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

George Godfrey - C. L.

King Jim Ricchiuti - Needham & Co Howard Rubel - Jefferies

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 second quarter 2016 earnings release conference call. We released our earnings earlier this morning before the market opened.

Joining me today 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 and Secretary, Melanie Cibik. After remarks by Robert and Sue, we will 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 is Robert.

Thank you, Jason, and good morning, everyone. In the second quarter, we achieved strong organic growth of 6% and 7% respectively in our imaging and aerospace and defense electronic segments.

Such results were generated through strong growth in our commercial businesses as well as growth but to a lesser degree in our government businesses within these segments. In the instrumentation segment, sales of both electronic test and measurement and environmental instrumentation also increased organically.

However, due to weak energy markets sales of marine instrumentation declined considerably year-over-year. While we remain quite cautious we are pleased that some of our offshore energy customers are reporting early signs of improved market sentiment.

I should note that orders within marine instrumentation were stable with a book-to-bill of 1.08 in the second quarter. Orders were also healthy in other segments with an overall book-to-bill of 1.04 in the second quarter and 1.14 in year-to-date.

Most of our industrial sectors are now experiencing growth while our government businesses have stabilized. Nevertheless, we are maintaining our emphasis on cost control and strong operating discipline.

For example, as we specifically highlighted last quarter, we incurred significant severance, lease termination and some asset impairment expenses in the second quarter as well as $500,000 in M&A transaction expense for three small acquisitions. Collectively, these pre-tax charges were approximately $11.2 million with the vast majority of the restructuring charges occurring within the marine instrumentation businesses.

However, we are able to absorb these expenses on a GAAP basis through the sale of real estate no longer needed directly as a result of higher facility consolidations. While the majority of these actions are behind us, we will continue to incur some severance and facility consolidation expenses during the remainder of 2016.

To be specific, we have reduced headcount by over a thousand employees in 2015 and year-to-date 2016. This was necessary as we’ve seen our marine business decline from a peak [ph] of $665 million in 2014 to an approximate annualized run rate of $435 million.

In addition, in the second quarter alone we exited approximately 200,000 square foot of facilities or roughly 4% of our total footprint. These actions built upon the initiatives we have – from 2013 through 2015 largely within our aerospace and defense businesses.

Collectively, we have now eliminated approximately 11% of our footprint. All of these actions are critical aspect of our ability to manage business cycles and at the same time improve future performance.

For example, by reduced, by maintaining our reduced footprint and manpower, we were able to once again report record operating margin in our aerospace and defence electronic segment. Despite aggressive cost cutting emphasis on new product development to internally funded R&D continues.

And as a percentage of sales was a record for Teledyne at approximately 8%. Coupled with relevant externally funded R&D, we spend approximately 11% of our revenues on new technologies and products.

It is also worth noting that despite the major year-over-year decline in offshore energy market, we expect to receive all time record of $27 million of customers funded R&D in our marine businesses. Finally, cash flow from continuing operations was strong increasing 50% from last year to $66.9 million.

Year-to-date we have generated $121.7 million of cash after capital expenditures. Turning back to quarterly results.

GAAP earnings per share from continuing operation of $1.32 decreased just modestly from last year’s $1.34. I should note however while this year included -- sense of net earnings that is the real estate gain partially offset by the charges mentioned earlier, last year included also $0.09 of net earnings from legal settlement and discrete tax items.

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 third quarter and full year 2016. In our instrumentation segment, second quarter sales decreased 18.9% from last year, sales of marine instrumentation decreased 35.8%, 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.

As we highlighted last quarter, year-over-year comparisons for marine instrumentation were especially difficult in the second quarter, but will moderate a bit in the second half of 2016. In the environmental domain, sales increased slightly and reflected greater sales across most laboratory and air quality product lines offset by some declines in part and petrochemical market.

