Ladies and gentlemen, thank you for standing by. Welcome to the Teledyne fourth quarter earnings release conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions].

As a reminder, this conference is being recorded.I would now like to turn the conference over to your host Jason VanWees. Please go ahead..

Thank you. Good morning everyone. This is Jason VanWees, Executive Vice President and I want to welcome everyone to Teledyne's fourth quarter and full year 2019 earnings release conference call. We released our earnings earlier this morning before the market opened.

Joining me today are Teledyne's Executive Chairman, Robert Mehrabian, President and CEO, Al Pichelli, Senior Vice President and CFO, Sue Main and SVP, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibik.

After remarks by Robert, Al and Sue, we will ask for your questions.Of course, though, before we get started, our attorneys have reminded me to tell you that all forward-looking statements made this morning are subject to various risks and caveats as noted in the earnings release and our periodic SEC filings.

And 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 and thank you for joining our earnings call. For the second consecutive quarter, we achieved all-time record sales, earnings per share and free cash flow. Likewise, full year 2019 was by any measures a record year.

Each of sales, earnings, GAAP operating margin and free cash flow were all-time records.Fourth quarter and full year sales increased 11.5% to 9%, respectively. Organic growth for both periods also exceeded 4% including some modest currency headwinds, about 0.6% in Q4 and about 1% headwind for the full year 2019.

In addition, for both the fourth quarter and full year, GAAP operating margin expanded just under 120 basis points.Fourth quarter earnings were $3.06 exceeding $3 per share for the first time, an increase of 24.9% compared to last year.

While we have increased our emphasis on margin improvement, we are continuing our proven strategy of disciplined capital deployment for compound growth in earnings and cash flow.In 2019, we deployed $484 million on complementary acquisitions and earlier this month, we announced the acquisition of OakGate Technology, a software and hardware company focused on the test, validation and operating performance of solid state electronic storage media.

This is our third bolt-on acquisition for Teledyne LeCroy and allows Teledyne to provide a complete set of protocol analysis software and hardware used from the design of new data storage devices to the use of such devices in hyperscale cloud storage networks.Teledyne continues to benefit from our balanced portfolio of common technologies serving different complementary markets.

We begin to 2020 with growth in our defense businesses expected to offset declines in sales of OEM avionics. Marine instrumentation continues to recover with growing sales, but also with orders having exceeded sales for the sixth consecutive quarter.

In digital imaging, we expect that to see continued strength in certain high-growth markets like microelectromechanical systems or MEMS and a modest recovery in certain commercial machine vision markets such as the semiconductor industry.Given the short cycle nature of our environmental and electronic test and measurement instrumentation businesses, at this point we are only projecting low single digit GDP like organic growth.

Finally, our balance sheet remains exceptionally strong with a quarter-end leverage ratio of 1.4x and we are continuing to pursue acquisition opportunities.Before turning the call to Al, I want to emphasize that all of our financial results this morning are reported on a GAAP basis, with no adjustments for amortization, stock compensation, acquisition charges, purchase accounting, restructuring or other charges.Al will now comment on the performance of our four business segments..

Thank you Robert. In our instrumentation segment, overall fourth quarter sales increased 14.5% from last year. Sales of marine instrumentation increased 14.7% organically in the quarter. And we also closed 2019 with the highest year-end backlog since 2014.

In addition, operating profit improved significantly.In the environmental domain, sales increased 31.9% as a result of our recent acquisition of the gas and flame detection business.

In addition, greater organic sales of pollution control instrumentation were offset by lower sales of selected process gas analyzers and laboratory instruments.Sales of electronic test and measurement systems increased sequentially to the highest level of 2019, but decreased 6.8% year-over-year given an especially tough comparison.

For the full year, sales increased 6% organically. Overall, instrumentation segment operating profit increased 38.4% in the quarter and margin increased 340 basis points with margins increasing for test and measurement and marine instrumentation.

Excluding the gas and flame detection acquisition and related purchase accounting, margins also increased within the environmental instrumentation.Turning to the digital imaging segment. Fourth quarter sales increased 20.1%. Sales of our proprietary medical and dental X-ray detectors again increased significantly year-over-year.

Sales of geospatial sensor systems and MEMS devices also grew nicely as did sales of advanced infrared and visible light detectors for defense and space applications.

The strong growth in these businesses more than offset some expected declines in the portion of our industrial machine vision business which serves consumer electronics and generally factory automation markets, especially in Asia.

However, sales of these products did increase sequentially given some recent recovery in the semiconductor-related inspection systems.

GAAP segment operating profit increased 29.8% and margin increased 131 basis points generally as a result of increased sales volume.In the aerospace and defense electronics segment, fourth quarter sales increased 2.7% primarily due to strong growth across majority of our defense electronic businesses, partially offset by lower sales of OEM aerospace electronics.

