Teledyne Technologies Inc (TDY) 2008 Q3 法說會逐字稿

Ladies and gentlemen, I apologize for the delay. We are having some audio difficulties with the host line. We will be with you shortly.

Good morning and thanks everyone and we apologize for the difficulties there with the conference call. This is Jason VanWees, Vice President Corporate Development and Investor Relations at Teledyne.

I would like to welcome everyone to Teledyne Technologies' Third Quarter 2008 Earnings Release Conference Call. We released our earnings earlier this morning before the market opened. Joining me this morning are Teledyne Technologies' Chairman, President and CEO, Robert Mehrabian, Senior Vice President and CFO, Dale Schnittjer, and Vice President Associate General Counsel and Assistant Secretary, Melanie Cibik. 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 today are subject to various assumptions, risks and caveats as noted in the Earning's 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 again our apologies to everyone. We don't know what happened to the lines at AT&T. Let me start by before comment on some specific results for the quarter I'd just like to make some introductory comments if I may. First, Teledyne performed well during the quarter despite an increasingly difficult economic environment. Second, we also have overcome approximately $0.10 per share of headwind in tax benefits compared to last year as well as some minor impacts in the quarter related to hurricanes in the Gulf region and two strikes at aviation customers.

Overall our total sales increased 21.7%. Income before taxes increased 32.7% and GAAP earnings per share increased 12%. Our financial performance this quarter demonstrates the successful execution of our strategy, that is operational excellence combined with focused acquisitions that further enhance our capabilities in our core markets. In fact, the three recently completed acquisitions not only complement existing Teledyne businesses but each company adds strategically important system level capabilities to our current product offerings.

Furthermore, because of the successful integration of previous acquisitions our technology capabilities and addressable markets continue to expand. As an example, during the quarter Teledyne Scientific and Imaging, which we acquired in September of 2006, was awarded 5 government advanced technology development contracts on which other Teledyne businesses participated as team members. Going forward, due to the potential impact of credit tightening on our end customer demand, the volatile commodity prices and anticipated pressures on government spending, we intend to manage the Company cautiously. Accordingly, we've already begun cost reduction measures in businesses that serve certain end markets such as aviation.

That being said, we continue to enjoy a balanced mix of commercial and government businesses that have strong positions in defensible niche markets. We also possess sufficient liquidity so that if certain markets weaken further we could capitalize on opportunistic acquisitions to strengthen and expand our longer-term market positions.

Turning to our results, in the third quarter Teledyne achieved all time record quarterly sales of $497.6 million driven by overall organic growth of 12.8%. Quarterly earnings were $0.84 per share, which was as I mentioned earlier, 12% increase over last year. This was the 27th consecutive quarter or for a span of almost 7 years of year-over-year growth in earnings per share and the 18th consecutive quarter, or 4.5 years of double-digit growth in earnings per share. As I mentioned earlier, the increase in earnings per share was achieved despite the $0.125 per share tax benefit in the third quarter of 2007 versus just $0.022 in the third quarter of 2008.

During the third quarter overall GAAP operating margin increased 65 basis points to 10.4%. I will now elaborate on the operating performance of our individual segments followed by Dale Schnittjer who will discuss in more detail our financial performance and comment on our outlook for the fourth quarter and full year 2008.

Starting with Electronics and Communications segment, sales in this segment increased 20.6% compared to last year from $273.8 million to $330.3 million with organic growth of 7.3%. Segment operating profit increased 24.3% from $37 million to $46 million and segment operating margin increased 41 basis points to 13.9%.

Our Electronics and Communications businesses generate approximately two-thirds of Teledyne's total sales through this segment. Our businesses lie within three separate market categories. First, Defense Electronics which represents approximately 40% of the segment; second, Electronic Instrumentation which now represents approximately 45% of the segment and third, Avionics and other Commercial Electronics which represent the remaining 15% of the segment.