Sales of electronic test and measurement systems increased 16% overall and 2.8% organically GAAP operating profit decline and operating margin decrease solely due to lower sales and margins within the marine instrumentation, and severance and consolidation related charges partially offset by increased profitability among both the environmental and electronic test and instrumentation product lines. Turning to digital imaging segment, second quarter sales increased 9.5% and operating margin increased to 107 basis points.

Excluding revenue from recent acquisitions organic growth was 6.2% and reflected higher sales of commercial sensors for medical imaging, laser-based mapping systems and increased volume of micro electro mechanical system or MEMS products. Sales of infrared sensors and government funded research also increased slightly.

In the aerospace and defense electronic second quarter sales increased 7.2% organically as both defense and commercial sales globally increase during the quarter. In addition, bookings were strong in both major end markets with a book-to-bill up 1.13.

As mentioned earlier, segment operating margin was again a record increasing 418 basis points from last year. Please note that shortly after the quarter ended we divested a lower margin contract manufacturing business and reclassified it as a discontinued operation.

In the engineering system segment, second quarter revenue decreased 9.2%, but operating margin improved over 200 basis points. The low revenue resulted from a decline in certain government services but was partially offset by increased marine, aviation and its nuclear manufacturing.

In conclusion, our balance business portfolio is not dependent on any single product or market. Aerospace and defense businesses now represent approximately 40% of our total sales.

A broad range of industrial market including factory automation, medical imaging, analytical instrumentation, satellite communication and also tries [ph] to represents another 50% of our portfolio. Today oil and gas exploration and production represent less than 10% of Teledyne sales and just about 40% of our total marine businesses.

As I noted earlier, we've taken the necessary steps to restructure our marine businesses for a total run rate of approximately $435 million. With the current projected marine sales level we're expecting meaningful improvement in profitability in the second half of the year.

And when the markets turn more favorable we stay eventually well. We expect significant margin improvement just as that we achieved in aerospace and defence segment between the sequestration hiatus of few years ago and today.

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 third quarter and full year 2016 outlook.

In the second quarter, cash flow from operating activities was $83.2 million, compared with cash flow of $57.9 million for the same period of 2015. The higher cash provided by operating activities in the second quarter of 2016 primarily reflected lower income tax payments partially offset by higher payments for severance, facility closure and relocation costs.

Free cash flow that is cash from operating activities less capital expenditures was $66.9 million in the second quarter of 2016 compared with $44.5 million in 2015. I should note that both our cash flow and cash balance exclude $19.5 million in restricted cash resulting from the recent real estate sales transaction given a potential Section 1031 like-kind exchange Capital expenditures were $16.3 million in the second quarter compared to $13.4 million for the same period of 2015.

Depreciation and amortization expense was $21.6 million in the second quarter compared to $22.7 million for the same period of 2015. Full year capital expenditures are expected to be $60 million; however should we take advantage of like-kind exchange and purchase new [ph] facility capital expenditures could increase up to $30 million.

We ended the quarter with $620 million of net debt that is $691.7 million of debt and capital leases, plus cash of $71.7 million for a net debt-to-capital ratio of 29.6%. In the second quarter we acquired three businesses for an initial purchase price of approximately $60 million, of which approximately half was funded with foreign cash balances.

In addition in the third quarter of 2016, Teledyne completed the sale of assets of Paradigm printed circuits business for $9.3 million in cash. Turning to pension and stock compensation expense, in the second quarter of 2016, pension income was $0.6 million compared with pension expense of $1.1 million.

For your reference our pension which is primarily for legacy retirees remains fully funded. Stock option, compensation expenses was $2.9 million in the second quarter of 2016, compared with $3.3 million in the second quarter of 2015.

Finally, turning to our outlook, management currently believes that GAAP earnings per share from continuing operations in the third quarter of 2016 will be in the range of $1.28 to $1.33 per share and we are increasing our full year 2016 earnings per share from continuing operations outlook to $5.10 to $5.20 from our prior outlook of $5.05 to $5.15. The 2016 full year effective tax rate excluding any discrete items is expected to be 27.6%.