Segment operating margin decreased 208 basis points to 19.2%.

The operating margin primarily resulted from product mix differences in defense electronics and lower sales of commercial avionics.In the engineered systems segment, fourth quarter revenue decreased 1.7% with greater sales related to space and energy programs, electronic manufacturing and turbine engines, more than offset by lower sales from missile defense programs and energy systems.

Segment operating profit and margin was flat year-to-year.Before turning to Sue, I want to offer some additional commentary regarding our 2020 outlook. Given the points raised by Robert earlier, we believe that total organic revenue growth in the full year 2020 will be 35 to 3.5%.

In addition, the full year contribution from the scientific camera, gas and flame detection, Micralyne and OakGate acquisition will add another $100 million or so of incremental revenue. This translates to total revenue of approximately $3.36 billion to $3.37 billion for 2020.I will now turn the call over to Sue..

Thank you Al and good morning everyone.

I will first discuss some additional financials for the quarter not covered by Robert and Al and then I will discuss our first quarter and full year 2020 outlook.In the fourth quarter, record cash flow from operating activities was $167.9 million, compared with cash flow of $125.5 million for the same period of 2018.

The cash provided by operating activities in the fourth quarter of 2019 reflected the impact of higher operating income, cash flow from recent acquisitions and improved working capital management.Free cash flow, that is cash from operating activities less capital expenditures, was $144 million in the fourth quarter of 2019, compared with $106.8 million in 2018.

Capital expenditures were $23.9 million in the fourth quarter compared to $18.7 million for the same period of 2018.

Depreciation and amortization expense was $29.3 million in both the fourth quarters of 2019 and 2018.We ended the quarter with $651.1 million of net debt, that is $850.6 million of debt less cash of $199.5 million for net debt to capital ratio of 19.4%.

Stock option compensation expense was $5.7 million in the fourth quarter of 2019 compared with $4.9 million in the fourth quarter of 2018.Turning to our outlook.

Management currently believes that GAAP earnings per share in the first quarter of 2020 will be in the range of $2.25 to $2.35 per share and for the full year 2020, our GAAP earnings per share outlook is $11.20 to $11.30.

The 2020 full year estimated tax rate excluding discrete items is expected to be 22.3%, a 170 basis point increase compared to full year 2019, due in part to less R&D tax benefits to percentage of capital income. In addition, we currently expect significantly less discrete items in 2020 compared with 2019.I will now pass the call back to Robert..

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

[Operator Instructions]. Your first question comes from the line of Andrew Buscaglia. Please go ahead..

Hi guys. Thanks for taking my question..

Good morning Andrew..

Good morning. I was hoping you could dig a little bit more into marine. So you are on your second quarter now of what looks like the beginning of a ramp.

How sustainable is the growth into next year? And then can you also talk a little bit about, I would think, given you have got marine finally rebounding here, you got potentially machine vision rebounding here, I would think that your organic growth rate guidance will be higher than that 3%? I believe you said 3%, 3.5%.

So can you talk about how that's weighing it down or what's weighing it down?.

Sure Andrew. Let me start with marine. I think our orders in marine were significant this year. We ended the year with about 1.1 in terms of the book-to-bill. It's been a good run. The oil prices hovered between $55 and $65 for brent and a lot of deepwater production is profitable below $50.

So we are seeing both improvements in our seismic activities for oil exploration as well as long term oil production contract. We think that in 2020 marine would have increased revenues in the range of about 6.6% versus 4% in 2019.Now, continuing with the second part of your question, which is why we have organic growth less than 4% or so.

This year, we achieved about 4.4%. We are projecting between 3% and 3.5% for next year. That's primarily affected by 737 MAX. It impacts our revenues by 1%. That's our best guess right now, which is equivalent to about $30 million.

We anticipated that we would have revenues of over $40 million, maybe as much as $45 million and because of the delays that you are very familiar with we expect that that would be down about, effect our revenue about 1% or $30 million.Having said that, I think it's important to note that given that hit that we are taking in our revenue because of our balanced portfolio even in the aerospace and defense segment, we expect revenue to be flat year-over-year because the defense businesses are going to do much better this year than they did last year.

So the answer to your question is primarily driven by MAX. When it comes back into production, we will pick it up again..

Yes. That's helpful. And maybe could you just comment, too, you said machine vision in the quarter seems to, you have got a little uptick sequentially here. What's your expectation for 2020? I mean, you have got semi markets moving higher or just good commentary out of those markets.

So what are you guys thinking?.

Right now, we think that in the machine vision that we will get some pick up from semi. We think for the year, we will probably organically grow to 3.5%, but we also made an acquisition, sci-cam acquisition last year as well as the Micralyne, et cetera. I think overall machine vision will be over 5%, maybe 5.1%, 5.2%.

