Ladies and gentlemen, thank you for your patience in holding. And welcome to the Teledyne Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later on, we will be conducting a question-and-answer session. Instructions will be given at that time. I would now like to turn the call over to your host, Jason VanWees. Please go ahead.

Thank you, Laurie, and good morning everyone. This is Jason VanWees, Executive Vice President and I would like to welcome everyone to Teledyne's second quarter 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. But 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 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. Good morning and thank you for joining our earnings call. Before discussing our results, I want to emphasize that all of our worldwide manufacturing sites, as well as our corporate office and research laboratory have been and remain operational. However, because our priority remains the health and safety of our employees, we're continuing social distancing, enhanced cleaning protocols, the usage of facemasks, and Personal Protective Equipment. I shall now make a few comments about our performance in the current environment and our outlook for the remainder of 2020. Despite record economic contraction, and a challenging operating environment for manufacturers, Teledyne performed extremely well in the second quarter. Our results reflect aggressive cost control and disciplined execution. In fact, although sales decreased approximately 5% compared to both last year and the first quarter of 2020, overall GAAP operating margin increased sequentially 150 basis points. Teledyne's business portfolio remains exceptionally well balanced across end-markets and geographies. Also, our mix of line cycle and short cycle business provides a reasonable level of predictability and helped us give us the confidence to provide our outlook in April. Looking back at the second quarter, the overall market and demand outlook played out as we had envisioned. In April, we predicted second quarter sales to decrease 5% year-over-year versus the actual results of negative 4.9%. That said demand for instrumentation was better than forecast, due to continued demand for test and measurement, protocol analyzers, and a record quarter for OakGate business, which was acquired in January. These product lines serve technology markets related to solid state storage and cloud networking, where capital spending remains relatively robust. On the other hand, digital imaging sales were slightly lower than forecast, not only in dental healthcare markets where weakness due to COVID-19 was expected, but we also saw temporary declines in surgery and cancer radiotherapy due to deferred patient treatments, our customers destocking, and fewer new OEM equipment installations in hospitals. Otherwise, everything else from a sales perspective essentially occurred as expected. More importantly, operating margin, earnings, and cash flow each exceeded our April expectations. Ongoing simplification of our processes and margin improvement actions, including progressive cost cutting in the first half of 2020 delivered superior results. Now, looking forward to the balance of 2020, we remain positive overall. Just as commercial sales to Asia improved late in the first quarter, we expect a recovery in sales in Europe and the Americas later this year. However, in light of the initiated shutdowns and travel restrictions, it is prudent to assume such recovery will begin in the fourth quarter. In other words, we expect the overall sales level in the third quarter to be very similar to Q2. As a result, we now expect 2020 full year's sales to decline approximately 3% from 2019, with sales of instrumentation and imaging increasing sequentially in the fourth quarter, and Defense Electronics and Engineered Systems sales continuing to remain robust throughout the year. We're not forecasting a recovery in commercial aerospace in 2020. However, this market will contribute less than 5% to our total revenue. Before returning to Al, to report on the second quarter performance by segment, I want to emphasize the following. First, as we have repeatedly demonstrated in the past, we know how to be disciplined and perform well in challenging environments. Second, in prior cycles, where revenue was challenged, we protected earnings while at the same time increasing cash flow. For example, in 2009, when revenue declined 4%, GAAP earnings were flat and free cash flow increased over 50% from 2008 and was a record for Teledyne at the time. Likewise, in 2016, when total revenue declined 6%, GAAP earnings were flat and free cash flow again increased over 50% from 2015 and was again a record for Teledyne at the time. More importantly, in subsequent years, we kept our lower cost structure. Hence GAAP earnings nearly doubled over the subsequent three to four years. In addition, following some periods of general market weakness, due to Teledyne's strong balance sheet, we were able to complete our largest and best acquisitions. For example, we announced the acquisition of Teledyne DALSA in 2010, and Teledyne e2v in 2016, both of which were our largest acquisitions on those days. Fast forward to 2020. We're aggressively managing variable costs as well as permanently reducing costs where appropriate. Our balance sheet is exceptionally strong with over $380 million of cash and cash equivalents and a borrowing capacity of over $1.2 billion. Al will now comment on the performance of our four business segments.

