Teledyne Technologies Inc (TDY) 2007 Q2 法說會逐字稿

Welcome to the Teledyne second-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

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

Thank you. Good morning, everyone. This is Jason VanWees, Vice President, Corporate Development and Investor Relations at Teledyne. I would like to welcome everyone to Teledyne Technologies' second quarter 2007 earnings release conference call. We released our earnings earlier this morning before the market opened.

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 of course, actual results may differ materially.

Also, in order to avoid potential selective disclosures, this call is simultaneously being Webcast, and a replay, both via Webcast and dial-in, will be available for about one month.

Here is Robert.

Thank you, Jason, and good morning, everyone. I will start with some introductory comments about the overall performance of the Company. Next, I will make more detailed observations about each of our business segments.

To start, in the second quarter, Teledyne achieved record sales of just over $400 million and record earnings of $0.67 per share, an increase of 13.6% from last year. This was the 22nd consecutive quarterly year-over-year growth in earnings per share, and the 13th consecutive quarter of double-digit growth in EPS.

While total organic growth was flat, primarily due to reduced sales of geophysical sensors and electronic manufacturing services for medical applications, orders across the Company substantially exceeded sales, with total book-to-bill ratio of 1.16. As a reminder, orders were also approximately 15% greater than sales in the first quarter of 2007.

During the second quarter, overall GAAP operating margin increased 127 basis points to 10.9%, which is a record for Teledyne. This was bolstered by Electronics and Communications segment operating margin of 14% -- again, a record. This performance was due to our operational excellence programs, as well as the successful integration of acquired businesses.

Furthermore, a continued focus on our core products and markets has helped drive profitability. For example, while sales of lower-margin electronics manufacturing services for medical applications decreased during the quarter -- by the way, that was intentional on our part -- sales of proprietary defense electronic products increased. Today, in our Electronics and Communications segment, almost 80% of our defense electronics sales are from proprietary products and specialized engineering services, including integrated microwave assemblies, infrared imaging sensors, and high-voltage connector assemblies.

Likewise, in our electronic instrumentation businesses, a focused acquisition strategy, coupled with successful integration, with emphasis on operational excellence, has helped make our environmental and marine instrumentation businesses among the fastest-growing and most profitable product lines in the Company.

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 third quarter and full year 2007.

Turning to our business segments, second-quarter sales in our Electronics and Communications segment increased 23.5% compared to last year, from $215.4 million to $266 million. Segment operating profit increased 33.7%, from $27.9 million to $37.3 million. And segment operating margin increased 107 basis points.

As I further discuss our Electronics and Communications businesses, I will break up my comments into three separate market categories. First, defense electronics, which represents approximately 40% of the segment. Second, electronic instrumentation, which represents approximately another 40% of the segment. And third, avionics and other commercial electronics, which represent the remaining 20% of the segment.

In the second quarter of 2007, sales of defense electronics increased approximately 38% compared to the second quarter of 2006. Excluding the acquisition of Teledyne Scientific & Imaging and Teledyne KW Microwave, organic sales were relatively flat.

During the second quarter, we made one small acquisition, Tindall Technologies, a provider of microwave systems and subsystems. Tindall, which designs instantaneous frequency measurement -- or IFM -- systems, was the sixth acquisition in our defense microwave business and has been merged into Teledyne Cougar.

Turning to our electronic instrumentation businesses, the second quarter of 2007, in this quarter, year-over-year sales of electronic instruments increased approximately 28% compared to last year, from $83.9 million to $107.8 million, due primarily to the acquisition of D.G. O'Brien in March of 2007 and a majority stake in Ocean Design in August of 2006. Both these companies are part of our marine instrumentation growth strategy.

Overall organic growth of electronic instruments increased just over 1%. This was comprised of organic growth of 9% in our environmental monitoring and industrial instruments, and organic sales of 14% in our marine businesses, other than geophysical, that we have owned for more than one year. This was offset by a 30% decline in shipments of geophysical sensors. However, recent orders in geophysical sensors have been very strong, with a book-to-bill ratio of 2.1 during the second quarter.

Finally, I will discuss our avionics and other commercial electronics businesses in this segment. In the second quarter of 2007, sales of these businesses collectively decreased about [3.7]% compared to last year. We had an 18% sales growth of high-margin avionics, but it was more than offset by a decline in sales of lower-margin electronic manufacturing services, especially in the medical applications area, and some commercial microwave assemblies used in cellular infrastructure applications.

