Ladies and gentlemen, thank you for standing by. Welcome to the Teledyne third quarter earnings call. [Operator Instructions]. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Jason VanWees. Please go ahead.

Good morning, and thank you, everyone. This is Jason VanWees, Executive Vice President, and I'd like to welcome everyone to Teledyne's Third Quarter 2019 Earnings Release Conference Call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Executive Chairman, Robert Mehrabian; President and CEO, Al Pichelli; Senior Vice President and CFO, Sue Main; and SVP, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibik. After remarks by Robert, Al and Sue, we will ask for your questions. 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 risks and assumptions, and caveats in our earnings release and periodic SEC filings, and of course, actual results, may differ materially. In order to avoid potential selective disclosures, this call is simultaneously being webcast, and a replay, both via webcast and dial in, will be available for approximately one month. Here is Robert.

Thank you, Jason, and good morning, everyone. Thank you for joining our earnings call. Today, once again, we reported the strongest quarter in Teledyne's history. Sales, earnings per share and free cash flow were all-time records. Operating margin increased 150 basis points compared to last year, and operating margin was also a record for any third quarter period. In the quarter, sales increased 10.6% and exceeded $800 million for the first time. Including approximately 1% of currency headwind, organic growth was 5%. Given the strong organic growth as well as acquisitions, sales in each business segment increased by double-digit rates for the first time in over 12 years. Record earnings per share of $2.84 increased 16.9% compared to last year. While we've increased our emphasis on margin improvement, we're continuing our proven strategy of disciplined capital deployment for compound growth in earnings and cash flow. We were pleased to complete the acquisition of 3M's Gas and Flame Detection business on August 1. In addition, with the acquisition of Micralyne on August 30, we immediately increased our Micro Electro Mechanical Systems or MEMS manufacturing capacity while also adding unique microfluidic technology for biotech applications. Teledyne continues to benefit from our balanced portfolio of common technologies serving different complementary markets. Our 2019 outlook continues to reflect strong growth in our life sciences and defense imaging businesses, more than offsetting declines in some industrial machine vision markets. Our defense and space electronics businesses will more than offset some lower sales of avionics to certain commercial OEM air transport platforms. In addition, the early-stage recovery of marine instrumentation continued. We achieved strong growth in orders and sales, and ended the quarter with the largest backlog in over four years. Finally, despite closing two acquisitions in the quarter, our balance sheet remains exceptionally strong with its quarter-end leverage ratio of 1.6%. Before turning the call to Al, I want to note that we slightly realigned the financial reporting of our segments. This was solely done to match our current management reporting structure, and historical results have been restated to conform to the new structure. Furthermore, I want to emphasize that all of our financial results this morning are reported on a GAAP basis, with no adjustments for amortization, stock compensation, acquisition charges, purchase accounting, restructuring or any other charges. Al will now comment on the performance of our four business segments.

Thank you, Robert. In our Instrumentation segment, overall third quarter sales increased 10.4% from last year. Sales of electronic test and measurement systems increased sequentially to the highest level in 2019, but grew 2.2% year-over-year given a tough comparison. Growth of industrial test and measurement products and services as well as specialty digitizers more than offset some tough comparisons in sales of protocol analyzers and oscilloscopes. In the environmental domain, sales increased 20% largely as a result of our recent acquisition of the Gas and Flame Detection business but also greater organic sales of process gas analyzers and certain laboratory instrumentation, offset by lower sales of pollution control instrumentation to customers in Asia. Sales of marine instruments increased 7.7% organically in the quarter, and orders exceeded sales for the fifth consecutive quarter. In addition, profit margins improved significantly as we benefited from prior aggressive cost reductions and current business simplification initiatives. Overall, Instrumentation segment operating profit increased 45.7% and margin increased 445 basis points, with margins increasing for test and measurement and marine instrumentation. Excluding the Gas and Flame Detection acquisitions and related purchase accounting, margin also increased within environmental instrumentation. Turning to the Digital Imaging segment. Third quarter sales increased 10.6%. Sales of our proprietary medical and dental X-ray detectors again increased significantly year-over-year. Sales of MEMS devices also grew nicely as did sales of advanced infrared detectors and data converters for space and defense applications. The strong growth in these businesses largely offset expected declines in the portion of our industrial machine vision business, which serves consumer electronics and general factory automation markets, especially in Asia. GAAP segment operating profit decreased 2.6% given a generally less favorable product mix resulting from lower industrial machine vision sales. In the Aerospace and Defense Electronics segment, third quarter sales increased 10.5%…

