Teledyne Technologies Incorporated (TDY) Q1 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, good morning. Thank you for standing by, and welcome to the first quarter earnings conference call. [Operator Instructions] And as a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Mr. Jason VanWees. Please go ahead.

Thank you, and good morning, everyone. This is Jason VanWees, Vice President, Strategy and M&A at Teledyne Technologies. And I'd like to welcome everyone to Teledyne's First Quarter 2013 Earnings Release Conference Call. We released our earnings earlier this morning before the market opened. Joining me this morning are: Teledyne's Chairman, President and CEO, Robert Mehrabian; 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 1 month. Here is Robert.

Thank you, Jason, and good morning, everybody. First quarter sales are $569.4 million, increased 15.3% compared to last year, and were an all-time record. GAAP earnings per share of $1.07 increased 11.5%. For the quarter, organic revenue growth was 2.1%, driven by 3.7% increase in organic sales in our Instrumentation segment and 5.5% increase in organic sales in our Aerospace and Defense Electronics segment. Orders were also strong in the first quarter. Total book-to-bill was 1.1, resulting in record backlog of over $1 billion. Today, Teledyne is a high-technology company serving industrial growth markets. We have evolved from a company that was primarily focused on aerospace and defense to one that now serves multiple markets that require advanced technology and high-reliability electronic and imaging systems. Sales to international and domestic commercial customers comprised more than 70% of our total sales in the first quarter. This largely resulted from a 38% increase in sales of Instrumentation. Specifically, our main Instrumentation business continues to perform very well, increasing over 20% in the quarter with organic growth of 8.7%. In addition, book-to-bill in the marine business, excluding acquired backlog from the RESON acquisition, was 1.25. In this domain, we now provide our customers one of the most comprehensive portfolios of marine technology, ranging from connectors and communication devices to sensors, imaging systems and complete underwater vehicles. In the first quarter, U.S. government sales were at their lowest level in percentage terms. Nevertheless, our government business grew organically year-over-year, although modestly, assisted by new programs and recent contract wins that we had as a prime. Specifically, new programs in the infrared imaging and missile defense market helped offset weakness in other areas. We continue to emphasize collaboration across our businesses and we are achieving success. For example, we recently were notified by the U.S Navy's intent to award our Engineered Systems segment a sole-source contract for an additional 150 autonomous underwater gliding vehicles, which were developed and are produced in our marine instrumentation business. I will now 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 second quarter and the full year 2013. Turning to our Instrumentation segment. This segment, which is our largest and most profitable, serves the offshore energy, including deepwater exploration and production, and global infrastructure market, as well as provides a range of both analytical and electronic test and measurement instrumentation. International sales represent approximately 55% of the segment sales in the first quarter. First quarter sales increased 37.7% to $221.2 million with organic growth of 3.7% mentioned previously. Marine instrumentation continues to be a key strategic market for Teledyne. As mentioned earlier, sales of marine instrumentation increased 20.4% with revenue from most product categories growing compared to last year. Sales of acoustic systems and autonomous underwater vehicles for hydrographic application, that is ocean mapping, grew nicely and our interconnect systems used in offshore energy production performed very well. Sales of environmental instrumentation decreased 3.8%, where increased sales of air monitoring equipment were more than offset by decreased sales of some laboratory instrumentation. Electronic test and measurement system, comprised of Teledyne LeCroy, which we acquired last year, contributed $43.4 million of sales. Segment operating profit increased 10.8%, while segment margin declined. The decline in margin resulted from the fact that recently acquired businesses had lower margin than our existing businesses, as well as the impact of acquisition and purchase accounting charges. Excluding acquisitions, margins in our environmental and marine businesses increased collectively compared to last year. Turning to the Digital Imaging segment. This segment provides a broad portfolio of visibles, including laser-based LIDAR, infrareds, X-ray and ultraviolet sensors, cameras and software. First quarter sales in Digital Imaging increased 8.7% compared to last year with the revenue growth primarily due to consolidated results of Optech. Sales of X-ray sensors for medical and dental applications and infrared sensors for government applications partially offset decreased sales of certain devices for remote sensing applications. At Teledyne DALSA, sales of industrial machine business systems, including those used for semiconductor, electronic inspection increased compared to last year. Segment profit and margin also improved. Turning to the Aerospace and Defense Electronics segment. First quarter sales increased 5.9% to $174.6 million. Sales of higher-margin avionics, microwave devices and contract manufacturing services also increased in the quarter. Segment operating profit declined somewhat, in part due to severance and relocation charges, as we're consolidating operations in our government businesses to drive down our cost structure in this segment. Finally, turning to the Engineering Systems segment. First quarter revenues decreased 4.3%, but operating margin improved 66 basis points. We expect the performance of this largely government-focused segment will remain somewhat challenging in 2013. However, we believe the outlook for this business has stabilized. Also during the first quarter, we were awarded 2 significant NASA programs as a prime related to space payload operation and space systems development. In addition, the large prime contract wins in 2011 related to missile defense system development and a new Navy SEAL delivery vehicle are now meaningfully contributing to revenue. Finally, as previously mentioned, we were quite pleased to see Navy's intention to award us a sole-source contract for another 150 autonomous underwater vehicles, effectively doubling the size of our own original contract for these systems. In conclusion, I'm very encouraged with our balanced business mix and our portfolio of high-technology industrial businesses. Our strongest growth is coming from international markets, which now represents 43% of total sales. We even saw decent growth in Europe, although organic sales in Asia were relatively flat. While there's going to be some risk to our U.S. government businesses, they performed well in the quarter and we're making necessary cost reduction to keep these businesses sized appropriately. We also seek to continue acquisitions. And in the first quarter, we amended our credit facility, adding an additional $200 million of borrowing capacity. Finally, we continue to expect 2013 to be our 12th consecutive year of GAAP, and I emphasize GAAP, earnings growth. I will now turn the call over to Sue Main.

