Teledyne Technologies Inc (TDY) 2013 Q1 法說會逐字稿

Ladies and gentlemen, good morning. Thank you for standing by and welcome to the Teledyne Technologies first quarter earnings conference call. At this time all lines are in a less listen-only mode. Later there will be an opportunity for questions and instructions will be given at that time. (Operator Instructions). 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. I would 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, and 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 web cast and a replay both via web cast and dial-in, will be available for approximately one month. Here is Robert.

Thank you, Jason. And good morning, everybody. First quarter sales of $569.4 million increased 15.3% compared to last year and we are at 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 million,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, US 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 that the US Navy's intent to award our engineered systems segment a sole source contract for an additional 150 autonomous underwater lighting vehicles which were developed and are produced in our marine instrumentation business.

I will now comment on our business segment after which Sue Main will review the financials in more detail and provide an earning 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 deep water exploration and production and global infrastructure markets, 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 continue to be a key strategic market for Teledyne. As mention 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 off shore 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 visible including laser based lighter, infrared, x-ray and ultra-violet sensors, cameras and software. First quarter sales in digital and 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 plans 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 semi-conductor and 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 are 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% where operating margin improved 66 basis points. We expect the performance of this larger government focus 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 two significant NASA programs as a prime related to space pay load 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 the 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 some growth in Europe,although organic sales in Asia were relatively flat. While there is going to be some risk to our are US government businesses they performed well in the quarter and we are making necessary cost reductions to keep these businesses sized appropriately.

We also seek to continue our 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 the 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 pre tax severance and relocations costs associated with certain electronic manufacturing services businesses as well as $600,000 in acquisition costs.

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 pre tax $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 non-recurring 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 like now to take questions. Would you please proceed with the question and answers.

Thank you. (Operator Instructions). First question today comes from the line of Jeremy Devaney with BB&T. Please, go ahead.

Good morning, Robert and Susan.

Good morning, good morning, Jeremy.

I wanted to touch on acquisitions first. Do you happen to have is the revenue numbers for PDM Netech and BlueView in the quarter?

Optech, I'm sorry,which ones did you mention?

PDM and blue view.

PDM and BlueView together were about $6 million.

Perfect. Thank you. So on the acquisitions we saw a bit of a deceleration in all those acquisitions except for PDM and BlueView, the biggest is surprise to me was the LeCroy number which looked like it was off about 11% versus last year's results. Were any of the slow downs 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 the not worrisome at all for us. The decline year-over-year for LeCroy was expected. First, other oscilloscope companies have had similar declines. Ours was partially artificial in nature for two reasons. One, because of our very rigorous processes for import and export, especially in this case export, we held up a bunch of shipments, almost half of 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 introduced a high definition oscilloscope which is 12 bit, 16 times better resolution. It is doing very well in the market and in the first quarter they introduced a 65 gigabit bandwidth oscilloscope lab master which is probably the highest band width oscilloscope in the market. So, I'm very pleased with the progress that LeCroy is making.

Excellent. That color extremely helpful. 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 are seeing in the acquisition pipeline and any additional thoughts on pricing and areas of focus especially compared to, possibly, the scale of your pipeline compared to at this point last year?

Well, we 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 will be mixed between small and intermediate that we have had before. I don't know when we will do another one because, you know, we have the hopper once in awhile something falls off the bottom and we catch it but we anticipate we will make some more.

Perfect and then lastly, and then I will get out of the way here. You mentioned a bunch of IDIQs in the engineered is systems group and there is a few legacies. I know NASA has been kind of hit hard on the budgets. 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?

If you looked at the engineered systems as a whole, Jeremy, 2011 to March 13th of this year, they have received about $1.6 billion of prime contract in seven programs. Two 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 process but we think that will resolve itself sometime early this summer.

Excellent. Thanks, Robert. Great job on the quarter.

Thanks, Jeremy.

The next question comes from the line of Mark Jordan, with Noble Financial. Please go ahead.

Good morning, gentlemen. Robert, I noticed that with, relative to pension, that you've moved to a 4.4% discount rate which is either very conservative or very realistic, I guess, depending on your viewpoint. With the contributions that you've made over the last year, voluntary contributions to the 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. Before we made the contributions with the discount rate that we lowered, our assets were about at 94% of our liabilities. 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 the board has decided to do is we should contribute what we are withdrawing from the pension, regardless of what the market does or the discount rate does because it will get us into trouble if we don't eventually.

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 only made half the contribution to $0.15 which we are 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 asset is now stood at with that contribution included at 104% versus our liabilities.

Okay. Thank you. Over the last few years you have used borrowings and internally generated funds to fund our 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.

Thank you.

Final question relative to sequestration. Seemingly that most companies are talking about that it hasn't been an issue because they are 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 is pushing out ramps in any of your programs yet?

Yes. In some programs we see some push out. Not too many. Mark, what we have done in the last seven years, as you know, knowing our portfolio, we have 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 half of the business that is government really not being subject to those things especially with our large contract wins. We do see a little push out like in our traveling way to business we own the socket so it is like you have the socket and they need a new light bulb and we provide the TWT. So we are seeing a little push out there but I don't think it is 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.