In the third quarter of 2008 sales of defense electronics increased 16.9% compared to the third quarter of 2007. Defense Electronic sales growth resulted from organic growth of 6.2% primarily driven by increased sales of imaging sensors and electronic manufacturing services. The remainder of the growth resulted from the acquisitions of Storm Products and Judson Technologies in the first quarter of 2008 and Filtronic PLC's UK based Defense Electronic's business in the third quarter of 2008.

The acquisition of Filtronic's Defense business adds expertise in receiver subsystems and digital signal processing and is consistent with our strategy to provide more highly integrated microwave systems to our defense customers.

Turning to our Electronic Instrumentation businesses, in the third quarter of 2008 year-over-year sales increased approximately 34% compared to last year from $112.8 million to $151.4 million. This was due to strong organic sales growth of 12.46% and the acquisition of Impulse Enterprise, Storm Products and TSS International early in the first quarter of 2008 as well as Webb Research in the third quarter of 2008.

Organic growth in instrumentation was comprised of approximately 23% organic growth in marine instrumentation combined with flat year-over-year sales of environmental monitoring and industrial instrumentation. We have continued to expand our marine instruments businesses. For example, the acquisition of assets of Webb Research added autonomous underwater vehicle systems to our existing collection of marine sensors and navigation subsystems. Webb's ocean gliders research changes in buoyancy for propulsion, consume very little power and perform missions over several weeks or months.

Teledyne Webb's primarily serves the oceanographic research and military markets. In fact, while off shore oil and gas exploration and production represent approximately two-thirds of the market for our marine products, the other one-third of marine sales are now derived for oceanographic research, military and other industrial markets.

Earlier this month we also acquired Corman Limited. Corman designs and manufactures sand and corrosion sensors as well as flow integrity monitoring systems used in oil and gas production. Corman Monitoring Systems are designed to accelerate hydrocarbon production, reduce operating costs and extend asset life for oil and gas operators. In addition, this acquisition has created an opportunity for us to provide more integrated flow quality assurance systems to our customers.

Finally, I'll discuss our Avionics and other commercial electronics businesses. In the third quarter of 2008 sales from these businesses collectively decreased about 2.8% compared to the third quarter of 2007. This was primarily due to continued decline in sales of electronic manufacturing services or medical applications and I have mentioned before that this is an area that we're slowly decreasing our efforts in.

Turning to our Engineered Systems segment, the third quarter of 2008 revenue in this segment increased 29.2%, all of it organically compared to last year. The strong sales growth primarily resulted from increased sales related to manufacturing of gas centrifuge service modules used to help enrich uranium for use in commercial nuclear plants as well as increased sales of systems engineering and technical assistance or SETA services for government customers. Recently ASME, the American Society for Mechanical Engineers, renewed this segment's nuclear and presidential certificates of authorization. This includes [M], MPT and use stamps which allow Teledyne to manufacture vessels and various components for nuclear facilities. In addition, in September our Engineered Systems segment was awarded a $155 million IDIQ prime contract from the Missile Defense Agency to continue our SETA services through 2009. Segment operating profit increased 59.7% from $6.2 million to $9.9 million and segment operating margin increased 193 basis points from approximately 8.2% to 10.1%.

I will now discuss our Aerospace Engines and Components segment, which as a reminder now solely represents Teledyne's Continental Motors, our aircraft system engine business. Sales in this segment were flat compared to last year as a modest increase in sales of asset markets, parts and services was offset by lower engine sales to aircraft OEMs. Operating profit declined 63.4% as a result of higher manufacturing costs and higher legal expenses.

Late in the third quarter we saw a reduction in orders for after market parts as well as a reduction in forecast aircraft demand from certain OEMs. We continue to monitor this business carefully and I have already taken certain actions including relocation of a product line and selected reductions in force.

Finally, in our Energy and Power Systems segment revenue in the third quarter of 2008 increased 76.3% compared to last year. This was primarily due to higher sales of military turbine engines and other government power systems. Operating profit increased 340% from $0.5 million to $2.2 million due to higher sales as well as better margins in our turbine engine business.

