Teledyne Technologies Incorporated (TDY) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Teledyne Second Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Mr. Jason VanWees. Please go ahead.

Thank you, and good morning, everyone. This is Jason VanWees, Senior Vice President, Strategy and M&A at Teledyne. And I'd like to welcome everyone to Teledyne Technologies' Second Quarter 2013 Earnings Release Conference Call. We released our earnings earlier this morning before the market open. Joining us today are Teledyne Technologies' 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 dial-in and webcast, will be available for approximately one month. Here is Robert.

Thank you, Jason, and good morning, everyone. Second quarter's sales of $601 million increased 15.9% compared to last year, our all-time record. GAAP earnings per share were $1.13 and were a record for any second quarter. Organic revenue growth of 2.9% was respectable, given the current economic environment and resulted from a 6.2% increase in organic sales in our Instrumentation segment and 11.8% increase in organic sales in our Aerospace and Defense Electronics segment. Total book-to-bill was 0.98x and backlog remained over $1 billion. Today, Teledyne is a high-technology company, serving industrial 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 approximately 75% of our total sales in the second quarter. Furthermore, given their greater profitability, these businesses contributed approximately 85% of our profit in the quarter. Instrumentation sales increased 43.5% and should approach $1 billion for the full year 2013. For example, our Marine Instrumentation businesses continue to perform very well, with year-over-year quarterly sales increase of almost 27.9%, with organic growth of 9.7%. In this domain, we provide our customers one of the most comprehensive portfolios of marine technological products, ranging from connectors and communication devices to sensors, imaging systems and complete underwater vehicles. I did want to point out that we made a minor change to our segment reporting. Two commercial businesses that were formerly part of Aerospace and Defense Electronics segment were moved to the Instrumentation segment. These interconnect businesses, primarily serve energy production markets and are now managed by and integrated with our other interconnect businesses within the Teledyne oil and gas, which is part of Marine Instrumentation. The financials for the current and prior periods have been revised accordingly. Given the challenging global economic environment, we have increased our emphasis on cost reduction, reducing our headcount and manufacturing footprint in those businesses which are facing headwinds. For example, through July 2013, we have announced headcount reductions equaling 2.9% of our workforce. That is in addition to a reduction of over 4% in 2012. Overall, in the last 19 months, headcount has been reduced by almost 700. In the first two quarters, we've expensed $4.2 million of severance and facility consolidation cost. For the full year 2013, we expect such costs will be $9.1 million, with $3.2 million occurring in the third quarter. 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 third quarter and 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 markets, as well as provides a range of both environmental and electronic measurement instrumentation. International sales represented approximately 55% of the segment sales in the second quarter. Second quarter sales increased 43.5% to $257.7 million, with organic growth of 6.2% mentioned previously. As mentioned earlier, sales of Marine Instrumentation increased 27.9%, due largely to strong sales of geophysical sensors for offshore oil exploration and continued growth in sales of interconnect systems used in offshore energy production, as well as the acquisition of RESON, the world's leading supplier of commercial shallow-water, multi-beam sonars in March of this year. Sales of environmental instrumentation were flat, with sales of both air monitoring equipment and laboratory and field instrumentation, changing only modestly year-over-year. Electronic tests and measurement systems comprised of Teledyne LeCroy, which we acquired last year, contributed $46.4 million of sales, an increase of 6.9% sequentially compared to first quarter of 2013. Yesterday, we announced that Teledyne LeCroy demonstrated the world's first 100-gigahertz, real-time oscilloscope. This performance dramatically exceeds currently available bandwidth and is truly an industry milestone, one of many achieved by Teledyne LeCroy over the years. Almost as important, we also announced that Teledyne LeCroy, in collaboration with Teledyne Scientific, our R&D laboratory, released for production our first jointly developed next-generation indium phosphide chip to be used in future high-speed oscilloscopes and related test and measurement devices. Operating profit in the Instrumentation segment increased 33.9% and -- while segment margin declined because, for the time being, recently acquired businesses have lower margins than our existing businesses. Excluding the acquisition, margins in our environmental and marine businesses increased