Turning to our government systems engineering segment, in the second quarter of 2007, revenue in this segment increased 7% compared to last year. Organic growth was 1.6%, as growth in our defense and space (inaudible) programs was partially offset by year-over-year decline in some of our chemical weapon demilitarization programs. Segment operating profit decreased 3%, and segment operating margin decreased 90 basis points, from 9.6 to a normalized level of 8.7%.

I should note in this segment we recently announced that Rex Geveden will succeed Jim Link as President of Teledyne Brown Engineering. I wanted to once again acknowledge the contributions of Jim Link, who will serve as special adviser to me until his planned retirement in January of '08. Since Jim joined Teledyne in 2001, sales in this segment have grown from approximately $200 million to a run rate of over $300 million, almost entirely through organic growth.

Rex Geveden, who will formally join Teledyne next week, currently serves as Associate Administrator of NASA, where he functions as the Agency's Chief Operating Officer. Prior to that role, Rex served as NASA's Chief Engineer. He has a proven track record of leading government industry collaboration, and at Teledyne, Rex will assume not only leadership of Brown Engineering, but the leading role in integrating and leveraging the capabilities of our defense electronics and scientific instruments businesses with the systems engineering expertise of Teledyne Brown Engineering.

Turning to our Aerospace Engines and Components segment, sales in the aerospace engines segment decreased 7.1%, due primarily to decreased sales of aftermarket aircraft piston engine and overhaul services, and decreased revenues in our turbine business. However, operating profit increased 38.8%. Even if we exclude a positive settlement of 1.4 million, operating margin increased almost 160 basis points compared to the last year. The improved profit resulted from better operating performance, as well as favorable mix of higher-margin sales, including greater piston engine spare parts versus rebuilt engines and engine overhaul services.

Finally, in our Energy Systems segment, revenue in the second quarter increased 15% compared to last year due to increased sales of commercial hydrogen generators. Revenue growth resulted from market share gains, as well as increased demand from global infrastructure expansion, particularly new power plant construction in China, India and the Middle East. While orders benefited in part from favorable timing, this segment's second-quarter book-to-bill ratio of 2.4 was particularly strong.

In conclusion, Teledyne enjoyed a record quarter in revenue and earnings. We believe our continued focus on operational excellence and our complementary acquisitions and successful integrations to date have allowed us to build a stronger and more profitable company. As an example, five years ago, revenue in the second quarter of 2002 was $188 million versus $400.3 million in 2007. This was an increase of 113%. Comparable earnings per share improved from $0.19 to $0.67, an increase of 250%.

I will now turn the call over to Dale Schnittjer.

Thank you, Robert, and good morning. I will first discuss some additional financials for the quarter not covered by Robert; then I will give an update on pension costs and discuss our 2007 outlook.

In the second quarter, cash provided from operating activities was $32 million, compared with cash provided from operating activities of $33.1 million for the same period of 2006. The lower operating cash flow was primarily due to increased working capital requirements and higher income tax payments, partially offset by cash flow from acquired businesses and lower pension payments.

Free cash flow for the second quarter was $21.9 million, bringing free cash flow for the first six months to $46.1 million. Capital expenditures were $10.1 million in the second quarter, compared to $4.8 million for the same period of 2006. Approximately $4.5 million of the capital expense for the quarter resulted from the continued relocation of our avionics business.

We made one small acquisition in the second quarter for an initial cash payment of $5.6 million, and we ended the quarter with $208.3 million of net debt.

Our balance sheet remains strong, with a net debt to cap ratio of 29.9%.

As noted in our press release, depreciation and amortization expense for the second quarter of 2007 was $8.9 million, compared to depreciation and amortization expense of $6.5 million in the second quarter of 2006.

In the second quarter of 2007, FAS 87 pension expense was $2.9 million, or a negative earnings per share impact of $0.05. This compares to FAS 87 pension expense of $4.1 million, or a negative earnings per share impact of $0.07 in the same period of 2006. Pension expense allocated to contracts pursuant to cost accounting standards, or CAS, was $2.6 million, or a positive earnings per share impact of $0.04 in the second quarter of 2007, compared with $2.5 million, or a positive earnings per share impact of $0.04 in the second quarter of 2006.

As we have mentioned before, starting January 1, 2004, new hires have been added to an enhanced defined contribution plan as opposed to the Company's existing defined benefit plan.

Now moving to stock option compensation expense. In the second quarter of 2007, further requirements of SFAS No. 123(R), stock option compensation expense, was $1.6 million, or a negative earnings per share impact of $0.03, compared with $1.5 million, or a negative earnings per share impact of $0.03 in the second quarter of 2006.

