Teledyne Technologies Inc (TDY) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Teledyne Technologies 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 with instructions being given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jason VanWees. Please go ahead.

Thank you. This is Jason VanWees, Vice President, Corporate Development and Investor Relations at Teledyne. I would like to welcome everyone to Teledyne Technologies' third-quarter 2009 earnings release conference call. We released our earnings earlier this morning.

Joining us 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 answer your questions. However, before we get started, our attorneys have reminded me to tell everyone 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 may differ materially.

In order to avoid potential selective disclosure, 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. Before commenting on the specific results of our individual businesses, I have some general observations about our performance and our markets. Like most other companies that are partially leveraged to the industrial economy, our revenue declined in the third quarter.

It should be noted though our sales in the third quarter of 2008 were at an all-time high prior to the onslaught of the credit crisis and the subsequent recession, which caused significant changes in demand in some of our commercial markets. Nevertheless, we believe that we have managed the Company appropriately and our financials reflect this.

First, both our earnings per share and cash flow were at record levels in the third quarter of 2009. Second, even excluding the R&D tax credit received this quarter, our earnings exceeded each of the first two quarters of the year. And finally, our operating margin of 10.2% was at the highest level in 2009 and it was greater than the full year 2008.

Given the performance to date and our current outlook, we expect total 2009 revenues to decline approximately 7% relative to 2008. On a full-year basis, the majority of our businesses are expected to have generally flat revenues compared to 2008. However, a portion of our businesses which represent approximately 30% of our sales are expected to decline over 20% collectively. Specifically, sales in our aerospace engines and components segments are expected to decline over 30%. Instrumentation used in oil exploration and environmental monitoring almost 15% and other commercial electronics about 20%. The latter is partly due to the fact that we have chosen to exit certain commoditized commercial markets.

I must also note that we have recently seen some positive signs in our commercial markets. For those commercial businesses, which principally serve the commercial aviation, global infrastructure and energy markets, aggregate book-to-bill in the third quarter of 2009 was approximately 1.2. As a result, we currently expect revenue in the fourth quarter of 2009 to be above the third quarter and to be equal to or slightly greater than the first two quarters of this year.

As I mentioned earlier, cash flow in the quarter and throughout 2009 has been very strong. Even after paying approximately $20 million for the remaining minority interest in Ocean Design, Incorporated and making another voluntary pension contribution of $37 million in the quarter, our debt decreased relative to the second quarter and is now at the lowest level in a year. Finally, today, our pension is almost 90% funded on GAAP TBO basis.

Now let's turn to some of our business segments. Third-quarter sales in our electronics and communications segment decreased 10.6% compared to last year. Segment operating profit decreased 13.7% and segment operating margin decreased 48 basis points. Most of this margin decline was a result of a year-over-year increase in pension expense.

In this segment, our businesses lie within three separate market categories. First, defense electronics, which represents approximately 45% of the segment. Second, electronic instruments, which similarly represents another 45% of the segment and third, avionics and other commercial electronics, which is now only 10% of the segment.

In the third quarter of 2009, sales of defense electronics decreased approximately 1% compared to 2008. Today, approximately half of our revenue in this market comes from sales of microwave devices and advanced interconnect products. Despite a cautious long-term view on defense spending, we continue to believe that sales of these products will be stable. We expect continued demand in the electronics warfare market and we have developed a number of new products for the radar and military communication markets such as radar subsystems and datalinks UAVs.

Turning to electronic instrumentation, year-over-year, sales declined 15.5%. Instrumentation revenue decreased as a result of an 18% decline in sales of marine instrumentation and 11.5% contraction in the environmental monitoring devices and 11% decline in sale of industrial instruments.

As a reminder, our environmental monitoring and industrial instruments are correlated with global capital expenditures in industries such as power generation and petrochemical refining. The decline in such global infrastructure market impacted the demand for our environmental and industrial instruments.

