Teledyne Technologies Inc (TDY) 2005 Q3 法說會逐字稿

Welcome to the Teledyne third-quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today Thursday, October 27, 2005.

I would now like to turn the conference over to our host, Mr. Jason Van Wees. Please go ahead, sir.

Good morning everyone. This is Jason Van Wees, Director of Corporate Development and Investor Relations at Teledyne Technologies. I'd like to welcome everyone to Teledyne Technologies third-quarter earnings release conference call. We released our earnings earlier this morning prior to the market open.

Joining me today are Teledyne Technologies Chairman, President and CEO, Robert Mehrabian; Senior Vice President and CFO, Dale Schnittjer; and Executive Vice President, General Counsel and Secretary, John Kuelbs. After remarks by Robert and Dale, 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 actual results of course may differ materially. Also in order to avoid potential selective disclosures, this call is simultaneously being webcast and a replay both by a webcast and dial in will be available for approximately one month. Here is Robert.

Thank you, Jason. Good morning everyone. Since our third quarter's earnings release was issued earlier this morning, I won't go through all the details but I would like to make some introductory comments about the quarter and the year to date followed by observations on the performance of the various segments.

To begin this was another strong quarter for Teledyne. Year-over-year earnings per share increased for the fifteenth consecutive quarter. Sales grew 9.4% while earnings per share increased 21.6%. In the first nine months of 2005, sales were 896.1 million, an increase of 23% over the same period in 2004. The corresponding increase in earnings per share was 62.4%. Teledyne's earnings per share of $1.38 in the first nine months already exceeds the $1.24 per share earned during the full 12 months of 2004.

We attribute this performance to first, our successful acquisition and integration programs. Second, investments made in product development; and third, operational excellence programs applying lean manufacturing principles focused on margin expansion.

Total organic growth during the quarter was 4%. Overall operating margin in the third quarter increased by approximately 100 basis points compared to last year and remained near record levels.

I will now elaborate on the operating performance of our business segments followed by Dale Schnittjer who will discuss in more detail our financial performance and comment on our outlook for the remainder of 2005.

Turning to our business segments, third-quarter sales in our Electronics and Communications segment increased over 15% compared to last year from 155.1 million to 178.9 million with organic growth of 6.1%. Operating profit increased 34.2% from 15.5 million to 20.8 million with operating margin up 160 basis points compared to 2004, up from 10 to 11.6%.

As I further discuss other Electronics and Communications businesses, I will break up my comments into three separate market categories. First, Defense Electronics; second, Electronic Instruments; and third, Avionics and other Commercial Electronics. Each of these three groupings currently contribute approximately one-third to our Electronics and Communications segment sales. In the third quarter of 2005 sales of Defense Electronics increased approximately 38% compared to the third quarter of 2004.

Excluding the acquisitions of Celeritek defense assets and Cougar Components organic sales growth in the third quarter was approximately 16% of sales in the majority of the Defense Electronic product and services grew at double-digit rates compared to last year. Examples included solid-state devices for electronics warfare, high-voltage connectors and cable assemblies and manufacturing services for printed circuit card assemblies using infrared countermeasure systems.

Turning to our Electronic Instrumentation businesses, in the third quarter of 2005, year-over-year total sales of electronic instruments increased by approximately 6% compared to last year mainly due to the acquisition of RD Instruments in the third quarter. Organic sales, however, decreased slightly by almost 2% primarily due to a reduction in sales of our geophysical sensor productline which serves the petrochemical exploration market. This reduction in sales of geophysical sensors resulted mainly from customers requesting delayed shipments as a result of Hurricane Rita in the Gulf region. Because these shipments were just delayed and due to strong quarter activity in the third quarter, we expect to see improved sales in this business in the fourth quarter of 2005.

Teledyne's RD Instruments was acquired in late August of this year and has become the nucleus for developing a highly focused platform of underwater measurement instrumentation and integrated acoustic imaging systems. Both Teledyne RDI and Teledyne Geophysical Instruments employ also sonic transducers based on piezo electric technology to send signals in water.

RDI's acoustic current profilers perform precise measurements of current at various depths in oceans and rivers and its Doppler velocity logs are used for navigation of civilian and military surface ships, unmanned underwater vehicles and by U.S. Navy divers. Both Teledyne RDI and Teledyne Isco manufacture also sonic instruments that measures the flow rate of wastewater, the combination of Isco's cost-effective instruments with TRDI's products which provide the highest accuracy for large pipes will permit us to offer a more complete portfolio of flow measurement solutions to our customers.