Thank you, Robert, and good morning. I will first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our second quarter and full year 2013 outlook. Regarding earnings per share, as we anticipated, the first quarter of 2013 included $2.7 million of net tax benefits, compared to $1.1 million in the first quarter of last year. However, it should also be noted that operating profit was impacted by $1.7 million of pretax severance and relocation costs associated with certain electronic manufacturing services businesses, as well as $600,000 in acquisition cost. Turning to cash flow. In the first quarter, cash flow from operating activities was a usage of $56.7 million, compared with the usage of $19.7 million for the same period of 2012. The lower cash from operating activities in the first quarter of 2013 primarily reflected a voluntary pretax $83 million cash contribution to our domestic pension plan, compared to $50 million last year. Free cash flow, that is cash from operating activities less capital expenditures, was a usage of $73 million in the first quarter of 2013, compared to $30.3 million last year. Capital expenditures were $16.3 million in the first quarter, compared to $10.6 million for the same period of 2012. Depreciation and amortization expense was $21.9 million in the quarter, compared with $16.8 million last year. We ended the quarter with $649.7 million of net debt, that is $698.7 million of debt and capital leases less cash of $49 million, for a net debt to capital ratio of 34.5%. Turning to our pension and stock compensation expense. In the first quarter of 2013, gross pension expense was $4.3 million, compared with gross pension expense of $1.7 million in the same period of 2012. Net pension expense after recovery of allowable costs pursuant to government cost accounting standards was $700,000 in the first quarter of 2013, compared to pension income of $1.5 million in 2012. Stock compensation expense was $1.8 million in the first quarter of 2013, compared with $1.5 million in the first quarter of 2012. Finally, turning to our outlook. Management currently believes that GAAP earnings per share from continuing operations in the second quarter of 2013 will be in the range of $1.03 to $1.06 per share. We expect full year 2013 earnings per share of approximately $4.47 to $4.51. As noted in the earnings release, the discount rate for our domestic pension plan decreased to 4.4% in 2013 from 5.5%. The 2013 full year effective tax rate is expected to be 30%, excluding nonrecurring tax benefits or adjustments. Finally, as we experienced in the first quarter of 2013, we expect additional severance and relocation costs associated with operations in the second quarter of 2013. I will now pass the call back to Robert.

Thank you, Sue. Tom, we would now like to take questions. Would you please proceed with the question and answers?