Now let me turn to our 2007 outlook. Management currently believes that GAAP earnings per share in the third quarter of 2007 will be in the range of $0.69 to $0.72, including anticipated tax credits of $0.08 to $0.10 per share. The full year 2007 earnings per share are expected to be in the range of approximately $2.56 to $2.62, compared with our previous outlook of $2.42 to $2.48. Both the previous and the current full-year outlooks included the anticipated tax credit.

Our full year 2007 earnings per share outlook reflects anticipated sales growth in our defense electronics and electronic instrumentation businesses, due primarily to contributions from the acquisitions made in 2006 and 2007. Our third-quarter earnings outlook also reflects some additional expenses, including intangible asset amortization and interest expense, as a result of the acquisitions completed in 2006 and 2007.

Furthermore, while sales of geophysical sensors are currently expected to increase sequentially in the third quarter, we continue to expect year-over-year declines in 2007 due to lower first-half sales.

Additionally, the Company's current outlook reflects continued anticipated declines in sales of electronic manufacturing services in the remainder 2007.

For the full year of 2007, we currently anticipate approximately $11.9 million, or $0.21 per share, in pension expense under FAS 87 and FAS 158, or $1.7 million, which is $0.03 per share, in net pension expense after recovery of allowable pension costs from our CAS-covered government contracts.

Full year 2006 earnings included $15.4 million, or $0.27 per share, in pension expense under FAS 87 and FAS 158, or $4.9 million, which is $0.09 per share, in net pension expense after recovery of allowable costs from our CAS-covered government contracts.

The decrease in full year 2007 net pension expense reflects pension contributions made in 2006, the impact of favorable market returns on pension assets, and changes to the Company's pension assets and liabilities resulting from the merger of the Rockwell Scientific LLC pension plan with the Teledyne Technologies pension plan following the acquisition of Rockwell Scientific Company. The Company's 2007 earnings outlook also reflects $6.8 million, or $0.12 per share in stock option compensation expense, based on assumptions regarding stock option issuances during the year and estimated fair value of stock option grants.

I will now pass the call back to Robert.

Thank you. We would now like to take your questions. Operator, if you are ready to proceed with the question and answers, please go ahead.

(OPERATOR INSTRUCTIONS). Mark Jordan, A.G. Edwards.

I would like to talk about the margin opportunity you have moving forward in the electronics group. Obviously, second-quarter performance was superlative. But I guess historically, you've looked at that group and have characterized a 12, 12.5% operating margin as a good, solid performance. Given the acquisitions and your change in (technical difficulty), should we look at that potential as being, on a normalized basis, in the 13% to 14% range now moving forward?

Thank you, Mark, and good morning to you. Last year we ended up with segment operating margin of just over 12%. I think our expectations are that (inaudible) this year, about 13% or 13.1%, about that range. It will be up maybe 100 basis points from last year. But, second quarter was exceptionally high. So I think it will be up from last year overall, but not quite up to the 14%.

Okay. But looking into '08, we should assume that it should be 13% plus, would be a reasonable goal?

That would be a reasonable goal, Mark.

Second question. I think I noticed that you had won an interesting imaging contract at Rockwell here recently. Could you update us where Rockwell stands today with regards to competing for the next generation of tactical vision systems against, I guess, DRS and Raytheon?

Yes. Currently, the new round of bidding has not begun. We are at the end of the phase that we have been in, and the performance of our devices are being evaluated. We think that award will be later this year. Beyond that, I don't want to comment, Mark, because that is a decision that the government would make. But we are working very hard on that program, including investing some of our own R&D dollars in it.

Could you characterize, if you get success here later this year, what implications it would have in '08 and '09?

I think, in the longer-term, it should add a few million dollars a year to our scientific imaging segment, imaging business. As to how large that would be, of course, it is impossible to judge at this time, because it depends on where we end up with the war and what the supplemental budgets come out to be.

Final question, then I'll get back in the queue. Looking at the tax rates this year, normalized, you said you would be at about 37.1. That's obviously an uptick from '06. Longer-term, should we assumed that that 37 rate is a more appropriate rate for the Company?

Let me ask Dale to answer that.

That would be true. We would expect that that would be a higher rate in future years.

Michael Lewis, BB&T Capital Markets.

Mark stole my thunder on his questions. Robert, if we could just spend a little bit more time talking about the other opportunities that you would have with the Rockwell advanced infrared sensors. Do you see any international opportunities with the UK or Australia off these technologies, or is it still too early to talk about that?

