Bromont we expect that to have about $75 million in revenue.

By the way that was ranked as the second largest independent MEMS foundry in the world recently. And it's going and we're making investments there and then we have a geospatial business which includes LiDAR and software for hydro for ocean, I think there we should have about a $50 million in revenue annualized.

We are a little worried about the flat panel display market because we think that would be a little down in the second half of the year. On the other hand we see the logistics and robotics market increasing. So overall as I mentioned before when we annualized the revenue across digital imaging, organic growth of a little over 11% is pretty healthy.

I hope that answers the question..

That was more than helpful. Thank you..

And next we have a line of George Godfrey with CL King & Associates. You are open..

Thank you and good morning. Thank you for taking my questions. Excellent job on the quarter..

Thank you George..

Well, you call out the orders the overall book to build rate greater than 1.1 but particularly strong defense and space related contracts, with digital imaging instrumentation book to build also over 1.10?.

Yes, it is. We expected to be above 1.1 of that or in Q2 it was pretty healthy. It was 1.19 but I think it’ll moderate in Q3 and this is in digital imaging of course and it should be above 1.1 by year-end..

Okay and it's been such an outstanding organic growth rate in the first half of this year and you've walked up the organic growth rate.

Just for me a bigger picture standpoint some of the trends longer cycle some of the trends shorter cycle but it is particularly an instrumentation if I look at each of the three segments marine, environmental and test and measurement the trends that you're seeing now from where we were back in ‘15, ‘16 how much is this related to the increase in oil prices but also how much do you feel like this has more of a tailwind on the positive side where we are today versus where we came from and again nice job on the quarter.

Thank you..

Thank you again. Let me start with the environmental and test and measurement and instrumentation. Then go to marine last.

In the tests and measurements we have a series of three companies, small companies rolling together that protocol analyzers these are rule based test systems for people to be able to communicate among between devices and other things. For example your Bluetooth that you get in the car with and connect up that has certain rule based programs.

Those businesses are growing very fast. Actually, we think in a little while there might be a bigger business than our oscilloscope business actually and it's a very profitable set of businesses.

On the other hand our oscilloscope businesses have been growing very healthily and we have – there we have our high-definition 12-bit scopes that are doing really well in the market. And will enjoy significant growth there.

So having said all of that the test and measurement growth is going to almost approached organically, almost approached 11%, maybe 10.8%. The environmental business is the more difficult to predict. Those includes among many things that we do including measuring quality of water as well as quality of air.

Those have had a good run this year but those are really short cycle businesses and we for example sell a lot to China there. They're buying both our monitoring systems for their environment as well as other products and also we also supply the semiconductor in the series as you know it’s really doing good, growing very well.

Having said all of that we're a little cautious about that business because it is such a short cycle business. We think organically for the year it will grow about 4% to 4.5%. Let me go back to Marine. Marine business year-over-year we expect it to grow about 3%.

The parts of the Marine business that are doing really well and those would be marine that deals with the defense, a businesses such as submarine connectors and also – and then we have a lot of gliders that go into naval [indiscernible] space sensing.

They are even talking about deploying a 100 gliders in front of the battleship group at any one time simultaneously. Those are doing great. If I move back to oil and gas while the oil prices are hovering around $70 and the expectations are that this year's cap investments would be almost $90 billion versus maybe $40 in 2016.

Those are a little longer term by the time we get the orders. Frankly, what's happened is they've laid out so many people in those domains that they're having a hard time getting their purchase orders and their designs out. They're lacking engineers.

So we think the recovery there is not going to come until close to the end of this year or most likely in 2019 and 2020. We think the longer-term, there's no question, that business is going to improve and I think that will be very good for us.

I would finish off by just saying that a lot of our marine businesses of our non-oil and gas production overall they're from about $450 million that we expect for the year only about the $150 of it comes from oil exploration and production. We do have a little bit of land business there.

So if that picks up it will be very good for us because we took it on the [chin] between 2015 and 2017 that business dropped about $200 million. So our expectations are that in the oil and gas domain marine there will be another year before we see a serious uptake..

Thank you very much for that detail Robert. Very helpful..

You bet..

And if there are any additional questions please press star followed by one. And at this point no one else is queued up..

Thank you [indiscernible]. And I will ask Jason VanWees to conclude our conference call. Thanks..

Thanks Robert and again thanks everyone for joining us this morning. Of course if you have followup questions please call me at the number listed on the earnings release. All our news releases are available on our website Teledyne.com. And this conclude today's conference call and save the replay details for the individuals that would be great.

Thank you everyone..

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International; 320-365-3844 and the access code is 451822 and that'll be available from 10:00 A.M. Pacific and run for one month. That does conclude your conference for today. Thank you for your participation and thank you for using AT&T executive teleconference service. You may now disconnect..