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 fourth quarter and full year 2019 outlook. In the third quarter, record cash flow from operating activities was $150.9 million compared with cash flow of $141.9 million for the same period of 2018. The cash provided by operating activities in the third quarter of 2019 reflected the impact of higher operating income and cash flow from recent acquisitions, partially offset by higher income tax payments. Free cash flow, that is cash from operating activities less capital expenditures, was $125.8 million in the third quarter of 2019 compared with $121 million in 2018. Capital expenditures were $25.1 million in the third quarter compared to $20.9 million for the same period of 2018. Depreciation and amortization expense was $27.9 million in the third quarter compared to $27.3 million for the same period of 2018. We ended the quarter with $796.9 million of net debt. That is $925.4 million of debt less cash of $128.5 million for a net debt-to-capital ratio of 23.7%. Stock option compensation expense was $5.7 million in the third quarter of 2019 compared with $4.6 million in the third quarter of 2018. Turning to our outlook. Management currently believes that GAAP earnings per share in the fourth quarter of 2019 will be in the range of $2.71 to $2.76 per share. And for the full year 2019, our GAAP earnings per share outlook is $10.37 to $10.42, an increase from the prior outlook of $9.86 to $9.96. The 2019 full year estimated tax rate excluding discrete items is expected to be 21.9%, a 60 basis point increase compared to full year 2018. In addition, we currently expect less discrete tax items in 2019 compared with 2018, which as Al mentioned, would increase our effective tax rate in 2019, over 200 basis points. I will now pass the call back to Robert.

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

[Operator Instructions]. We will begin with the line of Greg Konrad with Jefferies.

Just wanted to start with organic growth in the quarter. I mean, I think it was stronger than expected. Is there any way to think about what specifically has surprised the upside? And is that more on the short-cycle or longer-cycle side of the business?

Fundamentally, I think we had good growth in our marine businesses. As Al mentioned before, we're enjoying a good backlog, increased revenues. And that was over 7%, 7.5% about. We also had really good growth in our defense electronic businesses, which resulted on an average of about over 10% for Aerospace and Defense Electronics. And Engineered Systems also came up with about 11% growth plus -- 11%-plus growth. So when you add all of those up -- and Instruments did okay. It was just shy of 4%. And so when you add all of those up, it comes to about 5%. Digital Imaging was flat with -- Al said, with the products that serve the consumer electronics flight panel display and some of the electronic manufacturing circuit board inspection down, made up significantly with our health care and other programs.

And then just you mentioned A&D electronics. I mean, is there any way to think about the visibility within the defense business as we head into 2020? Any specific areas driving the A&D electronics strength? And then maybe any potential risk from a CR?

Well, CR is always a problem. I can't -- for us. On the other hand, most of our defense electronics contracts are long-term contracts, multiyear contracts. Right now, we think in 2020, we're going to enjoy good growth in our defense electronics businesses primarily because of the backlog, which stays strong. I would say we're looking at -- right now, we're looking at 9 to 12 months ahead in that businesses. Also, marine looks good. This is the fourth quarter that we've had good orders in our marine businesses. And some of our marine businesses are also, as you know, defense-related businesses. We just received an order, for example, for our underwater vehicles, which are Gavia vehicles. And some of our -- also, some of our gliders are doing well. And so overall, I think across all of our portfolio, defense electronics is doing very well, as well as the marine defense part of the marine businesses. And of course, we just announced -- in our Engineering Systems segment, we just announced that -- an expansion of our work for the underwater vehicles for our special ops. That's now gone into production.

Next, we will go to the line of Jim Ricchiuti with Needham & Company.

I was wondering if, Robert, if you might be able to provide a little bit of color on some of the -- on the bookings in some of the other segments. I mean, clearly, marine is -- you're continuing to see good orders. How about the rest of the business?

I think, overall, we're close to one, with marine being over one. Some of our environmental and T&M businesses are slightly below one, but that's probably also because those are very short-cycle businesses, somewhere between 2 and 6 weeks. So it's hard to predict. Digital Imaging, I think we'll end the year just shy of one. I'd say, 0.98, 0.97. Aerospace and Defense Electronics will be one. And Engineered Systems is over 1. In general, when you cut across all our businesses. In Q3, we were just shy of 1, but I think we'll end the year a little over one.

Okay. And just on the Micralyne acquisition, wondering if you could talk a little bit about that. What does it do from the standpoint of allowing you to accelerate the growth of the MEMS business? I'm wondering if you could just provide some color on the growth in this business. I guess you've had -- you've been capacity-constrained. I'm assuming it's going to help that as well.