Teledyne marine instrumentation businesses currently represent about $350 million or roughly 20% of our Company's total revenue. Oil and gas exploration represents a smaller piece of this, roughly about 4% and oil production represents about 6%. The balance, and the largest portion of our marine sales, are derived from oceanographic research, military, hydrographic survey and other industrial markets.

The overall decline in our marine instrumentation sales was due to a 50% year-over-year reduction in sales of geophysical sensors to the seismic oil exploration market. While we expect oil exploration sales to increase in the fourth quarter relative to our third quarter, oil exploration-related sales are nevertheless expected to decline approximately 12% year-over-year.

Finally, in our avionics and other commercial electronics, sales in these businesses collectively decreased slightly over 22% compared to last year, primarily due to declining sales of avionics and other commercial electronics components such as relays or electronic test equipment.

Turning to our engineered systems segment, in the third quarter of 2009, revenue decreased approximately 16% compared to last year. The decline is primarily due to lower sales of manufactured product, including gas centrifuge service modules, as well as reduced aerospace and defense engineering services. Segment operating profit declined 31% and margin decreased 182 basis points. Operating profit reflected both lower revenue and in this segment, also higher pension expense.

In the aerospace engines and components segment, sales decreased approximately 34% compared to last year. Year-over-year, sales of OEM engines declined approximately 70% while aftermarket parts and services declined only 15%. At the moment, we don't expect a significant increase in sales of OEM engines in the rest of 2009.

On the other hand, while the aftermarket was weak in the third quarter, we have been taking aggressive steps to capture marketshare and aftermarket sales increased sequentially in both the second and the third quarter of 2009. During the quarter, we reported operating profit of $1.2 million compared to $1.5 million for last year.

Finally, in our energy and power systems, sales in the third quarter decreased about 6% as a result of lower sales of commercial hydrogen generators and aviation batteries, partly offset by increased sales of power systems for government applications. Third-quarter operating profit increased 4.5% and margin increased 108 basis points.

To conclude, as we have noted in our earlier calls, we expect headwinds in 2010 relating to manufacturing of gas centrifuge service modules, as well as some of our lower margin missile defense engineering services. In addition, at this time, we can't predict the timing of meaningful improvements in some of our short-cycle commercial markets. However, despite the challenges that we and others face in the current environment, our balance sheet is at the strongest level in over a year. Our pension is almost 90% funded. We recorded earnings per share and we reported record cash flow.

Given Teledyne's performance to date and our strong liquidity and most importantly our significantly reduced cost structure, we believe we are well-positioned to benefit when demand in our commercial markets begins to improve. 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 discuss our 2009 outlook.

On cash flow, in the third quarter, cash provided from operating activities was $46.9 million compared with cash provided from operating activities of $51.8 million for the same period of 2008. The lower operating cash flow in 2009 was primarily due to greater pretax pension contributions, partially offset by the impact of higher net income and lower aircraft product defense and settlement payments.

We made a voluntary pension contribution of $37 million in the third quarter of 2009 compared with $24 million in the third quarter of 2008, of which $22 million was voluntary. Over the last 15 months, we have contributed approximately $170 million to our pension trust and as Robert mentioned, our pension is now approximately 90% funded when considering PBO liabilities.

Free cash flow for the third quarter was $37.6 million compared with $41.9 million for the same period of 2008. Adjusting for pension contributions net of taxes, free cash flow was $60.1 million in the quarter. For the first nine months of 2009, free cash flow, excluding net pension contributions, was $119.4 million. Capital expenditures were $9.3 million in the third quarter compared to $9.9 million for the same period of 2008.

Depreciation and amortization expense was $10.2 billion in the quarter compared with $12.6 million last year. For the full year of 2009, we expect capital expenditures of approximately $35 million to $40 million and depreciation and amortization expense of approximately $44 million. We ended the quarter with $292 million of net debt, the lowest level since September of 2008. Our balance sheet remains strong with a net debt to capital ratio of 33.4%. Our credit facility has $590 million of bank commitments and does not expire until July of 2011.