considerably compared to last year. Turning to the Digital Imaging segment. This segment provides a broad portfolio of visible, including LIDAR, which is laser-based, infrared, x-ray and ultraviolet sensors, cameras and software. Second quarter sales in Digital Imaging decreased 6% compared to last year. This was largely due to lower sales of images for remote sensing application, as well as reduced sales of LIDAR systems and MEMS products, partially offset by increased sales of infrared sensors and optics. At Teledyne DALSA, our Canadian imaging company, sales of industrial machine business systems, including those used for semiconductor inspection, increased compared to last year, but could not fully offset the tough comparison in the remote sensing market. This quarter, we made a small but important acquisition for Teledyne DALSA. We acquired Axiom IC, a designer of high-performance CMOS mixed signal integrated circuits. The technologies at Axiom will help us continue developing highly differentiated CMOS imaging sensors and cameras for our machine vision market. Within this segment, operating profit increased, and margins improved 81 basis points from last year. Turning to the Aerospace and Defense Electronics segment. Second quarter sales increased 11.8% to $169.5 million. Sales of higher-margin avionics, microwave devices and contract manufacturing each increased in the quarter. Segment operating profit declined due in part to greater pension expense and charges for severance and facility consolidation, as we are co-locating operations in our Defense Electronic businesses to drive down our cost structure. Turning to engineering -- Engineered System segment. Second quarter revenue decreased 9%, and our operating margin decreased 148 basis points. We expect the performance of this still largely government-focused segment will remain challenging in 2013. Nevertheless, this segment continues to developed system-level products using technologies from our Instrumentation and Digital Imaging segments. In the past, we have mentioned 2 system-level prime contracts. The Littoral Battlespace Glider and the Shallow Water Combat Submersible programs, which combined together have a value of nearly $500 million. In addition, we have funding and continue to work with NASA on the development of an exciting commercial space-based Digital Imaging capability to be deployed on the International Space Station. 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 represent 45% of total sales. While there's some ongoing growth[ph] for our government -- U.S. government businesses, a proportion of these businesses continues to decline. And we're also making the necessary cost reduction to keep these businesses sized appropriately. Finally, we are pleased to increase our earnings outlook, and 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 third quarter and full year 2013 outlook. Regarding second quarter earnings per share, I wanted to note that earnings included $2.1 million of pre-tax severance and facility consolidation expenses, partially offset by $0.9 million of net tax benefit. Turning to cash flow. In the second quarter, cash flow from operating activities was $112.8 million compared with $69 million for the same period of 2012. The higher cash from operating activities in the second quarter of 2013 primarily reflected the timing of accounts receivable collection, additional cash provided from recent acquisitions, partially offset by higher income tax payments. Free cash flow, that is cash from operating activities less capital expenditures, was $92.8 million in the second quarter of 2013 compared to $51.9 million last year. Capital expenditures were $20 million in the second quarter compared to $17.1 million for the same period of 2012. Depreciation and amortization expense was $22.1 million in the quarter compared with $18.1 million last year. We ended the quarter with $558 million of net debt, that is $628.1 million of debt and capital leases, less cash of $70.1 million for a net debt to capital ratio of 30.3%. Turning to pension and stock compensation expense. In the second quarter of 2013, gross pension expense was $4.4 million compared with gross pension expense of $1.6 million in the same period of 2012. Stock compensation expense -- stock option compensation expense was $2.8 million in the second quarter of 2013 compared with $2 million in the second quarter of 2012. Finally, turning to our outlook. Management currently believes that GAAP earnings per share from continuing operations in the third quarter of 2013 will be in the range of $1.10 to $1.15 per share. We expect full year 2013 earnings per share of approximately $4.50 dollars to $4.55, an increase from our prior outlook of $4.47 to $4.51. The 2013 full year effective tax rate is expected to be 29.5%, excluding discrete items such as nonrecurring tax benefits or adjustments. Finally, we expect additional severance and facility consolidation cost in the third quarter of 2013 of $3.2 million, partially offset by $1.9 million of anticipated net tax benefit and $9.1 million of severance and facility consolidation cost for the full year of 2013. I will now pass the call back to Robert.