In conclusion, Teledyne achieved another record quarter in revenue and another double-digit increase in earnings per share. We are very cognizant of the impact of constrained credit markets on the global economy and some of our end markets. However, as I mentioned earlier, risks to Teledyne are somewhat mitigated by a number of factors including first a balanced mix of government and commercial businesses that produced highly engineered products which are not easily commoditized; second, good visibility and backlog in many of our businesses and third, ample liquidity and a proven track record of successfully integrating acquisitions.

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 and full year not covered by Robert. Then I will give an update on pension costs and discuss our 2008 outlook.

In the third quarter cash provided from operating activities was $51.8 million compared with cash provided from operating activities of $54.5 million for the same period of 2007. The lower operating cash flow was primarily due to higher pension contributions of $19.8 million, the higher aircraft product defense settlement payments of $6 million partially offset the higher net income, the contributions from recent acquisitions and lower income tax payments of $15.2 million.

Free cash flow for the third quarter was $41.9 million compared with $46.2 million for the same period of 2007. Capital expenditures were $9.9 million in the third quarter compared to $8.3 million for the same period of 2007. We ended the quarter with $273.5 million of net debt. Our balance sheet remains strong with a net debt to cap ratio of 29.8%. We cannot foresee any liquidity concerns at this time. Our current facility has $590 million of commitment and does not expire until July 2011. Furthermore, all the banks in our credit facilities continue to honor their commitments.

As noted in our Press Release, depreciation and amortization expense for the third quarter of 2008 was $12.6 million compared to depreciation and amortization expense of $9 million in the third quarter of 2007.

Moving to pension, in the third quarter of 2008 FAS 87 and 158 pension expense was $2.8 million or negative earnings per share impact of $0.04. This compares to FAS 87 and 158 pension expense of $3 million or negative earnings-per-share impact of $0.05 in the same period of 2007. Pension expense allocated to contracts pursuant to cost accounting standards or CADs was $2.4 million or a positive earnings-per-share impact of $0.04 in the third quarter of 2008 compared with $2.5 million or a positive earnings-per-share impact of $0.04 in the third quarter of 2007. During the quarter we made a voluntary contribution of $20 million to our pension plan beyond the ordinary ERISA contributions.

Now on stock-option compensation expense in the third quarter of 2008 for the requirements of SFAS number 123R stock option compensation expense was $1.9 million or a negative earnings-per-share impact of $0.03 compared with $1.8 million or negative earnings-per-share impact of $0.04 in the third quarter of 2007.

Now let me turn to the 2008 outlook. Management currently believes that GAAP earnings per share in the fourth quarter of 2008 will be in the range of $0.74 to $0.77. The full year 2008 earnings-per-share expected to be in the range of approximately $3.24 to $3.27 an increase from our previous outlook of $3.20 to $3.25. Our outlook for the fourth quarter and full year of 2008 reflects an anticipated increase in expenses including intangible asset amortization resulting from the acquisitions completed in early fiscal 2008.

In addition, the fourth quarter 2008 outlook reflects reduced demand for aerospace piston engines and parts as well as increased interest expense given the recent increase in LIBOR. We expect full year 2008 capital expenditures of approximate $45 million and total depreciation and amortization expense of approximately $49 million. For reference intangible asset amortization is expected to be approximately $17 million in 2008, an increase of almost $10 million or $0.16 per share from full year 2007. For the full year of 2008 we currently anticipate approximately $9.6 million or $0.16 per share in pension expense under FAS 87 and FAS 158 or $200,000 of net pension expense after recovery of allowable pension costs from our CAS-covered government contracts.