I will now pass the call back to Robert.

Thank you, Sue. We would now like to take your questions.

Jason, if you're ready to proceed with the questions and answers, please go ahead.

Thank you. Good morning, Robert.

Good morning, George.

Question, on the full guidance how much is assume there in revenue from the acquisitions that have already been completed. I believe it was $5.5 million in the Q2.

What you assume for that for Q3 and Q4?

I would say for the year remainder of the year, George, about $20 million.

About $20 million. Okay.

Yes.

And the blended organic growth rate, you happen to have that for the company as a whole?

Yes. I think the organic growth rate, if we look at it – it's about down about 5% for the year and I would say that of course primarily driven by the downward trend in the marine instruments.

Everything else except engineered system will be down at little bit, but I just hope that business should be up.

Got it. Okay.

And then, my last question, looking specifically within instrumentation, I think you commented that your customers in energy exploration have seen some signs of stability or seem to getting to a floor. How much is that – how much is their outlook change month-to-month or even week-to-week depending upon what LNG pricing are doing it.

And what I'm trying to get at is does the price of the oil influence there thought process on stability or is it the capital investment and planning that they are doing for their customers? Thank you.

Thank you, George. I think theirs is no question that the price of the oil is influencing physiology, physiological outlooks.

On the other hand what we are learning is that almost all of our customers including ourselves by the way have significantly reduce their cost structures especially their cost structure vis-à-vis exploration and more importantly production. For example, we know from data that's been given to us that the offshore production cost have gone down significantly where some of the even deep ocean wells would be profitable at less than $50 a barrel.

That significant considering a year ago people were quoting $75 a barrel. So everybody is talking now, people are improving their cost and designing system that are much more cost effective.

And finally George, at least in their offshore domain what they're trying to do is do more processing on the ocean floor which has reduced costs also bringing everything up and processing it. But it also is also very good for us because we supply lot of the connectivity and corrosion and other products like pressure and temperatures sensors for the ocean bottom.

Understood. Thank you very much, Robert.

Thank you.

Thank you. Robert, you may have given this out, but what was the organic growth rate in the digital imaging business in the quarter?

I think in the digital imaging it was 6.3%, Jim.

Okay. So, pretty good growth.

And how should we think about the margins in our business. You're starting to show some improvement there.

Do we – do you think – feel that there is some room for operating margins in that segment of the business to improve from here?

Yes. Jim, I think you should look at that segment.

One thing in mind there's a part of digital imaging which is our research lab, which is about $30 million, $35 million of revenue. There we take no profit.

So -- and that, if you look at it that way, that comprises approximately 10% of imaging. Having said that, the improvement in margin are coming from those are large corporations and they will continue to improve the remainder of the year, perhaps another 100 basis points or so.

Okay. With respect to the instrumentation business it sounds like you've done a fair amount of restructuring, presumably that's going to lead to some margin improvement there as well.

How much do you really need to have the marine market come back a bit before we get back to maybe not quite the margins that you had that speak [ph], but just how should we think about margins in that segment of the business?

I think next quarter, next couple of quarters we ought to see maybe 300 basis points improvement in the margins in that segment primarily because we won't have the one-time restructure in charges that we took in the margin businesses. And so, I think we've structured the business as I mentioned before to start having meaningful margin improvement even at the current level if and when I should say.

When the oil and gas market comes back and coming back there is no question it's going to back. And the reason for that is very simple.

The existing wells all across whether its land based or ocean based they would be depleting, our reserves are depleting, people can estimate anywhere between 4 billion and 5 billion barrels a day per year and also there is some continuing change in demand that's positive, but the depletion is more significant. And we have to have new resources of energy to offset depletion.

And so I think this business will come back and when it comes back I expect our margins to go back up in the 15%.

Okay. That's helpful.

Thank you.

Thank you.

Thank you very much. First, I wanted to ask, Sue, about section 1031 like-kind exchange.

