Teledyne Technologies Incorporated

Ladies and gentlemen, thank you for your patience and holding, and welcome to the Teledyne Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later on, we will be conducting a question-and-answer session. Instructions will be given at that time. If you should require assistance any time during the call, please press star, then zero. I would now like to turn the call over to your host, Jason Van Wees. Please go ahead.

Thank you, Lori, and good morning, everyone. This is Jason Van Weese, Executive Vice President, and I would like to welcome everyone to Teledyne's second quarter earnings release conference call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Executive Chairman, Robert Moravian, President and CEO, Al Pacelli, Senior Vice President and CFO, Sue Main, and SVP General Counsel, Chief Compliance Officer and Secretary, Melanie Sivick. After remarks by Robert, Al, and Sue, we will ask for your questions. But of course, before we get started, our attorneys have reminded me to tell you that all forward-looking statements made this morning are subject to various assumptions, risks, and caveats, as noted in the earnings release and our periodic SEC filings. And of course, actual results may differ materially. In order to avoid potential selective disclosures, this call is simultaneously being webcast and a replay, both via webcast and dial-in, will be available for approximately one month. Here is Robert.

Thank you, Jason. Good morning and thank you for joining our earnings call. Before discussing our results, I want to emphasize that all of our worldwide manufacturing sites, as well as our corporate office and research laboratory, have been and remain operational. However, because our priority remains the health and safety of our employees, We're continuing social distancing, enhanced cleaning protocols, and usage of face masks and personal protective equipment. I shall now make a few comments about our performance in the current environment and our outlook for the remainder of 2020. Despite record economic contraction and a challenging operating environment for manufacturers, Teledyne performed extremely well in the second quarter. Our results reflect aggressive cost control and disciplined execution. In fact, although sales decreased approximately 5% compared to both last year and the first quarter of 2020, overall gap operating margin increased sequentially 150 basis points. Teledyne's business portfolio remains exceptionally well balanced across end markets and geographies. Also, our mix of long cycle and short cycle business provides a reasonable level of predictability and helped us, give us the confidence to provide our outlook in April. Looking back at the second quarter, The overall market and demand outlook played out as we had envisioned. In April, we predicted second quarter sales to decrease 5% year over year versus the actual results of negative 4.9%. That said, demand for instrumentation was better than forecast due to continued demand for test and measurement protocol analyzers, and a record quarter for OakGate business, which was acquired in January. These product lines serve technology markets related to solid-state storage and cloud networking, where capital spending remains relatively robust. On the other hand, digital imaging sales were slightly lower than forecast, not only in dental healthcare markets, where weakness due to COVID-19 was expected. But we also saw temporary declines in surgery and cancer radiotherapy due to one, deferred patient treatments, two, our customers destocking, and three, fewer new OEM equipment installations in hospitals. Otherwise, everything else from a sales perspective essentially occurred as expected. More importantly, operating margin, earnings, and cash flow each exceeded our April expectations. Ongoing simplification of our processes and margin improvement actions, including aggressive cost cutting in the first half of 2020, delivered superior results. Now, Looking forward to the balance of 2020. We remain positive overall. Just as commercial sales to Asia improved late in the first quarter, we expect a recovery in sales in Europe and the Americas later this year. However, in light of reinitiated shutdowns and travel restrictions, it is prudent to assume such recovery will begin in the fourth quarter. In other words, we expect the overall sales level in the third quarter to be very similar to Q2. As a result, we now expect 2020 full-year sales to decline approximately 3% from 2019. with sales of instrumentation and imaging increasing sequentially in the fourth quarter and defense electronics and engineer system sales continuing to remain robust throughout the year. We are not forecasting a recovery in commercial aerospace in 2020. However, this market will contribute less than 5% to our total revenue. Before turning to Al to report on the second quarter performance by segment, I want to emphasize the following. First, as we have repeatedly demonstrated in the past, we know how to be disciplined and perform well in challenging environments. Second, in prior cycles, when revenue was challenged, we protected earnings, while at the same time increasing cash flow. For example, in 2009, when revenue declined 4%, gap earnings were flat, and free cash flow increased over 50% from 2008 and was a record for Teledyne at the time. Likewise, in 2016, when total revenue declined 6%, Gap earnings were flat and free cash flow again increased over 50% from 2015 and was again a record for Teledyne at the time. More importantly, in subsequent years, we kept our lower cost structure, hence gap earnings nearly doubled over the subsequent three to four years. In addition, Following some periods of general market weakness, due to Teledyne's strong balance sheet, we were able to complete our largest and best acquisitions. For example, we announced the acquisition of Teledyne Dalsa in 2010 and Teledyne E2V in 2016, both of which were our largest acquisitions on those dates. Fast forward to 2020. We are aggressively managing variable costs as well as permanently reducing costs where appropriate. Our balance sheet is exceptionally strong with over $380 million of cash and cash equivalent and a borrowing capacity of over $1.2 billion. I will now comment on the performance of our four business segments.