Full year 2007 earnings included $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 CAS covered government contracts. The decrease in full year 2008 net pension expense reflects the return on pension assets as well as pension contributions made in 2007. The Company's 2008 earnings outlook also reflects $7.8 million or $0.13 per share in stock option compensation expense based on current 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'd now like to take your questions. Operator, if you're ready to proceed with the questions and answers please go ahead. Operator, I think we have lost our operator. I hope you can hear.

I'm sorry I am here. (Operator Instructions) And our first question is from the line of Mark Jordan with Noble Financial.

Got a tough one for Dale here. Given the fact that the Dow is off over 34% year-to-date and if we were to assume that we stay roughly in this range I'm also cognizant of the fact that you made a voluntary contribution, which would obviously lessen your forward liability but given those two events, could you try to gage what the quarterly pension expense might be in 2009?

Mark, you're right. With the volatility that's out in the market it's too early to know exactly where it will be at year end. However, if we assumed a decline in the assets of approximately $20 million at the end of 2008 versus the end of 2007, which would sort of equate to a negative portfolio return of 20% less about $30 million in contributions to retirees plus contributions of about $30 million and assuming a rate of return of about 8.25% versus 8.5% in 2008 and a 6.5% discount rate versus a 6% discount rate in 2007, we would think that we would have-- we would expect headwind of approximately $0.10 per share or $0.025 a quarter and of course if the assets performed worse than that we could have a little more headwind. If we had a higher discount rate or a stronger asset performance or additional discretionary contributions it might be a little less than that.

Yeah, but from a--at this point in time psychologically we should assume a headwind of about $0.10 versus this year?

That's about as well as we could guess it today.

Okay, thank you. The R&D tax credits since I guess that bill was signed in early October, will you adopt that therefore in the fourth quarter? What impact will that have and have you included that in your guidance for the quarter?

Yes we have and it's about $0.02.

Did you get that, Mark? Operator?

Our next question is from the line of John Harmon with Needham.

I guess a couple of questions. One, I believe previously you bought some other businesses from Filtronic. Are these-- so the new business, are they things that are near by that you can integrate? I think these new ones are in the UK or do you have existing facilities that you could integrate them into?

Yes you have a good memory there, John. We bought a Filtronic's solid state business in the United States and we actually co-located that in our microwave facility. That was done in December of '03. The new facilities in the UK are not close to any of our-- not very close to any of our other facilities that are in [Shipley] UK. On the other hand, we now have approximately five facilities in the UK and those are being integrated in terms of the financials, being able to have somebody supervise those overall and some of the other activities. But physically they're not co-located.

Okay thank you and you mentioned some cost reductions in your Avionics Division. Given the economic environment it would probably be prudent just to refrain spending across the board. Is there anything else that you are doing corporate wide or in other areas?

Well this, the cost reduction in the general aviation, as I mentioned, we're seeing some slowdown coming in our engines, piston engine, sales to OEMs and some parts orders are down so we have taken some-- we've consolidated a product line. We've reduced work force; we are very careful on our capital expenditure across the board in the Company and we've also taken some other limited actions in some of our other businesses in addition to aviation.

In terms of the aviation avionics supplied to the commercial end market, we haven't seen a lot of effects except from the Boeing strike and we have some revenue shipments that are on hold at the present time and so that's hurting us a bit. But I think overall in our Avionics businesses we're not seeing the kind of effects right now that we've seen in our piston engine business.

Thank you, maybe just one quick one. Usually you give a book-to-bill ratio or give it when it's asked.

I think year-to-date in September we're like 1.1 book-to-bill, Q3 maybe lower 0.9.

Steve Levenson with Stifel.

Maybe you can first confirm for us all that Teledyne had nothing to do with manufacturing the conferencing equipment.

I can absolutely confirm that.

On Continental Motors do you see the changes there being more driven by the economy or does it have to do more with the price of aviation gas and oil generally?