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

[Operator Instructions] And our first question comes from Mark Jordan with Noble Financial.

Robert, a question relative to the restructuring you seemed to be doing in your Defense and Aerospace area. I guess, the implication is that you expect another $1.7 million of expenses in the fourth quarter. And do you plan to have this overall restructuring program completed in the fourth quarter?

Yes, so I think, overall, you're correct. We may have a little bit left over for next year, but Mark, I think we should be pretty well done with it. That is what we see in our portfolio at the present time.

Okay. Relative to amortization with, the acquisitions that you've completed, what was the amortization of purchased intangibles in the second quarter? What do you expect for all of '13? And do have a number for '14?

I can tell you, in general, for the overall -- in the fourth -- in the third quarter, it was about $7.9 million. I think for all of 2013, Mark, it's close to $30 million, maybe $29 million.

And do you have an -- knowledge of what it should be for '14?

I would think it would be about the same range. I think $30 million, because of the acquisition of LeCroy and acquisition of RESON, which have added to our amortization. And they won't go away for a while.

Okay. Final question, if I may. You're seeing a very slow creep-up in diluted share base related to options. From a capital deployment standpoint, does using cash to offset that option creep, is that a viable thing that you think about? Can you just talk about how you view option creep?

Well, I don't like it, obviously. On the other hand, with the stock price at the current level and our return on capital hurdles that we have, I think, Mark, we're better off using the cash to make accretive acquisitions and leave the option creep for a while. Now if the stock price were significantly lower, which I hope it won't be, then we'll revisit that issue.

And our next question comes from Jim Ricchiuti with Needham & Company. James Ricchiuti - Needham & Company, LLC, Research Division: I have a question on the strength that you saw sequentially at LeCroy. Is this a case of the normal seasonality in their business, that at least that we've seen over the years? Or are they seeing some improving underlying demand?

No, I think, Jim, your first conclusion was more of correct. I think it's more seasonal. The underlying demand is okay in the U.S. It's okay in Far East. It's really bad in Europe. And that we're hoping that Europe may have bottomed out or will bottom out in the third quarter. All indications are that, that would happen. James Ricchiuti - Needham & Company, LLC, Research Division: Okay, that's helpful, Robert. And then, one follow-up question in the Digital Imaging business. As I recall, last quarter, you had been anticipating, I believe, a fairly good sequential increase in revenues at Optech. I think it might've -- you might've talked somewhere around 15%, 20%. It sounds like that business is still weak. What are some of the dynamics that you're seeing in that area?

Fundamentally, Jim, as you know, we have -- we really own only 51% of Optech. 49% is minority owned. We had some growth from Q1 to Q2. I'm going to say from about $9 million to $11 million -- $11.5 million. So there was growth that I indicated there would be. On the other hand, they'll have -- they have had some delays in their market, especially, in their survey-grade mapping and some of their space, terratial imaging from space, airborne laser and terrain mapping products. It's not the easiest business for us to control, because while we are majority shareholder, there's a very strong minority component there. But I must say that they've also done headcount reductions to bring their cost structures lower in the recent past.

And our next question comes from Tyler Hojo with Sidoti & Company. Tyler Hojo - Sidoti & Company, LLC: Just, firstly, could you just update us on your full year expectations for organic sales growth? I think last quarter, you were indicating low, single digits, somewhere in the 2% to 3% range. Still on track?