It is relatively early to talk about that, except that I would say right now, our most recent win in that area is for (inaudible), which we just announced (inaudible) a $15 million program for the Air Force Research Laboratory, where we will design advanced infrared sensors for future missile warning and missile defense. But having said that, if you look at the international arena, the area that our FPAs excel in is in space, and space-based astronomy is an area that we are very successful in. If you look at what is flying out there today, over 50% of commercial (inaudible) focal plane arrays were produced at Teledyne Imaging.

If I can just shift gears for one second and bring up the margin question again, because you outperformed my expectations across all the segments. If you could just talk about each specific segment and what is sustainable versus what is [outperformance]. I know we already discussed the defense (inaudible) electronic and communications segment, but can you walk down the other segments as well?

Yes. As you know, we have consistently said in the past calls that we expected our systems engineering margins to go to a more normalized level of between 8% and 9%, and they are now sitting at about 8.7%. We ended up last year the same place. So we think that's the margin, the expected margin for that segment, in the 8 to 9% range. And that is where I think that will remain.

In the piston engine business, we had a good margin, operating margin, of 12.7%. But in that was $1.4 million of litigation proceeds that we received from our crankshaft litigations that go back to 2001. So if you were to normalize that, you will go down to maybe half of the margin improvement, which was over 250%. So I would say on a normalized basis, we would go closer to 11%, maybe a little less even. But nevertheless, even that is much higher than we have historically enjoyed in that business.

In Energy Systems, of course, while it's got lower margin business, around 5%, it can go up to maybe 6% or 7% overall by year-end. But the income there is not that large percentage of our overall income, so it doesn't affect things that much. The most -- the highest bang that we get for our buck, of course, comes from Electronics and Communications, because that is almost 60-some%, 65% of our income now.

That is very helpful. Thank you very much. I will jump back in the queue.

Karl Oehlschlaeger, Banc of America.

Thanks, Robert, for the margin guidance you just gave. Now I want to go back to the E&C. The geophysical sensors there, you said, are (inaudible) before that they were going to be down on the year. But the book-to-bill was really good. And I'm just kind of curious. As we move into next year, how does that look? Is that going to kind of go back up to a pretty impressive growth rate, you think?

Thanks, Karl. Let me just comment on the geophysical sensors. In general, what has happened is we have had the orders. Last year was a banner year for that business for us. We had revenues of over $50 million. This year we have the orders. Our customers have asked us to make some modifications to our streamers, both in terms of the compositions that we use, and in terms of the design of the hydrophones within the streamers. So we have been doing a lot more testing to get ready for production than making actual production. We have the orders. Our two major customers have recently launched new products that require and use our streamers. And this will also -- these new streamers would also incorporate, in addition to hydrophones, velocity and pressure sensors. And there's some new vessels that are being built that will use our streamers.

I think in the fourth quarter of this year especially, we should have a really good uptick in our geophysical instrument business. It is a little early for us to predict what will happen to -- in '08. But we think with the oil and gas markets where they are, we should be okay. I just don't see down in oil and gas market, as nobody else does, actually. So I think that business is going to be okay in the future, too.

So the new product that you're kind of testing now, will that start shipping kind of late third quarter, into -- or during the fourth quarter?

Yes, absolutely. Mostly in the fourth quarter; we expect to ship a substantial amount of that new product.

Speaking of good book-to-bill, you have good book-to-bill in the energy segment. It's a lot smaller. But I'm just kind of curious as to -- what is the timing on those orders? Is that kind of a near-term thing, or those orders go over a couple of years? That seems like it would be something that could see pretty impressive revenue growth, even though it is small.

I think what is happening there is that the whole global infrastructure growth is accelerating, especially in terms of production of power plants in China, Indiana and the Middle East. And most of these power plants use on-site hydrogen. That is, they use hydrogen generators right on-site rather than importing hydrogen in bottles or liquefied form and storing them. So it is really advantageous if you can just generate what you need on-site. And we have seen that hydrogen generator business pick up. My expectation is that going forward that will be a very nice business. We are taking both market share, and we also have increasing orders because of what I said is happening in the global marketplace.

Having said that, we think with our production rate, Q3 may be flat in revenues for that business. But again, we think Q4 will pick up in that business.

Chris Quilty, Raymond James and Associates.