Finally, I will discuss our avionics and other commercial electronics businesses. In the third quarter of 2005, sales from these businesses collectively increased approximately 5% from the third quarter of 2004. This growth was all organic and resulted from increased sales in several product lines. Examples include broadband wireless assemblies, electronic relays, avionics systems and commercial contract manufacturing services.

A robust commercial air transport market and new product introductions have combined to boost our commercial avionics business. For example, our wireless ground link product which transfers flight safety and maintenance information directly to an airline's operations center continues to receive strong orders. Based on current customer interest, it is possible that we will receive broad link installations our first avionics content on Airbus 8380 sometime next year. In addition, we continue to work with Airbus to develop and certify our onboard information terminal essentially an electronic flight pack which has the potential to become standard equipment on all Airbus aircraft.

Turning to our government systems engineering segments, in the third quarter of 2005 revenue and operating profit in this segment decreased compared to last year. Nevertheless, the operating margin of 10.6% was quite attractive for this cost based government services business. In the third quarter, sales increased in our traditional missile defense and space programs. However, as previously forecast in our recent outlook statement we saw a contraction in revenue due in part to timing in certain environmental programs related to chemical weapons demilitarization.

This week we did announce a $10 million contract award for this new environment of business at Pine Bluff Arsenal in Arkansas. This new contract will represent our third ongoing project at Pine Bluff. Each of the projects is associated with weapons demilitarization or modernization. We continue to believe that weapons demilitarization will be a growth area for Teledyne Brown engineering.

Earlier this year, we announced a 3.7 (ph) million first phase award of the Class 3 unmanned aerial vehicle development and demonstration and in the future combat systems program. During the third quarter, the value at this contract was increased to 4.6 million. As a reminder, last year we made a strategic decision to re-enter the UAV market when we formed an alliance with Rheinmetall Defense Electronics who have developed a very modern autonomous UAV for the German Army.

Another area which is Missile Defense remains an important area for our government engineering services business. While we don't have enough visibility to quantify the impact, one item which may prove to be an opportunity for Teledyne is the result of the current base realignment and closure recommendation. As part of BRAC, the Secretary of Defense recommended relocating a number of missile defense agency responsibilities and personnel from the Washington D.C. area to military installations in Huntsville Alabama. As an established company with over 40 years of missile defense expertise specifically in ground-based test and evaluation and systems engineering and technical assistance, we believe our systems engineering businesses headquartered in Huntsville are well-positioned to benefit over the long term from MDA's growing presence in Alabama.

Turning to our Aerospace Engines and Components segment, sales during the third quarter of 2005 for our aircraft missile engine business increased approximately 6% relative to the third quarter of last year and resulted from higher sales to OEMs. In the turbine engine business, sales decreased by approximately 11% compared to last year primarily due to a decrease in sales of Harpoon engines which enjoyed a seasonally high shipment volume in the second quarter of this year.

Finally in our Energy Systems segment, revenue in the third quarter of 2005 increased by 18.5% compared to the third quarter of last year while operating profit was flat. Increased sales were driven by continued strength in our long-term government contract coupled with an increase in sales of commercial hydrogen generators partially due to the various hurricanes.

To summarize, this was another strong quarter for Teledyne. Our strategy remains the same. First, continue to focus on operational excellence and margin expansion programs. Second, invest and our organic growth initiatives. And third, find and successfully integrate acquisitions in the Defense Electronics, Systems Engineering and regulated Commercial Electronics market.

I will now turn the call over to Dale Schnittjer. Dale?

Thank you, Robert, and good morning. I will first discuss some additional financials for the quarter not covered by Robert plus add some full-year highlights when warranted. Then I will give an update on pension costs and discuss our 2005 outlook.

In the third quarter cash provided from operating activities was $28.4 million compared with cash provided from operating activities of $30.3 million for the same period of 2004. The lower cash flow in the third quarter of 2005 was primarily due to $4.1 million in higher pension contributions and higher aircraft product liability payments partially offset by higher net income.

Free cash flow, that is cash from operating activities less capital expenditures, was $23.5 million. Also during the quarter we purchased RD Instruments for $36 million, however, $3.6 million of the 36 million was subject to a holdback. The acquisition of RD Instruments also included assumed net debt of $1.6 million. Proceeds from the Isco non-core asset sales were $3.1 million.