Yes, Jim, two things. First, it's -- we are -- we've been making investments in our Bromont MEMS facility to expand our capabilities. We've spent a significant amount of resources there. But even with those expansions, we're constrained in terms of capacity. So -- and most of those lines there are also being converted to 200-millimeter or 8-inch lines. What we don't have there is the kinds of substrates that we can enjoy with Micralyne. We usually use a lot of silicon substrates for our MEMS devices. What Micralyne brings us is polymer and gold substrate capabilities, which is good for biotech. And it also has capability in developing new products and then transitioning those products to our larger MEMS facility. It's a really good business. On the other hand, some of the customers have been concerned as to when they invest in that business and develop new products, where would the next phase of production be. Now we're able to offer that to them because they have primarily a 6-inch facility, and we can transition those products to our 200-millimeter or 8-inch facility. It's a good acquisition for us. That puts us as number one independent multiproduct MEMS foundry in the world.

Got it. So it also -- it sounds like it's also getting -- broadening out your market presence in getting -- it sounds like getting some new customers as well?

Absolutely. Especially in the biotech area.

And next, we will go to the line of Joe Giordano with Cowen.

Can you talk a little bit about the visibility into 2020 for the radiation sensing business, assuming that we don't get new customers in surgical or mammography, just from what we have now with dental kind of technology shift? And then maybe if you can kind of scale what new customers in those fields might add over a couple of years or something.

Yes. Let me start by saying we think in 2020, without any new customers and applications like Nano [ph], it should be in the mid-single digits. Right now, we have good orders, and we expect that to continue. On the other hand, we're also moving up the top scale in terms of our capabilities to add to what we provide our customers there. And we have also some new products that are coming out. So we're kind of bullish about our Digital Imaging health care businesses overall. Now as we -- if we get new customers, of course, those single-digit, mid-single-digit growth would increase.

Okay. It seems like incrementally, you've shifted a bit from kind of maybe portfolio cultivations to portfolio optimization a little bit internally. And in that context, if I look at your margins on a gross basis versus some of the high-class competitive set that you're comped against, there is a pretty sizable gap. Some of it's structural, understandable with the cost-plus nature in R&D spend. But can you talk to what that gap is, in your minds, like that is available to close? And what are some of the levers that you could pull to get there over the next couple of years?

Yes. For sure. Let's start with where we are. We've been improving our margins continuously from last year to this year. When we finish the year this year, our margins should be up about 120 basis points, maybe 125. We started the year thinking it could be 55. Last quarter, we thought it'd be more like 65 to 85. Now we think it's going to be higher this year when we close the year. So we're improving our margins. But having said that, if you go to our total operating margin, which will be around 15.6% by year-end, because first quarter was low, obviously; this quarter was okay at 16%. I think there's a gap depending on how you look at comps for us. A lot of the comps report non-GAAP numbers, so you got to kind of sift through all of that to get to the bottom of what they're reporting. But having said that, I think there's an opportunity for us to improve our margins, certainly 200 to 400 basis points over the next couple of three years. I would say probably conservative with 100 basis points a year. I expect we should do that next year, primarily because we are now undertaking a lot of activities to look at our many P&Ls in the various businesses and to see which one of our products we should -- we're not making much money on and we should abandon, and which one of our customers we're not making much money on and focus where our -- we can make money using the concepts like 80-20, et cetera. So I think that's the good part. We've been growing with the acquisitions, and we've been improving everything that we bought. Now I think we can also improve our basic businesses. And frankly, I like that. I hate to be at the very top of the margin and earn $10.40 and have nowhere to go.

That's very helpful. And then last for me, are you seeing at least a sequential bottoming in the industrial machine vision? And maybe can you take us through your normal margin outlook by segment for the full year?

Yes. I think we're seeing some bottoming, and actually, some positive signs in the semi area. In the consumer electronics, things are still weak. There are some new products being introduced in the flat panel area, which we think will help. By and large, there's an overcapacity right now for existing handheld devices, et cetera. So I think that remains -- what we see in the consumer electronics, we see some improvements coming. So I'd say it's probably -- you're right, it's probably close to the bottom, with some potential upside. The flip side of it, I should mention, is that we have an opportunity to expand in adjacent markets, adjacent markets being from food sourcing, to traffic control, to lithium-ion battery inspection, et cetera, which are new areas for us. And I think that will offset some of the declines that we saw. And as you know, our Digital Electronics overall is a balanced portfolio just like Teledyne. It goes from health care to inspection of flat panel displays to MEMS, et cetera. Now if we go to the margin questions that you asked. We think that for the full year, if I may, instruments should enjoy significant margin improvement over last year. Maybe 300, 340 basis points over last year. So we should end up about 17.8%, 17.7%. That kind of implies an 18 -- over 18% in Q4. Digital Imaging, I think it will be flat with last year, about 17.7%, maybe 17.6%. That implies that we'll improve in Q4 over Q3, but not all the way to what we had in Q2. In Defense and Aerospace, I expect that our margins to be strong. I think we'll stay about over 21%, maybe 21.3%, 21.4%. Engineered Systems, because of some of the realignment, we sent some of our made-to-print products into that segment. So we think a little margin contraction from last year end up with about 9.6%, 9.7%. Overall, I think if you added our margin, we think the segments should enjoy margins of about 17.6%, 130 basis points above last year. And the total company, considering we had a low first quarter, should end up at 15.6% above -- Joe -- I said Jim, I meant, Joe, sorry. We should end 120 basis points above last year. I hope that helps.