If I understand this then, I mean, what kind of tax reserve did you set up or allow for with respect to that because again seems under the circumstance obviously you – it’s a tax beneficial event? I'll stop and let you elaborate.

Yes. If the cash tax benefit of about 7.7 million, 7.6 million, so it's not affecting the rate.

That will also again it will make the right 1031 exchange.

So, did you provide some reserve in the current quarter for what may eventually play out here or did you make the full assumption that this would in fact the 1031 selection?

We did not make a selection [ph]

Howard, the way this works is very simple. The fact that your sell a building for again, especially a building that we're hoping to replace with the similar building.

The tax benefit will reduce the cash that we will be paying for the new building, because otherwise if we don't we'll have to pay the $7.7 million in taxes. But it doesn't affect our current tax rate, our earnings or anything else.

I understand that the basis of the new building will be based on the basis of the old building. I just wanted to understand whether there were some – and I get how advantages this is I just want to understand if you had been – you've taken the full benefit in the quarter or it allowed for some contingency?

There is no book impact, it’s a contingency. If you don't use it you'll have to cope up the cash in the future.

Thank you. I appreciate that.

I wanted to understand the dynamic a little bit in the way you would called it out, but that's very clear. Second, there are a number of competitors that all of a sudden have recognized the attractiveness of the underwater AUV [ph] market.

What are you continuing to do to make sure that the modes that you've created for your vehicles continue to have very strong demand?

First, as you know Howard, we have a whole range of vehicles going from gliders to remotely operated vehicles, to automated underwater vehicles and of course we have the larger vehicles for the Special Forces. Having said that, the advantages that we enjoy over others are that we also have a very strong suite of sensors that we incorporate in our vehicles whether it’s a glider or it's an AUV or an ROV and what that does its gives us the ability to offer customers vehicles with completely integrated solutions from us.

Now, we sell our sensors to other people. But of course we have the advantage of cost benefits when we use them in our vehicles.

Just to give you an example. We have produced some [Indiscernible] vehicles specifically for the Chinese.

This has to do with trying to find the Malaysian Airline that disappeared and we’ve sold three of those already just under $1 million each but those contain about 10 of our different sensors in them all in the vehicles. Finally, I would just say that we not only are working with our vehicles in the commercial domain but we have remotely operated vehicles that are now being used by the Navy for Mine Explosive Ordinance Disposal and we have underwater vehicles for the Special Forces.

So I think our -- as you said other people are entering the market. Some have been in there for a while.

I think the important thing for us is to continue to improve our range of our offerings and integrate our sensors into them.

And thank you. And then one last question.

You called out some new -- some benefits of this laser based mapping into your special software in the digital imaging business. Can you talk for a little bit about what you see in terms of the opportunities there, I mean it seems as if there is more and more demand for these sort of solutions.

Yes there are two parts to that. On the laser based mapping we have a whole sequence of new products that are enabling operators to do the mapping without having someone direct instruments, so they are totally automated and -- or that comes out of our Optech businesses that are part of DALSA they had a significant increase there, it’s a small business but nevertheless year-over-year we had about 25% increasing from new products.

The other area, the geospatial software that is business that we just acquired that’s called CARIS, it’s also part of DALSA, it’s in Canada and what they do is they do use hydrographic sensors that are acoustic sensors primarily that do surveys of ocean floors and they provide all the data the software for people to convert all of that data into useful information and maths and 90 countries around the world use those systems. And that’s an increasing business for us because it’s not only occupies the space that it [Indiscernible] it but it also is very complimentary to our existing other marine businesses including aerial survey, Optech business where we do near shore and off shore survey.

Thank you very much Robert.

Thank you, Howard.

Thank you very much operator, Justin. What I like to do now is I’d like to ask Jason to please conclude our conference call.

Thank you everyone for joining us this morning. And if you have any follow up questions, please feel free to call me at the number on the earnings release.

Justin, if you could give the replay information right now that would be ideal. Thanks everyone.