Thank you, Robert. In our Instrumentation segment, overall second quarter sales were flat versus last year. Sales in marine instrumentation decreased 1.3% in the quarter. However, operating profit improved due to business simplification initiatives and improved pricing and procurement activities. As a reminder, while our marine includes products sold to the energy industry, we expect this market to directly account for just over a third of total marine sales in 2020 or approximately $150 million as annual revenue compared to almost $400 million in 2014. In the environmental domain, sales increased 7.9% as a result of our acquisition of the Gas and Flame Detection business. While sales of certain products such as medical grade oxygen sensors increased during the quarter, this could not offset declines in general and industrial markets, such as stack gas emissions monitoring and wastewater flow and sampling. Sales of the electronic test and measurement systems decreased 9.8%. While there was strength in our Protocol Solutions Group, sales of general-purpose oscilloscopes declined year-over-year, especially in Europe and the U.S. Nevertheless, order trends and sales leads in Asia and Europe have improved in recent weeks. Overall, Instrumentation segment operating profit and margin were flat with last year despite $2.8 million in higher severance and facility consolidation costs. Turning to Digital Imaging segment, second quarter sales decreased 4.3% and primarily reflected lower sales for x-ray detectors for dental and medical applications, partially offset by greater sales of infrared detectors for the defense market. Sales of industrial vision systems were largely flat with last year. Our strength in semiconductor inspection end markets in Asia largely offset some weakness in Europe and North America. GAAP segment operating margin of 19.7% was the second highest quarterly margin ever achieved, but was 108 basis points below last year's all-time record of 20.8%. In the aerospace and defense electronics segment, second quarter sales declined 18.7% as greater defense sales were more than offset by a 49% decline in sales of commercial aerospace products as well as lower commercial space sales related to OneWeb. GAAP segment operating margin decreased due to lower sales but also over 340 basis points of charges for severance and facility consolidation. In the Engineered Systems segment, second quarter revenue increased 6.4% primarily due to greater sales from marine, nuclear and other manufacturing programs, as well as electronic manufacturing services. Segment operating profits increased 20% with a margin of 123 basis points. I will now turn the call to Sue who will offer some additional commentary regarding the second quarter and our 2020 outlook.

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 third quarter and full-year 2020 outlook. In the second quarter, cash flow from operating activities was $155.8 million compared with cash flow of $83.2 million for the same period of 2019. The cash provided by operating activities in the second quarter of 2020 reflected improved collection of accounts receivable and $33.4 million of deferred tax payments partially offset by lower operating income. Free cash flow, that is cash from operating activities, less capital expenditures was $139.2 million in the second quarter of 2020 compared with $65.1 million in 2019. Capital expenditures were $16.6 million in the second quarter compared to $18.1 million for the same period of 2019. Depreciation and amortization expense was $29.0 million in the second quarter compared to $27.1 million for the same period of 2019. We ended the quarter with $468.6 million of net debt, that is $851.4 million of debt less cash of $382.8 million for a net debt to capital ratio of 14.0%. Stock option compensation expense was $5.7 million in the second quarter of 2020 compared with $5.8 million in the second quarter of 2019. Turning to our outlook, management currently believes that GAAP earnings per share in the third quarter of 2020 will be in the range of $2.25 to $2.45 per share. And for the full-year 2020, our GAAP earnings per share outlook is $9.45 to $10 compared with the prior outlook of $9.30 to $10. The 2020 full-year estimated tax rate excluding discrete items is expected to be 22.8%, a 220 basis point increase compared to full-year 2019 due in part to less R&D tax credits. In addition, we currently expect less discrete tax items in 2020 compared with 2019. Please note that the estimates for third quarter and full-year 2020 GAAP diluted earnings per share exclude any potential charge related to Airbus OneWeb Satellites. I will now pass the call back to Robert.

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

Our first question comes from Greg Konrad from Jefferies. Please go ahead.

Just to start on margins, I mean it seems like you maybe took down the organic growth outlook a little bit in Q3, EPS are kind of flat. I mean should we think about similar margins in Q3 and then a ramp in Q4 and then what type of assumptions have you made in terms of one-timers in H2 whether it's restructuring or anything embedded in the margins?

Sure, Greg. First, let's go back to Q2. The margin was 14.8%, the operating margin. We think in Q3, the margin is going to go up to about 15.4%. And we think in Q4 it'll go up further, so we should end the year at around 15% considering the first quarter was pretty low at 13.3%. So, we expect to have continuous improvement in margin. And forgive me, the second part of your question had to do with?