Okay, yeah. Thank you very much.

Thanks, Mark.

And our next question comes from the line of Tyler Hojo, with Sidoti & Company.

Good morning, thanks for taking the questions. 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 would say, yes. You know, there is 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 are seeing some improvements there. Interestingly enough, we don't see a lot of movement in the US in some of our markets except for oil and gas obviously. So I would say we will keep our current forecast at 2% to 3% organically.

Okay. That is great. And what about the recent acquisition. What is that expected to contribute to sales in 2013?

Well, it started in March which so it will give us ten months of revenue. I would say roughly about $53 million, $55 million for the year.

Okay, great. All right, great. And the only other question I had is just as it relates to the Optech acquisition. 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 would like quarter over quarter. They have fairly lumpy shipments because of they ship products that cost a million dollars a piece. I think we would probably be okay in Q2. We will go up maybe 20% sequentially so that will take care of that issue for us, Tyler.

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 are how do you look at that?

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

Fantastic. Thanks so much.

Thank you.

Our next question today comes from the line of Jim Ricchiuti, with Needham & Company. Please, go ahead.

Thank you, good morning.

Good morning, Jim.

The question I had relates to the digital imaging segment. Looks like excluding Optech the business was flat to up slightly and you called out a couple of areas where it looks like you are seeing growth. You mentioned the DALSA machine division 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 has been holding back the growth in that area?

The remote sensing was really one product line that we make for an external international customer. Other than that, it is a very nice and stable business. Let me give you an example. In the medical imaging, medical and dental imaging their low dosage high resolution image product are really gaining traction with our largest customers. And then if you look at their programs in flat panel display inspections which is a fairly important program for us, there are a number of things that are happening that are helping them. The smart telephone, 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 imager's to CMOS imager's which are higher speed imager's and higher quality images and we've been introducing new product so, all in all that business is doing pretty well.

Got it. So in terms of the display portion of the DALSA business, I didn't realize that you were also in addition to inspecting LCDs which I thought was right now that market is a little soft. The main benefit from that area is coming from (inaudible)?

Yes. Also the fact that both in the (inaudible) but in Korea and also Japan and China they are gaining market share and so the flat panel displays that we were doing, we still are doing for television and others, the declines there are being more than offset by smart phones and other devices.

And one final question, if we just look at the commercial business segment just putting aside government which has its own dynamics right now, if we look at the commercial area and can you characterize where are you see the opportunity for the most organic growth? I mean it sounds like instrumentation, and is it fair to say it is coming more from the marine instrumentation area and if you could just rank the areas? You are talking about 2% to 3% organic growth but I wonder if you could 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 in the future comes in deep water and deep water CapEx is forecasted to grow 90% between 2012 and 2017 with $135 billion going into sub sea 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. And then I would say the big opportunity was in the marine systems in general. For example, there is a very large program currently in ocean observation initiatives, observatory initiatives which is a big scientific study of oceans that includes connectors, communication systems, all kinds of sensors that we produce and we have already received about $20 million of orders just in that one program to date.

So I tell you that is the second. And then the last one, again in the marine domain, is your underwater vehicles. We are getting traction. They are both gliders as well as power under water vehicles. I would say marine first, international second, a lot of marine, of course, is also international, and lastly in some of our air monitoring equipment people have started ordering air monitoring equipment and some also water flow system, the municipalities have a little more money from taxes now and in the air monitoring the biggest growth area is in China. You know they had some really terrible news vis-�-vis the quality of the air there in the last 90 days or so, and so they are buying a lot of our air monitoring. I would say those are the areas.

Great. Thank you. That's helpful, Robert.

You bet. Thanks.

Our next question comes from the line of Steve Levenson, with Stifel. Please go ahead.

Thanks. Good morning, everybody.

Good morning, Steve.

I was glad to hear that selling equity would be a last resort, but do you think there is an opportunity to refinance any of the senior notes at a lower rate either now or in the not too distant future?

Yes, we looked at that, Steve. We have three sets coming up. One is in 2014 which is too close to be worth refinancing. There is one in 2017 and one in 2020. 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.

Okay. Thanks. 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 remain at current levels or maybe even grow?

I don't know. You will have to ask the administration that question. I tell you one thing about at least Iran, the whole underwater vehicle domain as we know it, both because of Iran and because of our emphasis in the Pacific is growing, for example, threats of shutting down the Straits of Hormuz caused the US to look at ways of using underwater vehicles to detect the mines because they are not going to close the Straits with boats, they will try to mine it. In general we are seeing some uptick in our underwater vehicle and as I mentioned very recently, the Navy and others understand [inaudible] source buy from us.

On the North Korea side, I think the only thing I can say there is you know we make missile engines, turbine engines for missiles and the most advanced one of those is JASM and that has stabilized for us. And that is a good sign for us. And we are 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 cut to our DT&E. Having said that, because of the objective simulation framework contract that we got, large contract, we feel fairly secure there.