Moving to pension. In the third quarter of 2009, gross pension expense was $5.7 million compared with gross pension expense of $2.4 million in the same period of 2008. Net pension expense after recovery of allowable costs pursuant to government cost accounting standards was $2.6 million in the third quarter of 2009 compared with $0 of net pension expense in the third quarter of 2008. For the full year 2009, net pension expense is expected to be $10.1 million compared to $200,000 of net pension income in 2008. The increase in pension expense is largely due to the amortization of market losses experienced in 2008.

Next, on stock option compensation expense, in the third quarter of 2009, stock option compensation expense was $1.3 million compared with $1.9 million in the third quarter of 2008. The lower 2009 amount reflects the decision to eliminate the annual grant of employee stock options in 2009.

Now let me turn to the 2009 outlook. Management currently believes that GAAP earnings per share in the fourth quarter of 2009 will be in the range of $0.72 to $0.76. We expect full year 2009 earnings per share of approximately $2.94 to $2.98. The outlook for the fourth quarter and full year 2009, compared with the same periods of 2008, reflects a reduction in the sales of environmental instruments for air and water monitoring and other electronic instruments.

In addition, the full year 2009 outlook reflects lower sales for the Company's aerospace engines and components segment, as well as a contraction in sales of selected marine instruments, which serve the offshore exploration market.

Finally, while we plan to give a more complete outlook for 2010 in January, we did want to mention a few programs in our engineered systems segment that we anticipate will contract in 2010. Given reduced program funding, as well as changes in contracting policy, sales of missile defense engineering services are expected to decline next year.

In addition, sales of manufactured products for USEC's American centrifuge plant are also expected to decline in 2010 since the decision regarding the Department of Energy's loan guarantee to USEC was delayed. I will now pass the call back to Robert.

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

(OPERATOR INSTRUCTIONS). Michael Lewis, BB&T Capital Markets.

Good morning, thank you for taking my questions. Robert, I was wondering if we could kind of talk about the cost rationalization that we have witnessed. We have seen significant fixed and variable cost rationalization here over the last few quarters. I guess my question is how much more ability do you have in the infrastructure to further rein in the costs with the various businesses throughout the Company?

That is a good question. Michael. Right now, where we stand is we have reduced our workforce by 9.5%. We probably can take more costs out in a number of our businesses. On the other hand, I think in some of our businesses like in our engineered services businesses, the reductions have been commensurate with reductions in programs. So if those programs start coming back, we will increase the numbers there. But on the other hand, our fixed cost structure, our intention is to maintain it as long as we can even when the markets return. So I think the answer is we could probably take more costs out. At this time, we are studying that. Depends on what the 2010 revenues look like. But we can take more out.

Okay, thank you. And Robert, with regard to the reduction in the workforce at 9.5%, is there an ability, if we see a re-ramping of some of the weaker businesses, to bring some of those employees back or do you think that once you have let them go that they are now gone?

I think, Michael, we can get them back. The job market out there, as you know, is very weak and I think we can get them back at least when we can afford to get them back. It is unfortunate, just totally unfortunate. It is not just us. The unemployment picture across the country is just not good. I think it was yesterday or the day before, 23 states indicated higher unemployment last month than they had previously. So I think the available labor market should be there when we need it.

Okay. I agree with you there on that on unemployment. But just one more question and I will get out of the way here. Can we just get a quick update on your outlook with regard to M&A? Specifically, what is your plan on size and scope of properties under evaluation? Do you think you're going to have to start looking at throwing a wider net out there and look at other areas that you may not have looked at say two years ago or three years ago? I would just like to get your thoughts there.

The answer is yes, Michael. We have been doing obviously smaller acquisitions. I think when we think about a wider net, we still think about doing things that fit our portfolio, but the size may be different. Frankly, I think there are some properties, businesses that are starting to look attractive to us both in this country and overseas.

Thank you very much.

Mark Jordan, Noble Financial.