Just have you embedded any additional restructuring, you kind of called into?

We have about $19 million year-to-date. We are still reducing our workforce, and by the end of the second quarter we were down about 660 people. We expect to be down about 1,000 out of 11,800 by the end of the year, which is 8.5%, so it will be below 11,000 when the year ends. Consequently, we anticipate maybe another $4 million to $5 million of charges in Q3 and Q4 collectively; let's say $5 million.

And then you kind of called out digital imaging maybe being a little bit worse than expected, but Instrumentation a little bit better and kind of a ramp into Q4. I mean when we think about toward the end of the year is digital imaging maybe where there's the most opportunity to kind of see increases as we exit the year?

Yes. The surprise in digital imaging was that we anticipated a decline in the dental market for our sensors due to fewer people visiting the dentist in the current situation. However, the decrease in radiotherapy, which includes cancer treatment and equipment services we provide, was unexpected. Most of the decline in cancer therapy stemmed from fewer people being tested for cancer or various types of cancers, which significantly decreased. Looking ahead, we expect Q3 to be relatively stable compared to Q2, with the possibility of generating around $20 million in Q4, primarily in digital imaging and instrumentation. Overall, we expect performance in these areas to improve in Q4 compared to Q2.

And then just last one for me, I mean, free cash flows kind of running ahead of expectations, where you kind of laid out last quarter. Any update there? And then kind of tied to that, you had mentioned M&A, I mean, any change in terms of your near-term appetite and what you're seeing in terms of opportunities?

Let me start with the cash. In April, I indicated that we expected our free cash flow to be around $375 million for the year. I am now raising that estimate to approximately $400 million, possibly a bit more, so let’s use $400 million as a round figure. This would set a new record for us, surpassing last year’s $394 million. If we can achieve this, it would indeed be a milestone. As I mentioned earlier, we currently have the capacity to pursue acquisitions worth about $1.2 billion excluding acquired EBITDA, which could increase depending on what we acquire. I'm guessing that by the end of the year, this capacity might reach up to $1.5 billion. However, there is an ongoing acquisition under consideration for Photonis, which would account for approximately $550 million, potentially a bit more due to currency fluctuations. Additionally, we are interested in pursuing other acquisitions, preferably significant ones, similar to our past acquisitions of DALSA in 2010 and e2v in 2016, which were made when those companies were not performing well and could be acquired at reasonable prices. I believe our interest in acquisitions will grow over time as our cash position continues to improve.

And our next question comes from Jim Ricchiuti from Needham and Company. Please go ahead.

Hi. Thank you. Maybe just to follow up on that comment, Robert, if you look at that M&A pipeline, are there areas in the business where you would like to focus more of the M&A activity, is it in digital imaging or are there still opportunities for you to look at Instrumentation acquisitions as well?

You're right on Jim, both areas. I think digital imaging, obviously Photonis would be a complementary acquisition, a really good complementary acquisition if we’re able to make it to Digital Imaging. On the other hand in the Instrumentation area, that's our second high-margin business, and we would like to make acquisitions there too. So those are the two main areas as you noted.

Okay. And maybe just in general terms, how were these booking trends in the quarter? Can you give us any color as to the book-to-bill and I assume there's been some variability in the book-to-bill in the different segments?

Yes. Let me start again. Going back to Q1, we had a strong book-to-bill ratio of about 1.09%. In Q2, it declined to roughly 0.85%, so we anticipate finishing the year slightly below 1%. Q3 should show improvement over Q2, and we expect Q4 to be a bit above 1%. Our projection for year-end is around 0.98%, influenced by fluctuating quarters, particularly in our Engineered Systems segment. It's important to note that our Aerospace business has a low book-to-bill due to a decline in that entire sector. In the Test & Measurement and Instruments area, we saw Instruments performing just above 1% in Q2, with expectations for 1% in both Q3 and Q4, so we believe we’ll be fine in that regard. In digital imaging, we anticipate finishing a little over 1%. As for Aerospace and Defense, we expect Defense to improve, resulting in a year-end figure just under 1%, despite the downturn in Aerospace and the variability in Engineered Systems. Overall, we expect to be around 1% by the end.

Okay. That's helpful. Robert, as a final question, considering the current economic environment, you have limited visibility on the short-cycle business but some insight into other areas. Looking at the portfolio, where do you see potential uncertainty regarding the anticipated full-year revenue decline of 3% that we should be aware of?