Finally, a purchased price adjustment on the Cougar transaction was $0.5 million and option proceeds received in the quarter were $3.7 million. The end result of these items was that net debt for the Corporation increased by $4.2 million and we ended the quarter with $61.6 million of net debt.

Our balance sheet remains strong with a net debt to capital ratio of 16% which provides flexibility for future acquisitions in our strategic businesses. As noted in our press release, capital expenditures for the third quarter of 2005 were $4.9 million compared to $3.9 million for the same period of 2004. For the third quarter of 2005, depreciation and amortization expense was $6.3 million compared to depreciation and amortization expense of $7 million in the third quarter of 2004.

Turning to pension, as we have stated before declines in the capital markets in prior years and adjustments in pension assumptions have resulted in an increase in FAS 87 pension expense and a requirement to make pension contributions. However, subsequent to November 29, 2004, the Company is able to recover certain pension costs from the U.S. Government. Pension expense allocated to various contracts pursuant to U.S. Government Cost Accounting Standards or CAS, can generally be recovered through the pricing of products and services sold to the U.S. Government.

In the third quarter of 2005, FAS 87 pension expense was $3.2 million for a negative earnings per share impact of $0.06. This compares to FAS 87 pension expense of $2.2 million or a negative earnings per share impact of $0.04 in the same period of 2004. However in the third quarter of 2005, pension expense allocated to contracts pursuant to CAS was $2.3 million or a positive earnings per share impact of $0.04 compared with no allocation in the third quarter of 2004 because we were prohibited from charging CAS pension costs to the government prior to November 29 of 2004.

As we had mentioned before starting in January 1, 2004, new hires have been added to an enhanced defined contribution plan as opposed to the Company's existing defined benefit plan. Furthermore, employees from acquisitions will participate only in our defined contribution plan.

Now let me to turn to our 2005 outlook. Management currently believes that GAAP earnings per share in the fourth quarter of 2005 will be in the range of $0.39 to $0.41. The full year 2005 earnings per share are expected to be in a range of approximately $1.77 to $1.79 compared to our previous outlook of $1.67 to $1.71. For the full year 2005, we currently anticipate $12.7 million or $0.23 per share in pension expense under FAS 87 or $3.4 million which is $0.06 per share in net pension expense after recovery of allowable pension costs from our CAS covered government contracts.

Full year 2004 earnings included $8.7 million or $0.16 per share in pension expense under FAS 87 or $8.2 million which is $0.15 per share in net pension expense after recovery of allowable pension costs from our CAS covered government contracts. The assumed FAS 87 discount rate is 6.25% in 2005 compared to 6.5% in 2004.

Beginning with the first quarter of 2006, the Company plans to record expense for stock options in accordance with financial accounting standards Board Statement 123R which covers share based payments.

I will now pass the call back to Robert.

Thank you, Dale. Michelle, we would like to take questions at this time if you are ready to proceed, please.

(OPERATOR INSTRUCTIONS) John Harmon with Needham & Co.

Good morning. Robert, I was wondering if you could just give us a couple preliminary thoughts about 2006? What do you think your markets will grow in 2006? If they hypothetically were flat? What rate do you think you might grow earnings? And the basis for this question is, your last three quarters have been pretty flattish in terms of revenues yet you've still managed to grow earnings probably getting leverage off your acquisitions.

Thank you, John. First, in the last three quarters if you look at revenues nine months over nine months, revenues actually cumulatively have grown 23%. And excluding acquisitions they were 12%. So we had -- I think we had fairly robust revenue growth this year. Over the long term we always plan at least in terms of our organic growth, we plan in the mid single digits. Of course as we do acquisitions that will add to that revenue.

It's a little early for us to project on earnings for next year. We do have a couple of headwinds as they are mentioned. We have the FAS 123 stock option expense and we do have -- we're going to have $2.5 million less received from Honda on the engine program. So I think those two would add something of the order of $0.17 or so headwind. And I we have some increase in pension. So you add that up, maybe $0.18 or so. Obviously we expect to make that up somewhere else in our efficiencies.

So having said that, let me just very briefly tell you about the business side which is more important. I think we're enjoying good strength in our defense electronics businesses. And we expect that to continue. In the instruments businesses while the overall revenue is remaining flat, our margins there are some of the best margins we have in the Company. And so we expect to do better as we go along.