Good morning, gentlemen. A couple of questions around pension and debt reduction. It looks like you have made pension contributions of $106.4 million for the first nine months. Could you talk about your strategy for pension contributions, voluntary pension contributions as opposed to debt reduction? Obviously, you are very heavy on the contribution side. What impact in 2010 will this $100 million plus in contributions year-to-date make in terms of reduced pension expense? And finally, could you size what that remaining 10% unfunded statutory liability is in terms of absolute dollars?

Okay, let me take a part of it and then hand the latter part to Dale. First, I must note that, over the last 18 months, that the $170 million about contributions have not been just this year, but they have been over the last 18 months. And so I think, as we said, we are now 90% funded.

What we decided to do going forward, Mark, is, even if we don't have to make a pension contribution, in order to stabilize our pension, we've decided on a go-forward basis to make equivalent contributions to the withdrawals that are being made in terms of paying for our retirees. And that is approximately $35 million to $37 million a year. So we think, on a going-forward basis, if we can do that, even if we don't need to, I think it is a prudent thing to do in the long term, just balance the outlays to the contribution. Now going back to the 10% -- magnitude of what that 10% PBO shortfall, is I will turn it to Dale.

Yes, on the qualified pension plan, the shortfall is about $65 million when considering the PBO liabilities.

And then given again the sizable contributions you have made this year, could you scale what kind of potential benefit or positive swing factor you might see in 2010 versus '09 assuming the stock market is at the same level at the end of '09 as it was at the end of '08?

Well, if the stock market -- you alluded to the fact that there are three things that really affect the pension contribution. One is the assets at the end of the year. Another one is the rate of return that we project for the next year and the third item is the discount rate. And currently our outlook -- well, our 2009 assumptions are 8.25% for the rate of return and 6.25% for the discount rate. And the discount rate is driven by or mirrors the AA corporate bonds and AA corporate bonds are currently 50 basis points below the 6.25%. So if we had -- if we look at a reduction in the discount rate, we might see a little bit of improvement in 2009, but that's probably $0.05 or less. I meant 2010.

Okay. Final question is relative to tax rates. Clearly, nobody was looking forward to big benefits that you were able to realize here this year. I mean it looks like for 2009, we will end up with about a 33.3% tax rate. '08 was 36.4% and I guess that compares to kind of a normalized tax rate for you, which would be around the 39% range. Looking out into 2010, should we be somewhere -- a couple hundred basis points below that statutory rate with the assumption that there should be some ongoing benefits from tax credits?

No, we don't see any big tax credit benefit coming in 2010. We think it will be closer to the 39% area.

Okay, and then I guess related to that, how did this large benefit in the current quarter materialize since again it seemed to be unexpected on our last call?

The big benefit here comes from the fact that we had done a fair amount of work on the R&D tax credits for prior years, 2000 through 2008. And the IRS took a look at the work we had done and they have made some determinations that were favorable to us on the R&D tax credit for those prior years. And this is where it came from.

So this was really all true-ups out of your type of events. So clearly one-time in nature?

That's correct.

I must note, Mark, that, in this study that Dale referred to, we spent over $4 million, which we have expensed on an ongoing basis in the last couple of years to justify this credit.

Thank you.

Robert Kirkpatrick, Cardinal Capital.

Good morning. Thank you for the results. Could you explain to us what a few of the leading indicators that you monitor are that will give you a heads up on a rebound in your businesses?

One, for example, is the semiconductor market. Since March, the book-to-bill ratios in that have been improving and in August, the estimate is that they just went over 1. But I must note that, even with that improvement, if you put year-over-year August comparisons, 2009 sales are still 30% plus lower than 2008. But we are not seeing any V here. What we are seeing is a trough that is slowly turning positive. That is one.

Another area has to do with our whole marine instrumentation businesses. Generally, the offshore oil production is anticipated, the investments, to decline about 3% overall year-over-year. On the other hand, what is happening there is that most of the new [finds] and a lot of the new work that is happening is at deeper oceans and that favors us because we have really high, advanced technologies in both electrical connectors and penetrators.