Next, we will go to the line of George Godfrey with CLK.

Nice quarter, as always. I heard your -- I got -- jumped on the call late. I heard the organic revenue growth, or saw in the press release for the company as a whole. Can you just give me that by segment? If I missed it, I apologize.

No problem. Be happy to. We -- for Q3, it's 5%. In the instruments, it's 3.7%, with marine leading at 7.8%. Digital Imaging is flat. Aerospace and Defense Electronics is about 10.5%, followed by Engineered Systems at 11.5%, which concludes at 5% for the quarter. And I don't know if you caught the year, but the year, we're projecting overall, a 4% increase.

Yes, I did, Robert. And then...

And that includes 100 basis points of foreign exchange headwind, as Al mentioned.

Got it. And then just one other question is on the Digital Imaging, the margin's down year-over-year. What was the product mix, specifically the products that contributed either the higher margin a year ago or the lower margin this quarter?

I think, in general, the higher-margin businesses are in the machine vision for flat panel display. We have a very good position there, probably over 85%. And when that -- and we enjoy good margins there. Some of the margins in health care, even though health care was up, are a little lower than that because we're still taking large orders, multiyear orders. And we have some development product -- development programs there. Some of our defense and space programs in Digital Imaging are cost-plus programs. So that, by its nature, is a little lower margin. But I think if you look at the broader job aspect of it, I think Digital Imaging, this probably would be the lower-margin quarter that are the 16.9%. Q1 was, of course, lower at 15.7%. We think margins will recover in Q4, maybe go over 17% -- 17.43 -- 17.3%, 17.4%. I hope that helps, George.

And next, we'll go back to the line of Jim Ricchiuti with Needham & Company.

Yes, I was wondering in the electronic test and measurement business, it looks like you're up against some tough comps in the scopes business in protocol analyzers. I'm also wondering if any of that, what you're seeing, might be some macro weakness. I know in the oscilloscope market, I guess, you have some automotive exposure. Is there any signs of macro-related weakness? Or is this just a case of tough comparisons?

I think your first observation of tough comps is correct. There is a little issue with some restrictions that are imposed on Chinese customers, primary customer. But our exposure there is relatively low compared to our competitors'. It's less than $3 million. Having said that, we also -- in our protocol businesses, we're transitioning to a whole new series of products. We're going, for example in PCI Express, from Gen 4 to Gen 5. And people always wait and not order until the Gen 5 is totally accepted and being used. So some of that weakness is a timing issue. Going back to the oscilloscopes. I think that's more of a comp issue. As you indicated, we seem to have a good demand in some of our automotive businesses. There might be a little headwind in Europe. Certainly, China trade issues are affecting us. But I'm relatively positive about our oscilloscope business. I'm very bullish about our protocol businesses.

Good. Then final question from me, Robert. You made some what would appear to be nice acquisitions over the past year. What's the pipeline like? How active is it? And what are you seeing out there?

Well, the same. We see some small acquisitions that have to be -- that have to fit pretty well within our portfolio. And we see a couple of midsized acquisitions. But competition is stiff, especially on the midsized acquisitions. We're really fortunate to carve up two nice acquisitions from two larger companies, the most recent one being 3M. And hopefully, other large companies, which we feel is very positive. This is because those acquisitions we did in a two month period with very little hassle. Having said that, there are some acquisitions in our pipeline, and we certainly do have over $1 billion in capacity to do what we want.

[Operator Instructions].

I think we're okay. Operator, if it's okay, I would like Jason to conclude our conference call.

Thanks, Linda, and thanks again, everyone, for joining us on the call today. If you do have follow-up questions, certainly feel free to call me at the number on the earnings release, or e-mail me the schedule, the time to speak. And again, all our news releases are available on our website. And the replay of this call is available for approximately one month. Thanks, everyone. Goodbye.

Ladies and gentlemen, this conference will be available for replay after 10 a.m. Pacific today through November 23 at midnight. You may access the replay system at any time by dialing 1-800-475-6701, and entering the access code 473038. International participants may dial 1-320-365-3844 and enter the access code of 473038. That does conclude your conference for today. Thank you for your participation. You may now disconnect.