And lastly, I would say that we intend to make acquisitions as we have in the past 40 years. And we think will add to both our revenue and our earnings. I hope that answers your question, John.

That is a great answer, thank you. Has the number of M&A candidates thinned out somewhat just based upon the fact that you've made fewer acquisitions thus far in '05 than you did in '04?

Well, you know, no. The answer is the pipeline hasn't thinned out. We work with a funnel. We have to be very selective. Sometimes we compete in a property that looks attractive but the competition drives the cost, the price to where we are not willing to pay. As I mentioned before, we don't want to be to effervescent in our acquisition processes. On the other hand, we do have some acquisitions in the pipeline and we've done some small things that haven't really been worth announcing. But we do have some in the pipeline and expect to make some acquisitions in the near future.

I will finally add that we are interested in large acquisitions as well but the problem with our larger acquisitions especially in the defense domain is that the larger the acquisition, the higher the multiple. And multiples are still at the level that we don't want to go there.

Interesting. Finally, housekeeping. I apologize I was distracted. What were the organic growth rates again for defense electronics and electronic instruments?

In defense electronics, organic growth was about 16%. In the instruments area, organic -- we didn't have an organic growth. We had just slight decrease but as I mentioned, that was primarily due to the fact that our customers asked us to delay some shipments from our Geophysical Instruments group which we will ship now because of Hurricane Rita.

Thank you very much.

Karl Oehlschlaeger with Banc of America Securities.

Another solid quarter -- very impressive. I have a couple questions. Maybe you can talk a little bit about the efficiencies that you hope to get going into next year that would offset some of these headwinds. You mentioned lean. Can you talk a little bit about lean and how much margin maybe you've gotten out of the lean activities? How much more do you think there is left to do?

Okay, thanks, Karl. First, if you go back to 2002 when we really started our lean activities in earnest. At that time I will just give you an example. In our factories if you measure three things, warranty cost, cost to rework and scrap. In 2002 in our electronics factories, those three items contributed 5% cost -- cost us 5% of our revenues, of our sales. Every year we've been endeavoring to reduce that number by 20%. To do that of course you have to do all the stuff that you do with synchronous manufacturing cells, everything that you do just-in-time inventory controls, everything. We have managed to bring that number -- by the way at the same time, we've been acquiring businesses. We've added about $300 million in revenue to that segment. Today that number is around 2.2, 2.3% of sales which means we brought it down less than half what it was.

Obviously what is happening as we go forward, we anticipate lowering that more, but there's not as much headroom as we had before. It's getting tougher. But I think this is a road without an end and it's a road you've got to stay on if you want to stay competitive.

I would just finally add one comment to that in that when we make an acquisition and we have an acquisition model for income from our acquisitions and revenues obviously, we bring the same energy and intensity in our operation of excellence programs to those acquisitions and those benefit us significantly. Our acquisitions perform better now than they have they did before we acquired them.

Two other things, we are now obviously began applying the same principles to our Aerospace Engines. Aerospace Engines business started at what we call price of nonconformance which is scrap, warranty and rework of about 4.6%. We brought it down somewhere around 3.5% already and intend to bring that down further.

One last comment, we do get through the acquisitions -- we also get some margin expansion because of other things in our operational excellence programs other than manufacturing. Some of them have to do with synergies where we can get one of our businesses sell products that they didn't sell to an acquired company; for example mass flow controllers from Hastings are being used at Tecmar which was acquired as well as API Instruments which was again acquired. API makes instruments that Monitor Labs which we acquired uses whereas Monitor Labs used to buy those instruments somewhere else. So these are some examples of the kind of other things other than manufacturing that will improve our -- hopefully improve our margin.

Great, that is great. Can you talk about the -- just revisit the Honda relationship and you discussed it before and you have the final $2.5 million payment coming in the first quarter of next year. Where does that stand now? I was under the impression that there is -- that relationship still exists and there could be possibly more to come in the future depending on what happens. How does that relationship stand at this point?

First, that is an ongoing relationship. I think the first $10 million which 2.5 of it is yet to come, was based on the work that we've done with them up to now. We're going forward with them and we are working with them but I think that large sums like that at least large to us are going to be unlikely to happen. In our relationship we obviously get reimbursed for the kinds of things services and technology that we provide.