Finally, the other thing that is happening there that is to our favor is that people are trying to do a lot more processing on the ocean floor rather than pumping oil to the surface. For example, separating oil and water and that again favors us. And lastly, in the oil exploration market, the technology that we are using for our -- while the predictions are that the exploration will go down, we are kind of holding our own because most of the technology that we use for our major customer is less than two years old and the streamers give the best results out there. So we look at market trends and then we look at whether we have advantages in the products that we are offering.

And then in your fourth-quarter estimate, are you assuming any further tax benefits?

No.

Great. Thank you so much.

Not at this time.

Steve Levenson, Stifel.

Thank you, good morning, everybody. Just to go back to the M&A situation, you alluded to the fact that the size may be different. Can we assume that that means it might be bigger?

Yes, if we can find it. I was trying to answer Michael's question from the perspective that when we say we will broaden our net, which we have, it is not that we are going to go way outside our field of expertise. We are looking at things that may be larger or smaller. Our focus always of course has been to make our businesses stronger, but we would not be shy if we were to find something larger that we can bring both (inaudible) what we do, as well as bring some of our capabilities in operation management.

Having said that, I still think -- we still think that the bid and ask spread are still a little high. The reality is settling in, but to a certain extent, but people are still thinking about what they hit their high five years ago. I think that will moderate with time.

Okay. And if they are bigger, even though Teledyne's stock isn't where it was a year or so ago, would you consider using stock as part of the consideration?

Partly yes, but when you use stock, then you have to start thinking about that -- you are using -- especially since our stock is not where it used to be, you are using more richer currency to buy it. So you have to offset that with synergies. For example, if it is a public company, you have to, in addition to the operations improvement, you start thinking about how much of the corporate expenses you can take out and so on. But it is a more expensive currency, the stock.

Okay. I'm sorry.

I said as you well know.

Considering that, I know it is still not quite two years till you said your bank lines expire. At what point do you go back to renegotiate or extend them?

Well, we have already begun some early discussions. We probably would begin discussions sometime in 2010 with some urgency because we certainly don't want to wait till the end. If we don't buy anything, obviously our debt is going to be very low. On the other hand, we need our line of credit. Right now, our interest rates are very low. It is LIBOR plus 75 at the bottom to 125 at the top of the grid. So we are paying 1%, 1.5% right now. We expect that that will go up certainly.

Thanks. And last, is there one or a few different product areas with what you have got today that are doing particularly well that have the best growth opportunities that you see you would like to expand?

We think, in general, we think that part of our defense electronics that deals with microwave and subsystem specialties, that is a good area. And the second area that we are still high on is the oil production, oil and gas production, especially in deeper waters where we have the distinct advantage. For example, we probably have 90% plus of the optical interconnect market in that domain. And as people start going deeper in the ocean and start thinking about doing more processing on the ocean floor rather than pumping the oil up, that favors us. So those are two areas that I would pick as examples.

Another area might be in the underwater autonomous vehicle. Our Teledyne Brown engineering and Teledyne [Web] along with our TS&I group, we are successful in getting this big glider contract from the Navy and we think that is a good area for us. We currently have, for example, a glider that is going across the Atlantic and it is 80% of the way across the Atlantic using lithium batteries. So we have -- we are gaining experience there and we think that is another good area for us.

Great. Thanks very much.

Thank you, Steve.

Chris Quilty, Raymond James.

Thanks, gentlemen. I could use one of those gliders for cleaning my pool. My kid doesn't do a good job.

If you can afford this thing.

You guys aren't cheap. I will stick with my kid. I will just pay him more. So on the leading economic indicators, you didn't mention the price of oil hitting a year high. Is that not causing an uptick in some of the energy exploration?