That's a good question, Steve. I think initially it had to do with gas because of the price of aviation fuel both went up just like the price of gasoline. But I think as the prices come down we are seeing some softening in demand and I think part of the reason there is that some of these planes are being bought with some financing, especially the OEM side and as financing becomes difficult then we see some softness there and if people are not flying enough then they're not overhauling their engines or buying pre-built engines and parts from us as much. So we're very cautious with that business right now.

On the subsea businesses including the new acquisitions, particularly the gliders, is the direction more on ocean science or is it more related to defense applications?

On the gliders both because we have both oceanographic research. This Webb Research makes both gliders and floats or drifters. Those are primarily used for oceanographic research. We have about 3,000 floats right now operating across the oceans in the world. The gliders are purchased for oceanographic as well as for military applications. The measurements are similar. You measure density, currents and every now and again the glider surfaces and communicates with satellite and then goes back down to make the measurements. And the other thing about these gliders is that we intend to add some of our other sensors switch that we have, acoustic sensors that we have and for visualization to these gliders, so it's a mixture of both defense as well as oceanographic research.

Would you prefer it to be leaning more towards one side or the other? I don't know if the margins are better one way or the other?

Can't tell right now because you know if the defense portion of the underwater vehicles accelerates like the airborne UAVs have obviously we would enjoy a much bigger business there but right now we're happy with the balanced approach we have.

Do those devices use synthetic aperture sonar? Are you involved in that product at all or that program?

Actually these gliders don't use synthetic aperture sonar but we do have some capabilities in that domain and part of the reason they don't use the synthetic aperture sonar is that these gliders have very small utilization of power. Mostly you use the power that's in the glider to change the buoyancy to be able to dive and come up and that's why they last weeks or months in the water. Synthetic aperture sonar uses a significantly higher amount of energy than some of the other sensors that are on these gliders.

Thank you and last one in terms of the acquisition atmosphere, have you seen much in the way of changes in pricing or willingness to sell? Is there an eagerness to sell in light of the potential change in capital gains treatments?

Yes that's a very good observation. There are two things that have happened. First, we are not seeing the equity players in the market. There was a time when every time you saw a potential acquisition at significant participation, a number of participants were from the equity market. We're not seeing that as much and, therefore, the prices have become more rational.

Second, because of the potential change in the capital gains private entities are really trying to sell their businesses if they have it, if they have it on the market, before the end of the year and we've seen some of that effect. And then finally, while the strong US dollar is not helping our revenues overseas and certainly it's not helping us in our profits that we bring home from the UK, it does help us in some of the potential acquisitions that we see in the UK especially for us. So there's a combination of two, three things happening.

And the pipeline?

Our pipeline is always reasonably healthy but we're-- we usually look at 10 things, maybe bid on one and the one if it gets outside what we think is a reasonable range we let other people enjoy that.

Mike Smith with BB&T Capital Markets.

A couple quick questions for you here, the Energy and Power Systems segment has benefited in the past few quarters from the sales of commercial hydrogen generators in the overseas market but what are you seeing there and kind of what are the expectations?

I think it depends on the area of the world. We are seeing-- our orders are down year-over-year as we look forward, primarily because of the uncertainty I think. We see some orders from the Middle East and we have some orders in Russia. Those are still very strong. Asia is weakening a bit. I think again it's a little early. The flip side is that because of the disruptions to hydrogen liquefied and gas hydrogen delivery systems, potential I should say of disruption, some US factories have adopted to using our generators as standby power, hydrogen generators, so it makes that overall I can say, Mike, our orders right now where we stand versus where we were last year at this time are down.

And you mentioned that shipments are on hold from Boeing. Can you maybe talk a little bit about what revenue comes from that customer and secondly, the selective reductions in staff that you mentioned, is that included in your guidance?

Yes let me just answer the latter part. Yes it is. You know we haven't taken a one-time charge of any kind since 2001. We've usually absorbed that in our operations so any cost associated with that is in our guidance. Second, going back to Boeing, we do a lot of business with Boeing. We have Systems Engineering businesses for the government and a whole range of other businesses. The part that's really affecting us is-- and a lot of military business is obviously-- the part that's affecting us right now is Avionics. It's not very large but it's significant in terms of our earnings. It's maybe a couple of pennies in our earnings right now.