[Operator Instructions] Our first question today comes from the line of Jeremy Devaney with BB&T. Jeremy W. Devaney - BB&T Capital Markets, Research Division: I wanted to touch on acquisitions first. Do you happen to have the revenue numbers for PDM Neptec and BlueView in the quarter?

Optech was 43... Jeremy W. Devaney - BB&T Capital Markets, Research Division: Neptec, not Optech.

Which ones did you mention? PDM? Jeremy W. Devaney - BB&T Capital Markets, Research Division: PDM and BlueView.

PDM and BlueView together were about $6 million. Jeremy W. Devaney - BB&T Capital Markets, Research Division: Perfect. So on the acquisitions, we saw a bit of a deceleration on all those acquisitions, except for PDM and BlueView. The biggest surprise for me was the LeCroy number, which looked like it was off about 11% versus last year's results. Were any of the slowdowns worrisome for you? Or had this been expected? And how do you see those acquisitions rolling out through the remainder of the reported periods?

Actually, it's not worrisome at all for us. The decline year-over-year for LeCroy was expected. First, other oscilloscope companies have had similar declines, but ours was partially artificial in nature for 2 reasons. One is that we -- because of our very rigorous processes for import and export, especially in this case, export, we held up a bunch of shipments almost half the difference to the Far East to ensure that we had appropriate export administrative processes in place. If you exclude that and look at our order side, on the order side, we seem to be, with those things in mind that I just said, fairly flat year-over-year, which is better than what other people have said. The second part of LeCroy is that they have, as you know, introduced a high-definition oscilloscope, which is 12-bit, 16 times better resolution. It's doing very well in the market. And in the first quarter, they introduced a 65-gigabit bandwidth oscilloscope LabMaster, which is probably the highest bandwidth oscilloscope in the market. So I'm very, very pleased with the progress that LeCroy is making. Jeremy W. Devaney - BB&T Capital Markets, Research Division: Excellent. That color is extremely helpful. Also on the M&A process, you guys have had excellent process historically. And I was wondering if either you or Jason would like to comment on what you're seeing in the acquisition pipeline and any additional thoughts on pricing in areas of focus, especially compared to possibly the scale of your pipeline compared to this point last year.

Well, we've just reviewed that interestingly with the board yesterday. We do have a good pipeline. The prices are, what I would say, in the moderate to high side because obviously the market is up and people's expectations are high. We will make some acquisitions. They'll be mixed between small and intermediate that we've had before. I don't know when we'll do another one because if we have a hopper [ph], once in a while, something falls off the bottom and we catch it. But we anticipate we'll make some more. Jeremy W. Devaney - BB&T Capital Markets, Research Division: Perfect. And then last and I'll get out of the way here, you mentioned a bunch of new IDIQs in the Engineered Systems group and there's a few legacies. I know NASA has been kind of hit hard on the budgets. And I was curious, what are you seeing on the take rates under your IDIQs? And have any of the newly announced awards actually begun to ramp on delivery orders?

Well, we have -- if you look at the Engineered Systems as a whole, Jeremy, over the last -- since 2011 to March 18 -- March 13 of this year, they have received about $1.6 billion of prime contracts in 4, 6, 7 programs, 2 of those are NASA. The most recent one at NASA is $350 million. The mission operations and integration contract, which was awarded in early March, was $120 million. And Shallow Water Combat Submersible is $391 million. That was last year. The Objective Simulation is about $595 million. Even if we get some decrease, as you know, in the IDIQ, I expect that we will get at least 75% of the $1.6 billion, which kind of secures our future. I must mention the last NASA contract that we received for engineering solutions and prototyping, which is $350 million, is under protest. But we think that will resolve itself by sometime early this summer.

Our next question today comes from the line of Mark Jordan with Noble Financial.

Robert, I noticed that with relative to the pension that you're using a -- you'd moved to a 4.4% discount rate, which is either very conservative or very realistic, I guess, depending on your viewpoint. But with the contributions that you've made over the last year, voluntary contributions to your pension fund, $83 million here in the first quarter, I guess, the question I would have is what would have been your pension expense if you had not made that series of voluntary contributions here in 2013?