I think it will in the long term. Right now, if you look at projects that are happening and I know you are talking about exploration, the production project started two, three, four years ago when oil was $40 a barrel, so those are okay. The exploration side usually lags the price of oil by six to nine months. I think as the oil price goes up, of course, that is going to be helpful. On the other hand, you and I know that oil price going up is partially relative to the fact that the dollar is going down, right? And in terms of real dollars, it may not be going up as much.

But having said that, we still are bullish about our oil exploration business, primarily because the technologies that our primary customer has are really advanced and superior to the competition. And so our factory is operating fairly regularly in that domain.

Okay. You mentioned you do feel good about the defense electronics market. When you look at either the FY '10 defense budget or the redeployment of troops to Afghanistan, is there anything specifically that you like in the budget or certain programs that you think you're going to benefit from?

Yes, in terms of liking -- let me start with the liking, but then I have got to talk about the other side too.

Otherwise it wouldn't be you, Robert.

In terms of liking, yes, in Afghanistan, obviously some of our communication, mobile communication products are going to be useful. But on the bigger picture, we have a negative impact from the F-22, but on the flip side, we have a very positive impact from the F-35 and if they make larger quantities of that, that will more than offset the F-22. As you go through the EAA Team G, that is favorable to our electronic warfares and including traveling wave tube. If you look at some of the scaling back as you have written frequently on the JTRS, that is actually not bad for us because that means that the legacy system operates are going to be there in which we participate.

If you now flip to the other side of the budget and you look at what the administration has done primarily to GMD, ground-based midcourse defense, they have dropped over 50% of funding from $2.5 billion their request to less than $1 billion, $2.1 billion to less than $1 billion. They are going to reduce missiles fielded from 44 to 30. Of course, you know about Europe and they have essentially also stretched out the campaign. That is going to have a negative effect on us.

Today, we enjoy about $130 million in total in missile defense in different areas. Some of it is SETA work of course. We are expecting, with the budget the way it is, we are expecting a 30% decline in that. So that could go from $130 million to $90 million for us. Now some of it is low-margin stuff, especially in the (inaudible) area, but that is a negative. So if I were going to talk about a positive and a negative, I think our engineering systems, engineered systems business is going to take a hit in the defense budget. On the defense electronics, we see some upside and stability.

Okay. Fair enough. The gas centrifuge, I mean that had been a pretty good growing area for you. Is that entirely related to the loan guarantee issue?

Yes. We do have -- the gas centrifuge is and that was -- that is -- right now, it is -- we had revenues of over $30 million this year in that area. The way things are looking with the loan guarantee and DOE from backing out of the small amount of R&D funding that they promised USEC, we are expecting a nine month or so delay. We think our revenues would go from maybe $36 million down to $6 million next year. That is unfortunate because, as you well know, if you look across the world, probably the two newest enrichment plants are in Iran.

Maybe we can do our work over there.

Maybe.

So also stimulus money. Has that started to work its way down to the municipal government so that you can see some uptake on your environmental instrument business?

Not so far, Chris. It has had the opposite effect unfortunately. What has happened is that the municipalities who are under severe budget constraints are shifting some of the monies that they would spend in wastewater cleanup for example and projects and waiting for the stimulus money. We haven't seen much of it. I guess if I searched really hard, I could dig up maybe $500,000 here or there, but we haven't seen any. There is supposed to be several billion dollars in wastewater projects and it just hasn't materialized.

You should have been in Cash for Clunkers. That is where all the money was at. So a final question here in terms of the balance sheet and willingness to do large acquisitions. You have kind of said in the past you are kind of carefully watching the level of debt and sort of balancing concerns about long-term refinancing versus willingness to do larger acquisitions. Has your thought process on that changed at all in the last several months either being more willing to do larger acquisitions or less so?

I have got to temper this, but I have to say that maybe we have grown too confident in having done 28 relatively small acquisitions and successfully integrated them. I think we can -- I think we feel comfortable that, today, that we -- more than we did before -- that we will be able to integrate a larger acquisition successfully. A couple of years ago, we were still concerned about that, but we feel a little more confident.