I would say the same, yes, 2% to 3% overall. Tyler Hojo - Sidoti & Company, LLC: Okay, great. And then, Robert, maybe you could talk a little bit about how that kind of growth on unfolds just from a segment or end market perspective? That would be really helpful.

Sure. I think, basically, a lot of the growth comes from our Instrumentation and Imaging businesses. We expect instrumentation, year-over-year, to be 6%, maybe Imaging, 3.5%. But we're seeing some declines, as expected, in our Engineered Systems segment, about 6%, as I mentioned. That's a primarily still government-controlled program. And we're giving up some of the programs that are low-margin programs that relate to technical assistance programs for the government. We expect to have a little upside in our Aerospace and Defense Electronics, primarily because of improvements in avionics, which are tied to, of course, aircraft build. And some of our other products, like relays and so on. So overall, I think 3 of our segments should show increased revenues between 3% and 6%. One of our segments, the Engineered Systems segment, should show a revenue decline of approximately 6%. Tyler Hojo - Sidoti & Company, LLC: Okay, wonderful. And then just lastly for me. Maybe you could just talk about -- or give us an update on the reservoir monitoring system that was developed and installed in Brazil late last year? I think last we spoke on this, you were perhaps anticipating some additional follow-on orders. Where do we stand there?

As you indicated, we shipped the product last -- late last year. It's been deployed, it seems to be working very well. Our primary customer is in the process of redesigning the system, and we expect that while we may supply some components and connectors into that domain, for the near future, we don't see a significant increase in that business. Partially, I think, it's turning out to be a lot more expensive than people initially thought.

And our next question comes from Chris Quilty with Raymond James. Chris Quilty - Raymond James & Associates, Inc., Research Division: Robert, just wanted to follow up on your guidance for the Aerospace, Defense. I think, you said a little bit of upside. But Q1, you were up 5.5% and up over 11% in Q2. Does that imply flat to down sales in the back half of the year or a continuation of the trends we saw in the first half? And the second part of the question, just, if you can give us your general thoughts on what you're seeing from, specifically, the defense part of the business, with budget cuts and sequestration. It seems you've sidestepped that pretty well, but indications that you're past the worst of it?

Chris, let me we start with the first one. The first 2 quarters, Aerospace and Defense Electronics were up for 2 reasons. Our avionics businesses were up. But we also had a very significant business with the U.K. MOD, which is kind of a anti-IED program that we had, which was significant in the first 2 quarters. That's going to very much slow down, because we've delivered the major systems already and we're waiting for a follow-on program, perhaps late in the fourth quarter or early next year. So that part of the growth, Chris, that contributed to the 11% and then the 6.9-or-so percent -- or 8.9% is going away. Having said that, our avionics businesses are doing well. But if you look at it overall, that's about $110 million or so -- $110 million, $120 million business, so a slight increase -- a good increase there doesn't change things very much. So I would say that in the Defense Electronics businesses, if you separate the Aerospace for a second, we are seeing some delayed sequestration. You know that one better than most. That is pushing the depots, the military depots that used to buy our products to replenish, for example, electronic warfare equipment, like Traveling Wave Tubes and solid-state amplifiers. They're pushing that off. It's going to the right. But one other thing is happening in the government that people haven't really paid attention to, there is an ongoing kind of a reduction in -- effort because of people being furloughed. A lot of the high-paid -- the executives at the high end of the government programs, senior executive service, GS15, 16s, et cetera, are being furloughed one day a week. So even when things were going well, programs were getting delayed, now with the furloughs, we can't get a lot of decisions from the government, because people are working, really, only 80% of the time. Chris Quilty - Raymond James & Associates, Inc., Research Division: Got you. Switching gears, the Engineered Services business, can you give us a sense, with the downsizing of that business, where the business mix stands nowadays between the traditional services business and your push towards more engineered products, I guess, a hardware versus service mix?