In terms of the long-term issue here is, as you know, they are really keen on developing and are developing with our help an advanced piston engine. It is important to note that we have been improving our engines for the last 75 years. And the engine that they are working on they want it to be much more reliable than current engines and hopefully be able to use automotive gas as opposed to the high octane gas that is currently used in piston engines. Having said all of that, I think it's taking them a little longer because of that. And I think on the other hand when the engine is developed and introduced, we have an agreement that we would do that together. In the long term, I'm very positive about our relationship with Honda.

Okay. And finally on missile defense, I think I estimate your missile defense revenue related revenues to be around 5%-ish and maybe you can tell me whether that is right or not? There is some risk that that could be an area that sees some budget savings going forward so to speak. Can you talk about your exposure and which areas of missile defense you are exposed to and why you think that you might be immune to some of the cuts because I think that is the case?

Yes, I would not use the word immune in this environment because of the changes that are occurring in the defense procurement arena. To back up a second, we think that our missile defense activities are divided into two areas. One is the ground-based missile defense which is about $50 million and there we are primarily as a subcontractor; we develop software support for the lead systems integrator which is Boeing. And this has accounted as I said for about 50 million in revenue in recent years. A lot of our work is in modeling and simulation which is key to missile defense development.

On the other side, we have another approximately $50 million that is in really is in the support area systems engineering and technical assistance to various agencies. That business helps them evaluate the programs that they have, gives technical evaluations. We give technical evaluations. We also do some signature modeling in that domain. Our exposure is a little more than what you indicated.

Going forward on the plus side as I indicated, there are at least BRAC recommendations are implemented. There are a number of things that are going to be positive for us from our location because we're in Huntsville Alabama. For example, the headquarters that are going to -- at least they are proposed to be relocated there, include the Army Materials Command, the U.S. Army Security Assistance Command, Army State and Missiles Defense Command which we serve in our SETA work, and the bulk of the Missile Defense Agency work. We anticipate that that might be a plus for us.

And of course as you mentioned, there is always risk and the major risk to us is as missile defense moves more into deployment, the kind of work that we do which is more testing and evaluation and simulation, the dollar volume of that may come under pressure. That is the best I can do on that.

That is great. Thank you so much.

Stephen McBoyle with Lord Abbett.

Good morning, congratulations on a super quarter. Maybe just to further the thought with regards to overall consolidated organic growth, you made the comment that you typically would see mid single digit organic growth. What I'm wondering is as you look out over the next 12, 24 months, is that a typical environment? And more specifically, is there meaningful incremental new product opportunity, share gain opportunities, the opportunity with Airbus 380 in terms of the proxy elaborated thereon? Or Boeing, which I think '06 versus '05 is going to be a larger opportunity for you that really are going to provide incremental opportunities through a period that likely is to be somewhat more challenging?

I will try and answer those questions, Stephen, in the order you have asked them. We always are aiming for mid single digits, maybe a little higher organic growth. There are a number of things that are happening that should help us. Let me start with defense. There are a few trends in defense that favor us. First, there is a trend to not just outsourcing manufacturing without outsourcing development. The primes don't consider manufacturing to be a core competency to a large extent so we are the beneficiary of that. But interestingly enough they've begun -- become more willing to outsource development of major programs. Another area that I think will help us --.

And maybe just on that point, are there tangible examples that you can provide that may represent incremental business?

I can give you a couple of examples. For example, Northrop Grumman, we had maybe a couple of million dollars worth of electronic manufacturing services in the past. We have now approximately -- expect to have approximately of the order of 15 million in that domain --.

15?

Yes. And that is primarily because we are working on different groups at Northrop Grumman than we did before. And some of this also have to do with new programs that we haven't had before such as assemblies of in terms of countermeasure products. The other thing, Steve, that is happening is that because of our acquisitions, we're able to offer a broader range of products and services to our customers and more integrated products. That is helpful to us because the higher value products as we got integrated products.

And then finally I would just say that most of our business in the defense domain has been with the Air Force and the Army. Now we are getting some work with the Navy. We do some hydrophone (ph) (indiscernible) with the RDI acquisitions. We have Doppler Navigators for Navy seals. We have sensors for autonomous underwater vehicles, etc.

And then you asked about Airbus. Let me just finish on defense with one last thing. And that is our entering the unmanned vehicle arena both in the air as well as now we're obviously looking under water. Also I think there is expansion room for our traveling wave tubes. The channels for communications for the defense industry are getting crowded and they are moving to the ka band and multiple band, tri band traveling wave tubes. And we are probably the market leader in both of those areas. We are fortunate to be uniquely positioned in that domain.

