Teledyne Technologies Inc (TDY) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Teledyne Second Quarter Earnings Conference Call. (Operator Instructions) 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 opened.

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 sales of $601 million increased 15.9% compared to last year, and were an 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.

To date, 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, this business has 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 increasing 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 segments were moved to the instrumentation segment. These interconnect businesses primarily serve an [anti-production] market 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 period have been revised accordingly.

Given the challenging global economic environments, 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 have experienced $4.2 million of severance and facility consolidation costs. 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 deep water exploration and production and global infrastructure markets as well as provides a range of work environment of an 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 test 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 oscilloscope and related test and measurement devices.

Operating profit in the instrumentation segment decreased 33.9%, and while segment margins declined because, for the time being, recently acquired businesses have lower margins than our existing businesses. Excluding acquisitions, margins in our environment, the land marine businesses, increased considerably compared to last year.

Turning to the digital imaging segment, this segment provides a broad portfolio of [visibles] including LIDAR, which is laser-based, infrared x-ray and ultra-violet 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 applications as well as reduced sales of LIDAR systems and MEMS products, partially offset by increased sales of intranet sensors and optics.

At Teledyne DALSA, our Canadian imaging company, sales of industrial machine vision 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 high-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 electronics businesses to drive down our cost structure.

Turning to engineered systems segment, second quarter revenue decreased 9%; our operating margin decreased 148 basis points. We expect the performance of this still largely government-focused segment will remain challenging in 2013. Nevertheless, each segment continues to develop system-level products using technologies from our instrumentation and digital imaging segments.

In the past, we have mentioned two system-level prime contracts -- the Littoral Battlespace Gliders and the shallow water combat submersible programs, which, combined together, have a value of nearly $500 million. In addition, we are 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 am 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 is some ongoing (inaudible) for our US government businesses, the proportion of these businesses continues to decline, and we are also making the necessary cost reductions 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 pretax severance and facility consolidation expenses partially offset by $0.9 million of net tax benefits.

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 collections, 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 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 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 costs in the third quarter of 2013 of $3.2 million partially offset by $1.9 million in anticipated net tax benefits and $9.1 million of severance and facility consolidation costs 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 are ready to proceed with the questions and answers, please go ahead.

Sure. (Operator Instructions) Mark Jordan, Noble Financial.

Good morning, Robert. A question relative to the restructuring you seem 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, I think overall you are correct. We may have a little bit left over for next year, but, Mark, I think we should be pretty well done with it, at least 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 purchase intangibles in the second quarter? What do you expect for all of 2013, and do you have a number for 2014?

I can tell you, in general, for the overall -- 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 knowledge of what it should be for 2014?

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. A 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? Could 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. The stock price were significantly lower, which I hope we won't be, and we have revisited that issue.

Jim Ricchiuti, Needham & Company.

I have a question on the strength that you saw sequentially at LeCroy. Is this a case of the normal seasonality in their business, 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 correct. I think it's more seasonal. The underlying demand is okay in the US. It's okay in the Far East. It's really bad in Europe. And we are hoping that Europe may have bottomed out or will bottom out in the third quarter. All indications are that that would happen.

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 [OpTek]. I think you might have 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 OpTek -- 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 have had some delays in their market, especially in their survey grade mapping and some of their [space to ratio imaging] from space, airborne laser and terrain mapping products.

It's not the easiest business for us to control because while we are a majority shareholder there's a very strong minority component there. But I must say that they have also done headcount reductions to bring their cost structures lower in the recent past.

Tyler Hojo, Sidoti & Company.

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.

Okay, great. And, Robert, maybe you could talk a little bit about how that kind of growth 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 are 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 are still (audio break) 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 three of our segments should show increased revenues between 3% and 6%. One of our segments, the engineered system segment, should show a revenue decline of approximately 6%.

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 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.

Chris Quilty, Raymond James.

Thanks. 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 it pretty well, but indications that you're past the worst of it?

Thanks, Chris, and good morning to you. Let me start with the first one. In the first two quarters, aerospace and defense electronics were up for two reasons. Our avionics businesses were up but we also had a very significant business with the UK MOD, which is kind of an anti-IED program that we had, which was significant in the first two quarters. That's going to very much slow down because we delivered the major systems already, and we are waiting for a follow-on program perhaps late in the fourth quarter or early next year. So that part of the growth craze that contributed to the 11% and then 8.9% is going away.

Having said that, our avionic businesses are doing well, but if you look at it, overall, that's about $110 million or so -- $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 delays. Sequestration -- you know that one better than most. That is pushing the depots that -- military depots that used to buy our products to replenish, for example, electronic warfare equipment like traveling [wavetunes] 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 program, senior executives 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.

Got you. Switching gears, the engineer 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 2000 and, I'd say, 10 -- we had about $75 million, $80 million of system engineering and technical assistance program, primarily missile defense area. That has pretty much gone away. We're about $10 million today. And those were, by the way, our lower-margin businesses. So we've given a lot of that up.