Yes. If you look at the big picture, Chris, back in -- let's say, 2010, we had about $75 million to $80 million of system engineering and technical assistance program, primarily in missile defense area. That is pretty much gone away. We're about $10 million today. So -- and those were, by the way, our lower-margin businesses. So we've given a lot of that up. Second thing that's happened, in the NASA program because of the weak support from the White House, especially in the manned space mission, we've gone from about $80 million to about $50 million in the last 3 years. So those are the 2 major declining programs. Our manufacturing, which is Marine and Aerospace manufacturing, in the same period, has increased from $13.5 million to almost $50 million. And as I indicated before, there are some very significant system-level programs that we've been fortunate enough to get and those include the shallow water submersible, the glider program. We also have time programs in space now which -- with NASA. And then, finally, in the missile defense program, we do have a significant effort in software, which is the objective simulation framework. So here's what happened overall. Programs that were lower-margin programs that we had -- we were subcontracting out to small businesses, we're obliged to do it, those have declined. Programs that are manufacturing-related have increased. And then our prime programs have increased. I think over -- this year's been a really tough comparison. We're going forward, I think we pretty much stabilized this business, especially as we also move with the space imaging, as I mentioned before, where we will -- we are building the multiuser platform at the present time, which will go on the International Space Station. And we're working on with NASA to see how we equip that platform with both a multispectral and hyperspectral imaging system. So when you look at it, I think it's a healthy shift in the business. So temporarily, we've taken some declines in revenue. But, frankly, I don't miss those programs that we had before, because they were lower margin and really not that exciting. Chris Quilty - Raymond James & Associates, Inc., Research Division: Got you. And are there any other big system-level program opportunities out there you're chasing?

At the present time, the one that comes to mind that's sitting out there is the USEC program, as you know, that is a nuclear fuel recycling program. We don't have a lot of information on it, it's in an R&D space right now. We enjoy about $7 million, $8 million a year in that program. But if that government guarantee is successful, which there are some indications that, that might come around, that program can grow to be 4 or 5x, maybe even 6x the size it is at the current time.

[Operator Instructions] Our next question is from Michael Ciarmoli from KeyBanc Capital Markets.

It's actually Kevin Ciabattoni for Mike. Most of my questions have been answered. Just wanted to look quickly at Digital Imaging. You guys gave a little bit of color, but just wondering if you could give some thoughts on kind of what we're looking at there in the industrial market. I know machine vision, you said, was up year-over-year, including the semiconductor part of that business. Just wondering if you could give us some more color there, if that seems to be like a trend that you're seeing or something kind of more seasonal? And then also, what you're looking at there in terms of potential expansion into the uncooled infrared market?

First, the machine vision, it's both semiconductors, but, also, there's significant increases in deployment of our system in flat panel display. And those -- especially, of course, located in Asia. I think we're doing very well. We see strength in that domain. In the uncooled infrared sensor development, what we have is we have a -- we're developing a capability to manufacture low-cost high-performance, long-wave infrared sensors, as you know, also known as microbolometers, in our Bromont, Québec, semiconductor facility. These will, obviously, complement our other infrared sensors, including those that we do here, based on mercad telluride, which are cooled. We are testing, at the present time, alpha testing processes. We have our equipment installed. We have collaborative efforts with the Canada's National Institute for Optics. We have developed some prototypes, and we have some partnerships established with a large customer in the U.S. As you know, once we get this thing going, the -- one of the advantages we would enjoy is because the production facilities are in Canada, they would be ITAR-free, which would give us a lot more freedom to sell to international customers. Having said all of that, Digital Imaging, overall, the comps have been relatively tough year-over-year. Having said that, this is the highest revenue we've had in the last 3 quarters.

Okay, that's helpful. And then, just one last one for me. In terms of pension, just wondering if you could maybe give us some initial thoughts of what we could see next year, with the expectation of kind of higher rates in terms of both pension expense and equity returns?