So let me leave that and go to the questions you asked about Airbus and Boeing. Most of our customers are foreign airliners. We have developed a number of new products and continue to do so. For example, the electronic flight pack that mentioned for us is an important one. The other thing is the ground link that I mentioned. And finally, there are -- we bought a company in 2003, Aviation Information Solutions, and they have a display for these jets called AV Visor and sales of those are doing well especially now that (indiscernible) is doing well or at least that domain is doing better.

On the negative side, we have been supplying extensively communication to the (indiscernible) market, telephony, and that product is getting long in the tooth. And we think we will have some detriment there.

Let's see, I think the other area in the aerospace that we enjoy some strength is with companies that do transportation companies like FedEx which we have really good relationships with.

And lastly I think if the oil and gas strength keeps continuing, we've added new capabilities there with our geophysical instruments. People that used to be our competitors have now become our customers for one. They mold more into analyzing data and running the ships and building the hydrophones and the streamers. Secondly is that we developed a new product which is a simmer (ph) cable that is filled with gel versus the oil that we had before. And it is very successful and being accepted in the marketplace. So if the oil and gas industry and oil exploration continues we expect to enjoy some strength there.

Maybe just to deliberate on that last point. Can you actually highlight what the order levels may have been in the quarter or backlog exiting the quarter or more specifically what revenues may be in this upcoming quarter? And maybe as you look forward, recognizing that that new product opportunity seemed to be more complimentary less substitution to your current product offering. And that area -- is that a meaningful growth opportunity in aggregate obviously the end market served continued to do well looking out over the next 12 months?

I think, let me start the book to bill. The book to bill ratio is healthy. It's about 2 and the ratio is about 2. On the flipside, this is not a very large productline for us. So significant growth there, a few million dollars is not going to move the needle much for us.

And then within electronic instruments, obviously organic growth down. Was there anything specific that you saw in the marketplace again thinking more along the lines of Isco and Lehman Labs, is it just general spend levels being somewhat tough in terms of the customer served there? Or pricing pressure being greater? Can you just comment along those lines?

Yes. First the slide down there, the 2% as I mentioned is primarily due to delaying Geophysical Instruments shipments because of the hurricane. If that had happened we would have been flat but even flat obviously is not acceptable. I think what we have is that we see the demand for our flash chromatography for example at Isco is still strong but it's not growing at the rate it used to historically.

On the environmental side, demand for our water samplers, flow meters for wastewater monitoring remains strong and now with R&D Instruments we expect to improve that. It's the laboratory market that is challenging as you probably know that better than I do. So that is an area that we have a little more work to do.

Congratulations again.

Mark Jordan with AG Edwards.

Good morning, gentlemen. I noticed an article out of the Huntsville area saying that you had done work or helped design a prototype of a multipurpose troop transport carrier system that you could potentially see a sizable contract on. Could you outline what the opportunity is with that central product?

Hi, Mark. That is basically if you look at it -- it is a box. It is a box, composite box reinforced that fundamentally you can lift it and put it on the back of a transport vehicle. It's starting from something about 2.5 tons up. It's in the development stage. It is not made to withstand very heavy artillery, small arms, fragments, etc. We sent one of those boxes as a test and had it used for about 90 days in Iraq. And it is still in the development stage and we are -- it's too early to determine what the requirements would be and whether we can go into production. So far it seems encouraging.

They said that if you are doing it, it would be sort of a 100 unit blocks. What kind of ASPs might one of these units have?

Too early to tell, Mark. I don't want to hazard a guess on that. They are less expensive than some of the current units that are out there but I can't comment on that at this time.

With Honda, as you said, I know your final payment is scheduled for early next year. But you also commented that the development cycle is longer. Would what assume that there is the potential for the relationship as currently defined to be extended beyond that period defined by this last payment?

Yes, we have a relationship that goes into -- our agreement which we signed I believe it was in 2001, goes about ten years out. I see this as a very long-term relationship. And frankly, you are familiar with this domain probably more than I am; relationships with Japanese firms generally last a long time and that is the way we are looking at this.

There has been an increase in other long-term liabilities about 26 million year to date. Is that related to the building of reserves just on the aircraft engine standpoint that you've had continue to make reserves and have not been paying out too much money and that is why that number is growing?