And let me slide another one in here for you. Last quarter you said that you expected the Engineering Systems segment could see margins decline to a more normalized level and it looks like those were up sequentially again, so have we reached a new margin level for that segment?

I think it's going to decline again. I keep saying that and my segment executive keeps embarrassing me because he goes out and does-- gets more manufacturing. But I think if you look at-- I think we've more like an 8.5 and we may finish the year over 9 because of the strong first three quarters but we think next quarter is going to be closer to 8.5% but I have to tell you that that business is becoming very healthy for us because it's always had a very strong systems engineering capability but what it has not enjoyed previously is emphasis on manufacturing like we do in the rest of Teledyne. Our new segment President, Rex Geveden, has kind of put a lot of emphasis on manufacturing and now we've become a unique systems engineering Company that can also bring manufacturing services to our customers so some of our margin expansions have been due to that.

Chris Quilty with Raymond James.

Question for you, you mentioned on the defense electronic strength in the imaging area. Can you elaborate on that a little bit?

There are really a number of things. One is that we do make a focal plane arrays and associated electronics for satellite systems. We-- of course you know we make some-- a lot of products for the space telescope James Web etcetera, but in the military domain, which is what you're talking about, that is one. The second is that we have now developed two colored infrared camera that we've supplied to our customers and those have been well received and that's a good part of our imaging program for the military. And lastly, we probably have the only laser eye protection system that is actively under-- being pursued for example, by the US Air Force. We've been delivering significant amounts of these eye protections systems for the air crews and we're starting some work for the Army. So there's a combination of some space satellite views of battlefields and other areas. Second is what we do with the two colored infrared cameras. I mentioned the spectacle.

And lastly, we do have a five-year contract with the Air Force Research Laboratory to develop technologies designed for advanced infrared sensors for future missile warning and defense space defense systems. So it's a range of programs. We are very pleased with that acquisition.

And also the news earlier this week that they're canceling the armed reconnaissance helicopter, I remember five years ago when they cancelled the Comanche, which was the predecessor, that also ran too expensive. You took a small hit in expectations from that. Did you have any content you were expecting on ARH?

No significant impact to us.

Also with regard to the environment test equipment you had talked in the past about perhaps a run up in sales due to the Olympics. Have you seen any fall off effect or maybe a pick up because now they realize they like clean air? Any follow-up on that?

Yes we did have a run up in the Q3 actually that moderated significantly. We may be up 2% on the different area they call air quality and waste water. In waste water I think some of the problems with budgets in the municipalities are negatively affecting that domain. In air quality we do two things. We do emission monitoring systems as well as measurement. The measurement part I think we're seeing some softness. On the monitoring, continuous monitoring systems, we still have a healthy market because of the international power plants that are being built, but a mixture.

And the Systems Engineering business you had talked I think last quarter about the fact that now you've got the $92 million follow-on contract for the gas centrifuge service modules, a pretty big jump in revenues here in the third quarter but do we look at that centrifuge business as being very much a steady state production on a go forward basis or is it going to be in some way lumpy?

Well, I think it's going to be continuing for the next two years, maybe at a level of about $30 million next year, maybe a similar number in 2010. I think at some point of course these are 550 plus modules that we're building. At some point that program would come to an end but the important thing that's happened there is that we have built a fairly significant capability in being able to play in the nuclear vessel piping components field and we have all the required stamps, authorization for that, and so we think in the long run we can play in the nuclear domain after this contract that we have goes another couple of years at least beyond this year.

And final question, I forgot to ask I guess for Dale, maybe I missed it but did you give an overall organic growth rate for the Company? I know we've kind of gone through it by different segments.

I didn't give it but it's about 12.8% in the third quarter.

12.8% Company wide. Got it.