You picked a bad day to put up some good numbers, but that's neither here nor there. I think Dale mentioned this in his guidance, but I didn't quite pick up on it. You have had two quarters in a row where your orders in geophysical sensors have been 1.8, 2.0 type numbers. When do those orders, when do they actually turn? And when would you expect to see some positive comps in the geophysical part of the business? And how material of an impact might that have on E&C margins?

I will let Dale address that.

In Q3 the orders were up, and -- Q2 the orders were up. We expect that to impact sales in Q3. We are anticipating that although the sales in the first half of 2007 were lower than the first half of 2006, that the acceleration of the sales in the third and fourth quarter will exceed what we had in the first half of the year. So we will have improvement in the second half.

But on a year-over-year basis, are you still tracking below last year's record level?

Yes, we will be. We'll be down from last year. And the unit isn't real large, so it doesn't have a real large impact on the E&C margin change.

And likewise, when we look at the defense business, you're coming up on a couple quarters here where you have some tough comps, and you have been putting up relatively flat growth in the defense business, I think, because of the tough comparables. Would you expect at some point next year to move back into a positive organic growth scenario? And are there any specific programs or customer activity that might be driving that?

What is happening, Chris, is that some of our programs, especially that deal with high-powered microwave products, are being delayed. And we're getting less orders, for example, for our multi-band tubes. On the other hand, there is a new satellite going up for Ka band, and we are one of the producers of Ka band tubes. We think when that launch comes, that business should pick up, especially in the second half of 2008.

Is that SPACEWAY?

Yes. And also, in the rest of our microwave businesses, we just have to make sure that we have some activities that would be gap fillers for some of the orders that have been pushed forward. Having said that, in our military microelectronics, we have really -- we have had very good orders recently. And we expect that business to do okay.

And finally, in our electronic manufacturing services, as I mentioned before, we kind of our exiting the box build for medical products, because our customers want to move to the Far East, and we don't want to move with them. So we shut down one facility in Mexico. Having said that, when you flip that over to EMS on defense electronics, we have had some significant orders in Q2, and expect some pickup later this year.

So overall, I would say there's some push-out of defense electronics orders, but I think we are going to be alright. We also make -- of course, you may know this -- we make the filters for [Crew 2] IED countermeasures for EDO. We received a little more than half, 600 out of 1100 system orders, in the first round, and we expect to get a significant chunk of the next round.

I guess you've got more than three times that in the pipe, from what they have received in orders. And likewise, I know you have a fairly diverse end-customer base and program base. But of any of the sort of hot programs out there, either the MRAP vehicles -- and I guess that is tied into EDO and the jammers -- but F35, or any of the shipbuilding programs, is there anything that's meaningful for your, or for your growth opportunity?

The only area that -- if I were to kind of focus on two things, I would say the Joint Helmet Mounted Cueing System has been a good business for us, and we think that will pick up. Because it's -- the experience there is very good with the pilots. Our (inaudible) electronic modules for F35 continue. And I think that's fairly stable business, (inaudible) a pickup in the overall program.

The one other area that I am very positive about is in our imaging systems, we have laser eye protection spectacles. We are unique in that in the world in our capability to make that. It is a very sophisticated product. It's requiring the position of as many as 150 layers on the spectacles. And we think that business will pick up. I am favorably inclined towards that.

And then finally, I would say our avionics orders have been very strong. Our wireless communication has been very well accepted for delivering data collected on aircraft to the ground. We have now over 36 customers, airline customers there. And lastly, we have the electronic flight bag, which has been qualified in Airbus. And we have a significant order from a major airline that we're working on right now.

By the way, you've got some competition on those laser eye protectors, because I saw those in the back of a comic book when I was a kid.

I'll let our leaders in scientific instruments go look at that -- for that. Maybe there's something we can learn there.

I doubt it. Thanks a lot.

(OPERATOR INSTRUCTIONS). Mark Jordan, A.G. Edwards.

A couple of follow-up contents on the aero group. Robert, is there any update on Honda for the piston engine? Any developments there?

No. I think that program is fairly well winding down. Our relationship -- their emphasis is gone towards their Honda jets, and we have moved on to other things. In that program, one of the things that is worth mentioning is that Cessna, which is part of Textron -- and of course, Lycoming is part of Textron -- Cessna just announced the light sport aircraft that they are going to build, and expect to build as many as 700 units in their first full year of production. They just announced a few days ago that they have chosen our Continental 0200, which is a 100 horsepower air-cooled engine, to power that aircraft. So we think that is a very positive thing for our business. And it's really the first installation for us in a Cessna aircraft OEM in almost 20 years.