Fundamentally, I can't say a lot. I think the returns have been healthy, so I think our funding ratio has improved. It's over 100% at the present time. We do have also the potential for improvement in the discount rate. As you know, as the discount rate moves up, the pension obligations go down. Right now, we're operating at 4.4% discount rate, Kevin. It's possible that by year end, that will go up. But it's a little early for us to kind of numerical numbers on that. But the trend is in the right direction, I would say.

And we have a follow-up from Jim Ricchiuti from Needham & Company. James Ricchiuti - Needham & Company, LLC, Research Division: Robert, I think that you commented that the book-to-bill was around 1. Can you talk a little bit about -- give us a sense of how the book-to-bill might look in some of the various segments?

It's not as easy for me to answer, but I'll give it a boyscout try. A lot of our businesses are book and burned, that I'd say a lot of our Instrumentation businesses, our LeCroy business, we book and burn every month. But if you look at the longer-term businesses, Digital Imaging is close to 1, it's 0.99 to be exact. Of course, we only count those things that are already approved and funded in our backlog. So if we have a program like the Shallow Water Submersible Program or the Glider program, that might have an IDIQ contract that is $500 million together, we only count that portion that we're sure we're going to get. So I'd say most of our segments are about 1 book-to-bill or higher. The only one that I'd say falls short of 1 is the one that I mentioned before, where we think year-over-year revenue would decline, and that's in the Engineered System, and that's about 0.94. James Ricchiuti - Needham & Company, LLC, Research Division: Got it. Okay. And if I -- one final question, if I may. Just getting back to LeCroy and the development work that you're doing in indium phosphide, that chip, you said, I believe is going to be released for production. Can you talk a little bit about the significance of this, and how you see this potentially finding its way into the market? Is next year realistic?

Yes, let me back up a second. As you well know, Jim, the limitations on silicon-germanium, you -- we've gone to a relatively small feature size of 130 nanometers or 0.13 microns at the present time. And you've got to do that if you want to increase the frequency. But we're at a point where that is kind of at its limit, and that gives us about 200 megahertz frequency. But then your design function is about 1/5 or that or below. So the kind of chips we're using today are -- at LeCroy, at the top end, would be 36 gigahertz. Now if you move to indium phosphide, indium phosphide at 0.5-micron feature size already has 350 megahertz bandwidth. If you go to 0.13, which we have already in our laboratory, that's much higher. So let's come back to the chip then. The first chip that was released for production yesterday will probably go into an auxiliary probe component that we would use. Next -- with at the present time, we'll have start designing other products for LeCroy. And I think to get to the broadband oscilloscope, we probably -- it would take us a couple of years to get there, maybe 2.5. But the important thing is that LeCroy will, hopefully, introduce one new product by year end, using the new chip. And then as the momentum builds and our experience in the design with indium phosphide improves, that would introduce more products in the marketplace. And as you know, yesterday, LeCroy had a phenomenal breakthrough. It was not the first time they've done it -- they did it with the 30 megahertz , 45 megahertz, 65 megahertz. And now -- I'm sorry, gigahertz. And today, yesterday, at the 100 gigahertz bandwidth. So we're really excited about that. I will just add one thing which we didn't get a chance to talk about. We are taking our environmental and chemical analysis businesses, which are in the Instrumentation domain, and we're taking those and putting it together with our test and measurement. So going forward, we will have environmental and electronics measurement instrumentation in 1 group. And Tom Reslewic would be running that group, which it would be now a significant sized group, which would be about 42% of our Instrumentation businesses. And we think that combination of going to market together would be helpful all around. James Ricchiuti - Needham & Company, LLC, Research Division: So Robert, that takes place -- will we see that in the next quarter?

It's already been put in place. It won't be changed, the reporting, because, you know, we report it in Instrumentation. It's all Instrumentation. But Instrumentation, basically, now will be 2 pieces. There will be the marine instrumentation, which has oil and gas and marine sensor systems imaging, on one side. And then on the other side, we would have the environmental and electronic measurement instrumentation, which will include everything that we did in our product line. Even though the products lines would be separate, they would be managed cohesively.