That's great. Thank you. Lastly, 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 is way above what their costs are. Book to bill for us in the marine domain in Q1 was $1.25 million. Which is about the highest we have seen.

Great. Thanks for all of the additional details.

Thank you.

Next question comes from the line of Chris Quilty, with Raymond James & Associates. Your line is open.

Thanks. I know Robert some years ago, maybe it was just last year, you had talked about with the engineered systems business making a greater move towards some of the manufacturing capabilities, or utilizing the manufacturing capabilities you have. Can you give us an update of where those efforts stand? Where the portfolio is today and where you think it might be in a year or three years from now?

Yeah, thanks, Chris and good morning to you. If you look back about two years or what I would say our marine and aerospace manufacturing programs there were about $25 million a year annualized. This year we expect that it will be $50 million. $40 million of that will be marine and some of it is gliders but we also make a whole range of products for little combat ships and other projects where we have large machining capabilities there and so we think that is 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 has come up quite a ways and I think it will keep increasing. We are not involving them in our electronic manufacturing services business because that is a separate segment and frankly that business has lower margins than the rest of our portfolio.

Got you. A house cleaning item. Can you give us a ballpark annualized revenues on the RESON acquisition?

RESON? You are actually pronouncing it better than I am. Annualized I think we are looking about $62 million to $65 million. At least that is the projection currently. And of course, you know, that we only will have ten months this year.

Okay. And final question here is a bit of a portfolio question. 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 non-core. I think you had, looking back over the last several years, the Al Gore opportunity to sell, the Obama opportunity to sell. Are you holding out for Robert Wexler to become president or is this something where you are looking to go out and buy Fiskar? What is going happen with the portfolio?

You are a piece of work, Chris. 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 is growing and it is a very good program actually and it is about $15 million a year and profitable. On the hydrogen business, the hydrogen generation business, we are probably one of the few commercial hydrogen generation businesses in the world that sells generators. Then we have some fuel cell products that we expect to introduce on some of our underwater vehicles. Some ways it is a fairly stable business. I don't think we would want to divest it at this time.

Okay, fair enough. So you are not the buying Fiskar?

Not except if it is for nothing. No, I wouldn't even touch it then. With a nice car.

You own one?

No, no, I couldn't afford it.

Thank you.

Thanks, Chris.

Our next question comes from the line of Michael Ciarmoli, with KeyBanc Capital Markets. Your line is open.

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

I'm going to say, of our international revenues maybe a third or less than a third is in Europe. Of that, there is a significant change from business to business. You don't see all of the down side 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 (inaudible) vision equipment. This quarter our revenues in Europe increased. I don't know if there was a fluke or not. So far because of the mix of our businesses I would say we would expect that to be relatively flat.

You have the strong book to bill in the quarter. What is the order pipeline looking like? Is it still characteristic of what you are seeing in the end markets with instrumentation with marine leading the charge? Do you have good visibility into the future pipeline of order flow?

Probably the orders will decrease in Q2 some what because some of our orders carry over into Q2. In general, I would say in our commercial businesses it is fairly stable. The government businesses, as I mentioned earlier, we are seeing a little push out. 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 is the expected level of amortization this year which would include maybe any one-time inventory step-up or other purchase accounting adjustments?

Amortization is about $29 million and the purchase accounting step-up's, we only have one right now is about $600,000.

That $29 million translates into $0.53 amortization intangible amortization expense. So that if we were doing non-GAAP we would probably stick that up top.

Got you. Very good, perfect. That's all I had, guys.

Thank you.

(Operator Instructions). We will go to the line of Robert Kirkpatrick, with Cardinal Investment. Please, go ahead.

Good morning. 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, on the average, our withdrawal from the pension is around the around of $41 million to $43 million a year; last year, this year, next year. With the $83 million contribution that we made in January that was for both 2013 and 2014. If things don't drastically change and create terrible headwind's especially if the market stays as healthy as it is today at the 104% funding versus our liability we wouldn't make a contribution in 2014.

Certainly that will boost your cash flow then.

Yes, he.

Great. Thank you so much.

Thanks, Rob.

And we have a question from Jeremy Devaney, with BB&T. Please go ahead.

Thanks for taking the follow-up. So one of us usually asks you to spoon feed us the model. Robert, if you could go through the segment and give us an idea of what you are expecting on the growth and margin side, especially focusing on the margins, since we have seen such a turn in instrumentation.

All right. I will 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. 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.

So it was 5.1%, I expect that to move up more towards the 7% 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 engineered system we were 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 the 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 is as much detail as I have given on that subject ever.

That was perfect, and very helpful. Thank you.

Thank you.

There are no further questions at this time.

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

Thanks Robert. Thank you, everyone, for joining us this morning. If you have follow up questions please feel free to call me at the number listed on the earnings release. 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 would appreciate it. Thank you.

Yes, sir. Ladies and gentlemen, this conference will be available for replay starting at 10 AM 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. Those numbers are 1-800-475-6701 and international participants dial 320-365-3844 and enter the access code of 280571. 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.