Let me back up a second, Mark. When we -- before we made the contributions with the discount rate that we lowered, our assets were about at 94% of our liability. So it wasn't really out of line. What we chose to do, we chose to pay up 2013 and 2014 contributions together. Because every year, regardless of where our pension is, what we've decided, what the board has decided to do is we should contribute what we're withdrawing from the pension, regardless of what the market does or what the discount rate does, because it will get us into trouble if we don't eventually. But coming back to what you said, with that additional contribution for 2014 this year rather than next year, we took the headwind that we were going to have from pension costs from $0.25, which would have been if we had only made half the contribution, to $0.15, which is what we're estimating right now for this year. Finally, I must note with the market being so favorable in the last few months, as of March 31, our pension assets now stood at, with that contribution included, at 104% versus our liabilities.

Over the last few years, you've used borrowings that are internally generated funds to fund your acquisition program. Do you have thoughts that given quite a reasonably decent valuation for the equity here, that despite the additions to your bank lines, that you might look to equity as a potential to allow you to accelerate your acquisition plans?

That would be a last resort. No, I hate to give up our equity.

Okay. Final question relative to sequestration. It's seemingly that most companies are talking about, that it hasn't been an issue because they're not going back and trying to claw back funding. But have you seen delays in funding that is not necessarily canceling a program but a funding delay that's pushing out ramps in any of your programs yet?

Yes. In some programs, we see some pushout but not too many. If -- Mark, what we've done in the last 7 years, as you know, knowing our portfolio, we've kind of walked away from a lot of the programs that would be affected by sequestration. And so with 70% of our business being commercial now and 1/2 of the business that's government really not being subject to those things, especially with our last contract wins, we do see a little pushout. Like in our Traveling Wave Tube business, we own the socket. So it's like you have the socket. They need a new lightbulb, and we provide the TWT. So we're seeing a little pushout there. But I don't think it's significant. If everything goes against us, as we see today, for the full year, it might affect us, let's say, $20 million in revenue.

And our next question comes from the line of Tyler Hojo with Sidoti & Company. Tyler Hojo - Sidoti & Company, LLC: Just in regards to the guidance, could you maybe update us on top line expectations? I think, as of last quarter, you were looking for 2% to 3% organic growth. Does that still stand kind of following a pretty solid Q1 here?

Tyler, I'd say yes. There's so much going on around the world. Europe is weak. Even though we gained in Europe, Europe is, by and large, weak in a lot of markets. Far East is okay. We're seeing some improvements there. Interestingly enough, we don't see a lot of movement in the U.S. in some of our markets, except for oil and gas obviously. So I'd say we'll keep our current forecast at 2% to 3% organically. Tyler Hojo - Sidoti & Company, LLC: Okay, that's great. And what about the RESON acquisition? What is that expected to contribute to sales in 2013?

Well, it started in March, which is -- so it will give us 10 months of revenue. I would say roughly about $53 million, $55 million for the year. Tyler Hojo - Sidoti & Company, LLC: All right. Great. And the only other question I had was just as it relates to the Optech acquisition. It looks like -- if my numbers are right here, it looks like the revenues were down about 35% year-over-year. I was hoping that maybe you could just comment on what drove that and what the expectation is there.

The main issue there is, as a private company, they still haven't adjusted to linear shipments as much as we'd like quarter-over-quarter. They have fairly lumpy shipments because of their -- they ship products that cost $1 million apiece. I think we would probably be okay in Q2. We'll go up maybe 20% sequentially, so that will take care of that issue for us, Tyler. Tyler Hojo - Sidoti & Company, LLC: Okay. And I think you said in the press release that they had posted an operating loss. Will the volume increase in Q2 kind of heal that issue? Or how do you go about that?

Yes. I think there are 2 things, Tyler. One is that we think there would be more shipments in Q2. The second thing is that they are putting in place -- we own only 51% of the company, but they are putting in place some cost efforts that would bring their breakeven cost point down. We are very excited about Optech because what it offers us is looking down from above the waterline, both on the coastline but also coupling the Optech images to our underwater imaging systems, fusing the images together. They have great technology, so we think they're going to be fine.