I will let Dale answer that, Mark.

Mark, that is the largest piece of the increase. Obviously some of those accrued liabilities, reserves -- or accrued liabilities are also the result of our new acquisitions. But what you mentioned is the largest piece.

Okay. Could you give an overview as to where you see the Boeing business on the avionics side going over in '06 versus '05?

We think there's some growth opportunity there. On the other hand, we don't directly sell to Boeing. We sell very little directly to Boeing. What we do sell, as you know, is we sell to our airline customers who specify our data acquisition boxes and communications systems. We think as both Airbus and Boeing as they are projecting growth in their businesses, we think that will help us.

Any updating comment on what you think the operating margin outlook is for the engineering services for '06 versus '05?

I think as you recall, our margin has gone down somewhat from last year to this year. Last year it was closer to 11, a little over 11%. This year especially this quarter it's closer to 10.6%. We've had it as high as 12% in the past because of award fees. We think it's going to moderate downward some more in the long term somewhere between 9 and 10% even in the short term we think it's going to be closer to 9.5%.

Okay, thank you very much.

Chris Quilty with Raymond James and Associates.

Good morning, gentlemen. Something happened between calls, so please excuse me if I ask a redundant question. Can you tell us your thoughts on the aerospace and engine side? Have fuel prices started to impact sort of repair parts, replacement parts market for you or will they have an impact in your view?

I think we've seen some downward trends in spares and what we call our rebuilt engines. On the flip side, we have been getting an uptick in our OEM engines primarily because Cirrus is gaining share and we're the prime supplier to that aircraft. Overall our piston engine revenues are up about 6% because of that but I think you are right.

And finally, we are introducing electronic controls on these engines which should help us in the long term because that would be the only available engine with electronic controls that is made by (inaudible).

Is there a retrofit opportunity?

We think so. Because the oil and the gas prices should help us there because one of the advantages of putting electronics on these engines is that you can operate it much more efficiently just like the automobile does and can reduce gas consumption by something of the order of 15% on the average.

Okay. The JASSM program given some of the deliberations in Congress about the funding and what not, can you give us a sense of sort of what is in your numbers or expectations for the program and general thoughts on where you think that program will go?

There is pressure on the JASSM program partially because of a couple of missiles that did not perform as expected. On the other hand, the long-term development of that program has been fairly consistent and in line with other missile development programs. There is pressure in both the House and the Senate to reduce the number of procureds in that domain. We don't know where the Joint Committee is going to end up.

The flip side of it is that you price those engines, Chris, as you well know, you price those engines based on quantity. And if the quantity is decreased we think what will happen if that the price will go up. And we think -- the revenue in that should remain at least -- assuming nothing really bad happens to the program, the revenue stream in that program should remain relatively flat in the foreseeable future.

And Lockheed is already developing the ER version. Are you involved with that?

Not on the extended range version, no.

Different type of engine?

Yes, it's a bigger engine.

Okay. And in the past you've talked about some of your, within the aviation, avionics space, efforts to get involved within flight, high-speed interest Internet access and those sort of business service suites. Is that still an ongoing effort for you?

At a much lower level. As you know, that field has not really enjoyed the success that we and everybody else was predicting. And we're just going to wait on that. Frankly we have enough R&D dollars that we're putting into other product developments in that domain right now like the electronics like that, that we're going to wait to see how user adoption of that looks in the future.

We do have one thing that I mentioned before which are AV Visor which is a display that goes in business jets. And this is a product that we acquired with one of our acquisitions. And that is enjoying some healthy growth. And that is a display that information -- display like you see on the small business jets.

Thank you gentlemen, and congratulations again onto the nice results.

(OPERATOR INSTRUCTIONS)

Operator, if there are no other questions, can we move on?

Certainly. Please continue.

Thank you. I will now like to have Jason conclude our conference call please.

Thanks, Robert. Again thank you everyone for joining us this morning. If you have any follow-up questions, please feel free to call me at the number listed on the earnings release. And of course, all news releases are available on our website, teledyne.com also.

Operator, if you could conclude the call please.

Certainly. Thank you. Ladies and gentlemen, this conference will be available for replay after 11:30 Pacific time today, through November 27th at midnight Pacific. You may access the AT&T executive replay system at any time by dialing 1-800-475-6701 and entering the access code 799620. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844; access code 799620.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.