Teledyne Technologies Incorporated

Ladies and gentlemen, thank you for standing by. Welcome to the Teledyne Third Quarter Morning Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, please select star, then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Jason Van Wees. Please go ahead. Mary Beth.

Good morning, and thanks, everyone. This is Jason Van Weese, Executive Vice President, and I'd like to welcome everyone to Teledyne's third 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 Morabian, President and CEO, Al Pacelli, Senior Vice President and CFO, Sue Main, and Senior Vice President, 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's Robert.

Thank you, Jason. Good morning, and thank you for joining our earnings call. I want to open with the following comments. First, all of our 70 worldwide manufacturing sites, as well as our corporate office and research laboratory, remain operational, and only 16% of total employees are working from home. Our short cycle environmental and test and measurement instrumentation businesses rebounded from the trough in the second quarter, growing approximately 6% and 5%, respectively, quarter over quarter. Third, we believe our longer cycle commercial markets, such as marine instrumentation and medical imaging, bottomed in the third quarter. Fourth, Our government businesses continue to grow and generally remain in attractive niches such as space-based imaging, manned and autonomous subsystems, and electronic warfare. Despite the market turmoil and lower sales in 2020, we have successfully demonstrated gap margin improvement. For example, The second quarter gap operating margin increased sequentially over 150 basis points. Specifically, operating margin of 16.4% was the second highest in the company's history. In addition, we achieved greater margins compared to last year in nearly every major business category except commercial aerospace. where sales have declined nearly 50%. We also achieved record third quarter free cash flow and all-time record free cash flow for any first nine months period. Finally, our balance sheet has never been stronger and our acquisition pipeline is healthy. As the overall demand environment continues to improve, Our substantially lower cost structure, for example, we're operating with 9.3% fewer employees. Our lower cost structure should provide significant operating leverage in future quarters. Coupled with acquisitions, we expect earnings and cash flow to continue compounding for years to come. Before turning to Al to report on the third quarter performance by segment, I want to comment briefly on two important items. First, the OneWeb satellite program, and second, the potential acquisition of Photonis. Over the last few weeks, the OneWeb situation has improved considerably. First, OneWeb, parent of our customer, Airbus OneWeb satellite, secured $235 million of interim financing in late September. Second, we received a substantial advance payment in the month of October, and third, we recently signed a new, more favorable contract for which we have resumed limited production. While some risk remains, including a successful exit by OneWeb from bankruptcy, we currently expect a modest charge of approximately $3 million in the fourth quarter versus the potential $40 million noted earlier during the work stoppage. Now, regarding Photonis. On September 28, we paused our efforts to acquire the business and voluntarily withdrew our application for authorization by the government of France. In summary, we determined at that time that an acquisition under the proposed conditions of the French government was not feasible at the seller's valuation expectation communicated to Teledyne. However, in recent days, The seller's valuation expectations have significantly moderated, and we have renewed our acquisition efforts. At this time, we are hopeful to conclude the negotiations and announce the acquisition before the end of the year. Al will now comment on the performance of our four segments.