The digital imaging that includes machine vision is recovering modestly. Where we have done well really is in the healthcare which is our X-ray business and our MEMS area and we think those areas will help us as well.

I would think the sales in that whole digital imaging will increase from what was this year about the $900 million to about $1.4 billion, $1.450 billion, I mean $1.045 billion. And so we are positive about machine vision. Of course, if the business picks up more especially in the flat-panel displays, then we will do better..

Got it. All right. Thanks for the color..

Thank you..

Your next question comes from the line of Joe Giordano. Please go ahead..

Hi guys. Good morning..

Good morning Joe..

Hi Robert. You answered a bunch of my questions there.

But maybe can we just talk about margins a little bit and how dilutive was the M&A in the quarter and how much dilutive do you have it into 2020 margins? And maybe we can get a little color on margins by segment there?.

Yes. I can give your margins first, if I may, by segment and relate it to 2019. Let me start with instrumentation. Instrumentation had full year margin of about 18.1%. And that was really good because it improved about 370 basis points over 2018. We think that will go up again in 2020 for us as much as 70 basis points.

Right now we think it would end up about 18.8%.And moving to digital imaging. Digital imaging margins were flat year-over-year at 2018 was 17.8% and 2019 was 17.8%. We think we are going to get some margin improvement there, perhaps as much as 65 basis points.Aerospace and defense and engineered systems.

We don't think we are going to improve margins in the aerospace and defense, primarily because the margins are already pretty high at 20.8%, but also as I mentioned, because of the headwinds from the 737 MAX.

We think even though defense will make up for the revenue, margins will stay flat.And then engineered systems, we think margins will remain about 9.7%.

So overall, in the segments, we think that the margins will increase overall about 45% or 45 basis points and the company as a whole, it will be about the 50 basis points.Regarding the question you asked about dilution, accretion dilution from the acquisitions. The Roper acquisition was the scientific cameras was not dilutive.

Right now, gas and flame, which is the business we bought from 3M and Micralyne which we bought, we think they added about 50 basis points in dilution probable in Q4. I would think going forward they will be flat.

Most of our acquisitions that we may maybe diluted very early on because of the expenses we have in acquiring them, but after a while they are accretive..

That's very helpful. I just wanted to clarify, I think you said earlier marine up about 6.5% in 2020. What about the oil and gas, the energy component of marine specifically? I just want to make sure I wasn't confusing which things you were talking about there..

Yes. Let me just point that out. I think in the oil and gas, first let me start with the big picture. This year we ended marine at about $450 million, which was a 3.9% improvement over 2018. Our present plans or our present anticipation is that that will 6.6% to $480 million.

Of that, the oil and gas in 2019 was about $185 million and we think that will increase to $202 million, a healthy increase for us. And we think the rest of the marine which has to do with defense and security and other things, that will go up from $265 million to $278 million.

So to put it in a nutshell, the 6.6% is balanced between oil and gas and the other businesses, especially defense where we do have really good programs, especially in the submarine area..

So maybe last for me.

On the healthcare part of digital imaging, that business has been great for you guys and what's the outlook and current thoughts around new customers in new field like on surgery and mammography? And what's kind of the pacing and discussions with big customers there? And what's embedded in your new guidance for growth in healthcare in 2020?.

We think we are going to have a little growth in healthcare but it is not going to be as robust as we had in 2020 because we had a lot of the new OEMs sign up in 2020 and we don't see any new OEMs right now. It could happen but we don't see it right now. In prior years, we had really good extraoral surgery, we had good intraoral, we had mammography.

So we think it's going relatively flat, maybe increase another $10 million year-over-year. I think last year it was about $255 million. We are projecting about $265 million or so this year. But it's a healthy business. We are trying to also move up-market with some of our products.

So as the year progresses, I think we would be able to project improvement, especially in mammography and other OEMs as we move closer to 2021..

Good. Thanks very much..

Thank you..

[Operator Instructions]. And at this time, there are no further questions..

Well, thank you very much, Greg. What I would like to do is ask Jason to conclude the conference call. Thank you..

Thanks Robert. And again, thanks everyone for joining us this morning. If you do have follow-up questions, please feel free to call me at the number on the earnings release and of course our news releases are available on our website.

Greg, if you conclude the conference call and please provide the replay details for the audience please, we would certainly appreciate it. Thanks again..

Thank you. Ladies and gentlemen, this conference will be available for replay after 10:00 a.m. Pacific time today through February 22. You may access the AT&T Executive Replay System at any time by dialing 1-866-207-1041 and entering the access code 1455431. International participants dial 402-970-0847.

Those numbers, once again, are 1-866-207-1041 or 402-970-0847 with the access code 1455431. That does conclude your conference for today. Thank you for your participation and for using AT&T TeleConference. You may now disconnect..