The second things that's happened in the NASA program because of the weak support from the White House, especially in the manned space missions, we have gone from about $80 million to about $50 million in the last three years. So those are the two 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 prime programs in space now, which, and therefore 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 is what's happened overall. Progams 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 has been a really tough comparison. But, going forward, I think we have pretty much stabilized this business, especially as we also move with this space imaging, as I mentioned before, where we are building the multi-user platform at the present time, which will go on the international space station, and we are working on -- with NASA, to see how we equipped that platform with both a multi-spectral and hyper-spectral imaging system.

So -- when you look at it, I think it's a healthy shift in the business, though 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.

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 guarantees success, we'll -- which there are some indications that that might come around, that program can grow to be four or five times, maybe even six times the size it is at the current time.

(Operator Instructions) Michael Ciarmoli, KeyBanc Capital Markets.

It's actually [Kevin Cabatoni] on for Mike, good morning, everyone. Most of my questions have been answered. I just wanted to look quickly at digital imaging. You guys gave a little bit of color, but I'm just wondering if you could give some thoughts on kind of what we're looking at there in the industrial markets. 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.

Thanks, Kevin. First, the machine vision is both semiconductors but also there are significant increases in deployment of our systems in flat panel display. And those, especially, of course, located in Asia, I think we are doing very well with the strength in that domain.

In the uncooled infrared sensors development, what we have is -- we are developing a capability to manufacture low-cost, high-performance, long wave infrared sensors. As you know, also known as microbolometers in our Bromont, Quebec, semiconductor facility. These will, obviously, complement our other infrared sensors including those that we do here based on MeerKAT Telluride, which are cooled.

We are testing, at the present time, alpha testing processes. We have our equipment installed. We have collaborated efforts with Canada's National Institute for Optics. We have developed some prototypes, and we have some partnerships established with a launch customer in the US, but as you know, once we get this thing going, 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 three 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 thought to 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 are 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.

Jim Ricchiuti, Needham & Company.

Robert, I think you commented that the book to bill was around 1. Can you talk a little bit about -- give us a sense how the book to bill might look in some of the various segments?

That's not as easy for me to answer, but I'll give it a Boy Scout try. A lot of our businesses are book and burn. I'd say a lot of our instrumentation businesses are 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'll 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.

Got it. Okay, and 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 are that -- we've gone to relatively small feature sizes 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 this limit, and that gives us about 200 megahertz frequency but then your design function is about a fifth of that, or below. So the kind of chips we are 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 deck. The first chip that was released for production yesterday will probably go into an auxiliary probe component that we would use. Next, we're at the present time, we will start designing other products for LeCroy, and I think to get to the broadband oscilloscope will probably -- it will take us a couple of years to get there, maybe two and a half. 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, then we'll 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 13 megahertz, 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 one group, and Tom Reslewic would be running that group, which it would be now a significant size 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.

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 reported in instrumentation -- (inaudible) instrumentation -- but instrumentation basically now will be two pieces. There will be the marine instrumentation, which has oil and gas and marine sensor systems imaging on one side. Then, on the other side, we would have the environmental and electronic measurement instrumentation, which will include everything that we did in our job product line, even though the product lines would be separate, they would be managed cohesively.

Steve Levenson, Stifel.

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 extend it into other operating segments or other operating product lines where you think you can use it to capture share?

Well, 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 are all moving to higher frequencies both in the solid state and other. And our TWTs, for example, in the solid state products, microwave products, we've gone from gallium arsenide to gallium nitrite. We are now looking at some indium phosphide. We do have some terahertz electronics programs in our scientific, which is our main laboratories.

And the whole mixed signal area, there is overlap between the technologies. And then, finally, we are looking at some -- all 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.

Okay, thanks. 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 there is to get our CMOS imaging development programs improved, and there is some analog to digital conversion work that is planned for LeCroy there.

Chris Quilty, Raymond James.

Yes, 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 three 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 are moving our main facility -- we actually have, but we are in the process of doing the rest of the stuff with it. We have moved 110,000 square feet of manufacturing space all over Los Angeles to Tennessee, and at one time we had 350 people in that business.

So -- very few of those are located here, and so we have a $3.2 million charge coming yet with that. So I think there's going to be some struggling through margins there because of that.

Is that the marina facility?

Yes, exactly. And we've been there -- I think that was the first business that Henry Singleton bought in 1961.

Nice tax move from LA to Tennessee.

I'm not going to respond to that, because my headquarters is in California.

Okay, and I guess the call would not be complete unless someone asks you about your thoughts on the M&A pipeline.

Oh, 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 are becoming expensive because everybody is 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.

Mostly technology acquisitions?

Everything with it is technology.

Fair enough.

Thanks, Chris. 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?

Sure. Ladies and gentlemen, this conference will be available for replay at 10 a.m. Eastern Time and will remain available through August 25th. The dial-in number for the replay is 1-800-475-6701, access code 292096. Again, that number is 1-800-475-6701, 292096. Outside the US the dial-in number is 320-365-3844 and, again, access code 292096. That does conclude our conference for today, thank you for your participation, and you may now disconnect.