Our next question today comes from the line of Jim Ricchiuti with Needham & Company. James Ricchiuti - Needham & Company, LLC, Research Division: A question I had is -- relates to the Digital Imaging segment. It looks like excluding Optech, the business was flat to up slightly. And you called out a couple of areas where it looks like you're seeing growth. I think you mentioned that the DALSA machine vision was up year-over-year. And certainly, the medical piece seems to be doing fairly well. What areas are weak? You called out in your press release, I think, remote sensing applications, some of the images for remote sensing. Is that the area that's been holding back the growth in that area?

It was really -- the remote sensing was really one product line that we make for an external international customer. Other than that, it's a very nice and stable business. Let me give you an example. In the medical imaging, medical dental imaging, their low-dosage, high-resolution image products are really gaining traction with our largest customers. And then if you look at their programs in flat panel display inspections, which is fairly important program for us, there are a number of things that are happening that are helping them. The smart telephone phone, hand phones and tablet businesses are growing very fast. And most of these are using new organic LED technologies for the display. And our customers, as a consequence, are ordering more products from us in that domain. We also have very active programs in migrating from CCD imagers to CMOS imagers, which are higher-speed images and higher-quality images, and we're introducing 2 new products. So all in all, that business is doing pretty well. James Ricchiuti - Needham & Company, LLC, Research Division: Got it. So in terms of the display portion of the DALSA business, I didn't realize that you're also, in addition to inspecting LCDs, which I thought was right now, that market was a little soft, the main benefit from that area is coming from OLEDs?

Yes. Also the fact that both in the OLED -- both in Korea and also in Japan, that -- and China, they're gaining market share. And so the flat panel displays that we were doing, we still are doing, of course, for television and others. The declines there are being more than offset by smartphones and other devices. James Ricchiuti - Needham & Company, LLC, Research Division: Okay. And one final question, if we just look at the commercial business segment, just putting aside government, which has its own dynamics right now. But if we look at the commercial area and -- can you characterize where you see the opportunity for the most organic growth? I mean, it sounds like Instrumentation. And is it fair to say it's coming more from the marine instrumentation area? And if you could just rank the areas. I mean, you're talking about 2% to 3% organic growth. But I wonder if you can give us a little flavor for what you might be anticipating in some of the major commercial markets.

On the bigger picture, we are seeing about 3% to 4% growth in international markets for our commercial businesses. When you walk back to the marine businesses, we had over 8% organic growth. And primarily, that is driven by the fact that most of the oil that is now being produced and will be produced, new oil in the future comes from deepwater. And deepwater CapEx is forecasted to grow 90% between 2012 and 2017 with $135 billion going into subsea equipment, which is where we play. So in terms of ranking, I would say oil and gas, underwater connectors, underwater, both optical and electrical connectors. Then I would say the big opportunities are in the marine systems in general. For example, there is a very large program currently in ocean observation initiatives -- observatory initiative, which is a big scientific study of oceans that includes connectors, communication systems, all kinds of sensors that we produce. And we've already received about $20 million of orders just in that 1 program to date. So I'd say that's the second. And then the last one, again in the marine domain, is our underwater vehicles. We are getting traction there, both gliders, as well as powered underwater vehicles. So I'd say marine first, international, second. A lot of marine, of course, is also international. And lastly, in some of our air monitoring equipment, people already have started ordering air monitoring equipment and some also water flow systems. Municipalities have a little more money from taxes now. And in the air monitoring, the biggest growth area is in China. They had some really terrible news, vis-à-vis the quality of the air there in the last 90 days or so. And so they're buying a lot of our air monitoring. So I would say those are the areas.

Our next question comes from the line of Steve Levenson with Stifel. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: It was glad to hear that selling equity would be a last resort. But do you think there's an opportunity to refinance any of those senior notes at a lower rate, either now or in the not-too-distant future?

Yes. We've looked at that, Steve. The -- we have 3 sets coming up. One is in 2014, which is too close to be worth refinancing. There's one in '17 and one in '20. We look at it all the time. It doesn't financially make that much sense right now. But if it ever makes sense, we would, yes. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Does the news coming out of North Korea and Iran and the other threats that have shown up recently give you any confidence that funding will at least remain at current levels or maybe even grow?