So you were not on the 172 Sky capture, which I would assume that this new -- the 162 is going to cannibalize a lot?

I know we are going to be on the 162. I don't know what it's going to do, but we were not on the 172. You're right. That was a Lycoming engine.

Right. That seems to be the current low-end of their product line. So this is all net gain for you.

Yes, it is.

A final question on JASSM. With the stop-ship order because of the liability problems, what do you have in terms of your expectations for JASSM through the end of this year?

I think right now, what we see is that there are some issues. They are being worked on by the prime contractor and our team members. As far as we know, it is not related to the engine in these issues. The Armed Services Committee, the House Armed Services Committee, has funded the effort. And we expect that if JASSM revenues slow down, or production slows down, it is quite probable that the Air Force will begin using the SLAM-ERs, which also has our engine. So, we are moderately optimistic about how that is going to work out for us.

A final question relative to cash flow. What is the current expectation for CapEx for this year? And then finally, on free cash flow, is an easy rule of thumb that you ought to be about -- free cash flow for this year ought to be roughly equal to net income?

We expect the capital expenditures to be in about the $40 million area, and we think that cash flow will be sort of equal to net income.

Michael Lewis, BB&T Capital Markets.

Robert, just a standard M&A market question. Are some of the high multiples in the market impacting Teledyne's ability to go out there after larger deals? Or is this just a scenario where some of the companies out there on the block don't really [feel] the multiple business lines where you like to basically use that double-down approach? Can you talk a little bit about what you are seeing out there, please?

We are seeing the multiples are pretty high, especially as you move to larger assets. And we have said repeatedly that we would like to look at larger assets. But when the multiples are very high, they can be extremely dilutive. Having said that, if we find strategically important assets out there, we might be willing to go there and take some of the dilution, under the assumption that we would have synergies that would affect -- that would in due course take care of that.

On the other hand, most of our acquisitions are with bolt-ons and smaller assets. And historically, we have remained in the 8 to 10 EBITDA multiple ranged, usually closer to 8 than 10. And we think there's still opportunities out there for us to continue in that area, but it is getting expensive. You're right.

With regard -- I know Tindall is a very small company. You paid 5.6 million for, I think it was 2.7 million in revenue. Are we to assume that this is a very high-growth business? Is this a 15, 20% grower? Is that why you paid this multiple?

We paid that -- it's a high margin business. And more importantly, it fits -- it fills in a pretty important gap in our microwave business. They make electronic warfare training products, which we are not involved in that much. We can also use some of our channels to bring them into our operational systems. And they also use some of our parts from Teledyne Cougar, like controlled -- voltage-controlled oscillators, in their products. And they are going to be -- we're moving them into the Cougar operations. So there is a multiplicity of things -- fit to our business; move us into a new business; we can move them into our businesses; also, we are going to move them -- [plug] them down inside our factory and enjoy significant synergies.

That's very helpful. I'd just ask Dale one follow-up. Can you give us what your expectation would be for D&A, 123(R) expense? And again, Mark asked about the tax earlier in '08. Could you repeat that? I missed that.

I will let Dale address that.

We think that depreciation -- if I understand your question, we think depreciation and amortization for 2007 will be about $35 million.

Okay. And the 123(R) expense?

Is about $6.8 million.

And then finally just the tax. You said that your expectation for tax in 2008 would be -- did you say it would be higher than '07?

I said that we expected '08 to be sort of like '07, maybe up a little bit.

Okay. That is fair enough. Thank you very much.

Thank you. There are no further questions in queue at this time. Please continue.

Thank you, operator. I just want to -- Dale just pointed something out. In '07, we have a onetime tax benefit, as we did in '06. When you go to '08, we are -- at this time are not expecting to have that. Therefore, the marginal rate would be closer to 38% for '08.

Operator, thank you very much. I will ask Jason to conclude the conference call.

Thanks, Robert. Again, everyone, thank you for joining us this morning. And if you have any follow-up questions, please feel free to give me a ring. My number is on the earnings release. And of course, all our releases are available on our Web site, Teledyne.com. Operator, if you could conclude the call and give the replay information, please.

Thank you. Ladies and gentlemen, this conference will be made available for replay after 11:30 AM today until August 26, 2007 at midnight. You may access the AT&T executive playback service at anytime by dialing 1-800-475-6701, and entering the access code 875349. International participants may dial 1-320-365-3844. That does conclude our conference for today. Thank you for your participation, and for using AT&T executive teleconference service. You may now disconnect.