Mark Jordan.

A question first of all relative to the advanced legal fees you saw at the aerospace, could you go through how that was incurred and how does that fit in with your insurance assumptions and self insurance that you do?

Well, as you know, we have a first layer of first dollar coverage that we cover. On the other hand, as some of these cases go to trial and we've had a kind of a convergence of a number of cases recently-- as they go to trial you have to expense your legal fees at the time that they occur and so while you preserve your first dollar coverage your expenses for legal fees don't come from that directly. You take it directly from your operations, so that's one.

Our first dollar coverage goes up to about $20 million so I think that's what happened in this quarter.

So does that basically reflects just a miss, a timing mismatch and that, therefore, in theory you would "recoup" that in later periods?

Possible but we're going to have some more expenses in the fourth quarter in that and you know sometimes we have settlement expenses that obviously affect our cash flow but we expect we'll have some expenses in the this current quarter also.

Two sort of business questions, one relative to the next generation two color sensors, can you look longer-term and see what kind of opportunity is there? Is it something that could be just incremental to what you're getting now or is there a very large opportunity out there that we should be watching? That's question one. Secondly, there was a recently decent sized drifter contract out there that a number of companies were positioning for. Do you have any update on that?

Yes let me start with the first one. We have-- we are in discussions with a number of DOD primes about potential insertion of our two color cameras and, of course, there is that system development and demonstration fair phase of the Army infrared engine program that's in competition but initially they said they were going to have two participants. Then they reduced it to a single source so we have some stiff competition there from incumbents but in general I think this is a good area for us and we intend to stay in this area. I think it's going to be healthy for us. Whether we can win a big contract I am not sure at this time because we're new to the field.

Let me go to the drifter. That Navy contract, as you know, we are one of the bidders for that. This is led by Teledyne Brown Engineering, our Systems Engineering house and Webb Research and almost all of our marine groups that develop and have the various sensors, both sensors for sonar sensors as well as communication modems, so we are waiting. We haven't heard anything about it. We're still waiting for a decision on that.

Final housekeeping if I could, the minority interest, is that just the now the 14.8% of ODI that's still outstanding?

Basically that's true. There's just a little bit at Energy Systems.

Steve Levenson.

Just a follow-up on the laser eye protection, is that something that could at some point be required for sensors as opposed to humans? Is there a danger that needs some protection there? I don't know how you see that market developing.

The answer to that, that's a very good observation. The answer to that is yes and we are developing a product for specialty space sensors, as you know, which would have some danger from lasers.

And I assume that's not something that can be retrofitted then so it would just be on new applications?

That's a good assumption.

Mike Smith.

Just a follow-up here, on the centrifuge contract I believe that when you announced the award you said you were going to ramp up to about 200 jobs so should we assume you're fully ramped on that now and you're producing X units per month or per quarter?

The answer is right now I would say the number of jobs are closer to 140 and we just are finishing our first one so we're in the process of ramping up. I think we will delivery the first one in December and expect that next year we will be fully ramped up. Part of the reason for that is, of course, you have a lot of incoming materials, a lot of stainless steel components that we're procuring for this but we have all the capabilities now in place. It's 140,000 square foot facility, maybe a little more, fully-- approaching 200 I am told, fully equipped and ready to go.

Okay and on the tax credits I believe you said that was included in the guidance and I believe the Press Release said that you're forecasting a 39% tax rate on the year. Am I reading-- is that correct?

That 39% tax rate excludes any credits or pickup of tax reserves and yes we did say that the R&D tax credit was included in the outlook at about $0.02.

And we have no further questions at this time. Please continue.

Thank you, operator. I'll now ask Jason to conclude our conference call.

Thanks, Robert, and again thanks everyone for joining us this morning. If you have any follow-up questions please feel free to call me at the number listed at the Earning's Release and of course all news releases are available on our website, Teledyne.com. Operator, please end today's conference call and give the replay information. Thank you.

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