I don't know. You'll have to ask the administration that question. But I'll tell you one thing about, at least, Iran. The whole underwater vehicle domain, as we know it, both because Iran and because of our emphasis in the Pacific, is growing. For example, threats of shutting down the Strait of Hormuz caused us to look at, us being the U.S., to look at ways of using underwater vehicles to detect the mines because they're not going to close the straits with their boats, they're going to try and mine them. And in general, we're seeing some uptick in our underwater vehicle. And as I mentioned just very recently, the Navy announced another 150 gliders of sole-sourced buy from us. On the North Korean side, I think the only thing I can say there is we make missile engines, turbine engines for missiles. And the most advanced one of those is the JASSM. And that has stabilized for us. And that's a good sign for us. And we're also having some foreign military sales in some of our Harpoon engines. And of course, missile defense is always on the radar. And there might be some actually cuts there to our DT&E. Having said that, because of the Objective Simulation Framework contract that we got, a large contract, we feel fairly secured there. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Okay, that's great. Lastly, it's good to hear about the projections for oil and gas. But in the near term, do you see any slowness in that market?

We haven't seen that. I know the price of oil goes up and down, but it's way above what their costs are. Book-to-bill for us in the marine domain in Q1 was 1.25, which is about the highest we've seen.

Next question comes from the line of Chris Quilty with Raymond James. Chris Quilty - Raymond James & Associates, Inc., Research Division: Just had a question. I know, Robert, some years ago or maybe it was just last year, you had talked about with the energies -- the Engineered Systems business making a greater move toward some of the manufacturing capabilities or utilizing the manufacturing capabilities you have. Can you give us an update of where those efforts stand, just kind of where the portfolio is today and where you think it might be in 1 year or 3 years from now?

Yes. If you look back about 2 years, what I would say, our marine and aerospace manufacturing programs there were about $25 million a year annualized. This year, we expect that it'd be $50 million. And $40 million of that will be in the marine and some that are the gliders. But we also make up a whole range of products for Littoral Combat Ships and other projects, where we have large machining capability there. And so we think that's going to grow. Right now, it stands at $50 million for the year out of a revenue of, let's just say, approximately $300 million. So it's come up quite a way, and I think it's going to keep increasing. We are not involving them in our electronic manufacturing services business because that's a separate segment. And frankly, the business -- that business has lower margins than the rest of our portfolio. Chris Quilty - Raymond James & Associates, Inc., Research Division: Got you. A housecleaning item, can you give us a ballpark annualized revenues on the RESON acquisition?

RESON, you're actually pronouncing it better than I am. Annualized, I think, we're looking about $62 million to $65 million, at least that's the projection currently. And of course, you know that we'll have them 10 months this year. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay. And final question here is a bit of a portfolio question. A small part of your business but one place where you haven't really had much activity in years is your energy systems business. And kind of unusual for you to either not invest in or divest businesses that are noncore. I think you had, looking back over the last several years, the Al Gore opportunity to sell, the Obama opportunity to sell. You hold now for Robert Wexler to become President. Or is this something where you're looking to go out and buy Fisker? I mean, what's going to happen with the portfolio?

I don't think Qatar wants to buy that business, even though they buy hydrogen systems. What we do have in that business that we can't really discuss in public is we do have a classified program that's growing. And it's a very good program actually. And it's about, I'm going to say, about $15 million a year and profitable. On the hydrogen business, the hydrogen generation business, we're probably one of the few commercial hydrogen generation businesses in the world that sells generators. And then we have some fuel cell products that we expect to introduce in some of our underwater vehicles. So in some ways, it's a fairly stable business. I don't think we would want to divest it at this time. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay, fair enough. So you're not buying Fisker?

Not, except if it's for nothing. No, I mean, wouldn't even touch it then. But it's a nice car.

And our next question comes from the line of Michael Ciarmoli with KeyBanc.

Robert, maybe just on Europe. Can you give us sort of the mix, the revenue mix there of what is truly exposed to sort of the broader industrial markets in Europe versus what your energy exposure is there that might be a bit more insulated from the kind of general macro conditions?