Well, I think you hit it on the head. We think that the declines would be most pronounced in Aerospace and Defense as has been. We think in Q3, for example, that would be down about 20% and for the year it could be as much as 14.5%. I think where we have some risks is in the environmental instruments and some of our Test and Measurement so even though the protocol analyzers are doing really well. We're seeing some encouraging signs in early July as Al alluded to. It's early to tell, but I'm hopeful that some of the environmental and T&M as is beginning to pick up in China will also pick up in Europe and subsequently in the U.S. But the danger really is has to do with environmental. Digital I think would be okay, because we've got a very diverse portfolio. We think throughout the year for the full-year we might be down a percent which is to me is acceptable especially since as we go along we're also improving margins in digital imaging. We think that by the end of the year the margin there will improve 130 basis points or so, so 1% decline is acceptable.

And our next question comes from Joe Giordano from Cowen & Company. Please go ahead.

Hey, guys. How you are doing?

Good morning, Joe.

Can you talk about cost savings in the quarter and how you kind of characterize them? And how much was more structural in nature versus how much was more due to volume declines and temporary savings that may have to come back into the business as things start to pick up?

Yes. The primary savings, Joe, come from people. We spent approximately $1.2 billion; $1.3 billion are people expense. What happened there is that we have turnover, so we haven't been replacing those folks except where we have really good strong orders and then we've cut folks. And so the big change for the year is in people and I think that savings rolling forward net of charges that we take could be as much as $40 million to $50 million. Now having said that, it is our sole intention to keep that low cost structure into next year as we've done previously. The other area of cost savings is we have very strong initiatives in procurement and we have a target of saving over $25 million in procurement this year and that is not savings because we're buying at a lower cost here, because we're signing contracts with our favored suppliers. If we can get that done that will save us another $20 million. In terms of the 1,000 people that I mentioned, I'd say half of it was maybe because the market demand going down like at controls where the market tanked to 50% of what it was. And the other half is really proactive on our part in reducing complexity in our operations and we intend to keep that and we've done that in prior years. We've kept our lower cost as we move forward. I hope that answers your question.

Thank you. I also wanted to ask about China. You mentioned observing some positive signs there over the past couple of months. How would you describe that in terms of how much is due to restocking from low levels versus genuine demand increase?

I believe the demand is driven by various factors. While it's not as strong as last year, there has been an improvement compared to the first two quarters. The positive aspect is that there has been an increase in back-to-work initiatives. However, it's important to note that China represents only 8% of our total sales. We are also seeing a rise in demand in other parts of Asia, including Taiwan and Korea. We expect this trend to continue in Europe and eventually in the Americas.

Great. And then maybe last for me. It sounds like you're looking pretty actively on M&A and you talked about what you are able to close on in prior downturns. I guess what color can you give us here? This is a weird downturn where economics of companies have gone down dramatically but prices of the businesses have not. So what are you seeing in terms of valuation and how people are thinking about selling their companies and what price they deserve?

That's a great question. Many people tend to focus on past prices, even though recent price declines haven't been as significant as some companies' valuations have changed over time. For those that have dropped by 30% or 40%, there’s a tendency to cling to previous prices. However, this is a timely opportunity; many companies have shareholders with varying levels of patience who will also reflect on past prices like management does. Therefore, I believe we will find opportunities. While we might not meet current market prices, we definitely won't pay what was asked a year ago. We're exploring our options to see what's available.

There are opportunities for us. We may not be able to acquire something at the current market price, but we definitely will not pay the prices from a year ago. We are exploring the list of opportunities to see what is feasible.

Lori, if there's nobody else asking a question, what I'd like to do is I'd like to end the call and ask Jason to conclude the conference call, please.

Thanks. Thanks, Robert, and again thanks everyone for joining us today. Of course, if you have follow-up questions please feel free to call me at the number listed on the earnings release. Lori, if you'd give the replay information and close the call, we would appreciate it greatly. Thank you.

And ladies and gentlemen, your replay is available through August 22, 2020, until 11:59 PM Pacific Daylight Time and USA callers may dial 866-207-1041 and enter the access code 3245794. International callers may dial 402-970-0847 using the same code, the access code is 3245794. And once again those numbers are USA callers may dial 866-207-1041, international callers 402-970-0847 and enter the access code of 3245794. And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.