And our next question comes from Steve Levenson with Stifel. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: You pretty much answered the questions I was looking for on LeCroy products. So I'll ask, is there any way to use this technology and extended it into other operating segments or other operating product lines, where you think you can use it to capture share?

We are looking at potentially some overlap between LeCroy's capabilities and our Aerospace and Defense signal processing. Obviously, we do a lot of microwave products. And they're all moving to higher frequencies, both in the solid-state and others or TWTs. For example, in the solid-state products -- microwave products, we've gone from gallium arsenide to gallium nitride, we're now looking at some indium phosphide. We do have some terahertz electronics programs in our Scientific, which is our main laboratory. And the whole Mixed Signal area, there's overlap between the technologies. And then, finally, we're looking at some -- out of the immediate product line opportunities that might be there in controlling motors and other areas that would really move us into a whole new domain. Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division: Does the Axiom acquisition have a role? Do the people at Axiom have a role in design of these products?

Yes, they could. Right now, they do work for outside customers, that, in this domain. But right now, our focus is to get our CMOS imaging development programs improved. And there is a analog-to-digital conversion work that is planned for LeCroy there.

And our next question comes from Chris Quilty with Raymond James. Chris Quilty - Raymond James & Associates, Inc., Research Division: Robert, you gave some great guidance on the revenue side. I was wondering if you could perhaps do the same with us for the margins by segment. I know, at least, you've given some guidance previously that we should look for Instrumentation around 16% by the year end, and wanted to know if we were still on track for that, likewise for Digital Imaging and Systems Engineering?

Yes, I think -- let's go to Systems Engineering first. As I said, that business is going to be challenged for the year. It was about 8% in Q2. I think that will go down a little bit. It might end the year shy of 8%, because we were really good in the first quarter, but we expect it to go down. I think in the other 3 segments, Chris, I see sequential growth in margins. Modest growth, but nevertheless, growth. I think by year end, Instrumentation should be north of 16%. Digital Imaging should improve from what it is, 7.5% now, more approaching 8% in the next couple of quarters. And Aerospace and Defense Electronics, we do have that cost -- that associated with facility consolidation. We have a nice hit coming in Q3. We're moving our main facility -- we, actually, have, but we're in the process of doing the rest of the stuff with it. We've moved 110,000 square feet of manufacturing space out of Los Angeles to Tennessee. And at one time, we had 350 people in that business. So very few of those are located. So we have a $3.2 million charge coming yet with that. So I think there's going to be some struggle to improve margins there because of that. Chris Quilty - Raymond James & Associates, Inc., Research Division: Is that the marina facility?

Yes, yes exactly. And we've been there. I think that was the first business that Henry Singleton bought in 1961. Chris Quilty - Raymond James & Associates, Inc., Research Division: Nice stacks move from L.A. to Tennessee.

I'm not going to respond to that, because my headquarters is in California. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay. And, I guess, the call would not be complete unless someone asked you about your thoughts on the M&A pipeline?

That's a nice question. Let's see. There's some stuff happening there. I like what I see out there, especially in the smaller businesses. Of course, they're becoming expensive, because everybody's kind of effervescent about the market. But we'll do some small ones -- I haven't seen any big ones that we can afford at this time. But I think we'll make a few small ones going forward, the rest of the year. Chris Quilty - Raymond James & Associates, Inc., Research Division: Mostly technology acquisitions?

Everything we do is technology. Chris Quilty - Raymond James & Associates, Inc., Research Division: Fair enough.

Thank you. Operator, how are we doing?

There are no further questions in queue at this time.

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

Thanks, Robert. And again, thanks, everyone, for joining us. If you have follow-up questions, certainly feel free to call me at the number on the earnings release. And of course, our earnings releases are available on our website, teledyne.com. Operator, if you could conclude the call and give the replay information, please?