I'm going to say of our international revenues, maybe 1/3 or less than 1/3 is in Europe. Of that, there is a significant change from business-to-business. You don't see all the downside in any one time. We don't serve the auto market in Europe. And as you know, the auto market there is in real depression. We don't serve the construction market there, either. On the other hand, we do sell a lot of instruments, oscilloscopes. We do sell photometric vision equipment. This quarter, interestingly enough, our revenues in Europe increased. I don't know if that was a fluke or what. But so far, because of the mix of our businesses, I'd say we expect that to be relatively flat.

Okay. And then what about -- you've got the strong book-to-bill in the quarter. What's the order pipeline looking like? Is it still sort of characteristic of what you're seeing in your end markets with strength in kind of Instrumentation, with marine kind of leading the charge? I mean, do you have good visibility into the future pipeline of order flow?

Probably, the orders will decrease in Q2 somewhat because some of the orders carry over into Q2. In general, I would say in our commercial businesses, it's fairly stable. The government businesses, as I mentioned earlier, we're seeing a little pushout. But right now, I would say our orders are fairly stable. We expect orders to remain stable for the year.

And then just shifting over to the financials. Maybe, Sue, what's the expected level of amortization this year, which would include maybe any sort of one-time inventory step-up or other purchase accounting adjustments?

So the amortization is about $29 million and the inventory -- purchase accounting step-ups, we only have 1 right now, it's about $600,000.

Yes. That $29 million translates into a $0.53 amortization, intangible amortization expense so that if we were doing non-GAAP, we'd probably stick that up top.

[Operator Instructions] And we'll go to the line of Robert Kirkpatrick with Cardinal Investment.

If your discount rate doesn't change in the coming year, does that mean that in 2014, you would make no pension contribution?

That's correct, Rob. Because the contribution that, on the average, our withdrawal from the pension is of the order of $41 million to $43 million a year, last year, this year, next year. So with the $83 million contribution that we made in January, that was for both 2013 and 2014. So if things don't drastically change and create terrible headwinds, and especially if the market stays as healthy at is it today at 104% funding versus our liability, we wouldn't make a contribution in 2014.

Well, certainly that will boost your cash flow then.

Yes.

And we have a question from Jeremy Devaney with BB&T. Jeremy W. Devaney - BB&T Capital Markets, Research Division: So one of us usually asks you to spoonfeed us the model. Robert, if you could go through the segments and sort of give us an idea of what you're expecting on the growth and margin side, especially focusing on the margins, as we've seen such a turn in Instrumentation...

All right. I'll try and do that. In Instrumentation, as I mentioned previously, our margins went down from last year primarily because of the acquisition. And they were at 15.8%. I think Q2 would be maybe similar, maybe a little down. But as we move through the rest of the year, I expect the margins to improve, and we end the year at maybe a little over 16%. On Digital Imaging, I expect our margins to improve. Again because you recall, Jeremy, we talked about Optech having a loss and pulling the margins down there, so we expect that it was 5.1%. I expect that to move up to more the 7-ish range. In the Aerospace and Defense Electronics, it was about 12.5%, and I expect that to move up a little bit as time goes on. And in Engineered System, it was at 9%. That was very high for us. And I think that will go down somewhat. So when you add and subtract all of what I have just said, we think that our segment operating margin was about 12% this quarter. It should creep up over the year and maybe end up at 12.8%, 12.9%, something like that. Does that help? That's as much detail as I've given on that subject ever.

Well, there are no other questions at this time.

Thank you, operator. I'll just now ask Jason to conclude our conference call.

Thanks, Robert. And again, thank you, everyone, for joining us this morning. If you have follow-up questions, please feel free to call me at the number that's been on the earnings release. And again, all our earnings releases are available on our website, teledyne.com. Tom, if you could give the replay information for the dial-in, I'd appreciate it. Thank you.

Yes, sir. Ladies and gentlemen, this conference will be available for replay starting at 10:00 a.m. this morning and running through the 24th of May at midnight. You may access the AT&T Executive playback service at any time by dialing 1 (800) 475-6701 and entering the access code of 280571. International participants may dial (320) 365-3844. That does conclude our conference call for today. We thank you for your participation and using the AT&T Executive TeleConference Service. You may now disconnect.