Okay, very good. Well, thank you, gentlemen.

Margot Murtaugh, Snyder Capital.

Yes, thanks. And most of my questions were answered. But your corporate expense is at around $6 million down versus last year. Could you go over the reasons for that and whether that will continue in the fourth quarter?

Let me start and then let Dale answer it. There are pieces of our corporate expenses, like for example legal work and financial help, that we are getting on something like the tax, R&D tax credit and other things that are less. But I will let -- there is also less option expense on the corporate side because we didn't offer our stock options this year. Anything else, Dale?

Those are the two main drivers and we still think the corporate expense will be in the $27 million to $27 million plus area.

Okay. And the missile defense business, $130 million that you had this year, what portion of that is in the engineering service business?

About $75 million is in the systems engineering and technical assistance program. About $30 million is in ground-based missile defense and there is about $23 million in integrated testing missile defense. But I have to say, all of what we do is in engineering services and [modeling]. But all of it is in the engineered systems segment.

Okay. And is the margin on that like the margin for the segment or is it a little over?

The margins for the segment this past quarter were 8.3%. Sometimes they have been as high as 9% or a little better. In the SETA business, which is systems engineering technical assistance, which is more than half of that, the margins are lower because we have subcontractors that we pass through and that is a lower margin than the rest of the business.

Okay, well, thank you very much.

Howard Rubel, Jefferies.

Thank you. Robert, just to follow up a little bit, what else can you do with the engineering talent that you have in Huntsville as sort of the program goes down? Are you going to go after other contracts? I mean SETA does seem to be some opportunity as others have sort of had to back away from it.

Yes, Howard, where we are shifting our attention are two places. First, in the whole area of integrated testing, we have some very unique capabilities that we are exploiting and that is a growth area for us. While it is not very large right now, it is only less than $20 million, that is almost double what we had last year.

The other area that we are making some headway in is at Aberdeen Proving Ground. We have captured a lot of good programs there recently. And we have bids out both in the Chem/Bio area, as well as in the communication area.

And finally, the one area that we have emphasis on is in the general nuclear manufacturing because we have been fortunate in that we have capped all of our nuclear manufacturing steps and we have a significant number of those and as nuclear plants are being constructed, especially overseas, that is an advantage for us. So even though the gas centrifuge program has gone into a hiatus for a while, we are really working very hard with some of the larger engineering firms to capture that.

And lastly, what has happened with our engineering business systems is that they are helping us capture programs that otherwise we couldn't in the other segments. For example, this glider program that I described and there are some actually programs from DARPA like EXACTO. That is the guided bullet program. So we think we will have to diversify which in and of itself is a good thing.

That's fair. I have got to give you credit to hold aerospace engines components essentially flat despite being down 35% is pretty good or maybe it is better than pretty good. I know it is not what it once was and probably won't be, but tell me a little bit more about what are you thinking about the market and how you can take advantage of it still and what sort of outlook do you have?

I think, right now, we have had issues there in terms of both the market and some recalls and God knows we may have always have these recall issues and high insurance. What we would like to do there is chip that -- keep that market and not lose money, maybe make a little money for a while until the market returns.

I think the opportunity for us is going to be if we can move into the diesel engine market, Howard. If we can do that -- because that will open up the Far East market to this small aircraft and that will also open up a market that we haven't participated in, which is the small UAV market.

So if I were going to say what do I think will happen economically to that market, I don't know because credit is so tight. On the other hand, if we can move into making these small diesel engine, that will open up an opportunity that heretofore, we haven't had.

Or even take the battery and use that to power an engine.

There you go.

In any event, thank you very much.

Thank you, Howard.

Mark Jordan, Noble Financial.

Thank you. Just following up on the last question. Relative to Continental, you've seen in some of the local news articles that through the balance of this year at least you are going to short work weeks, furloughing weeks around the holidays. At least on the news articles, they are saying you are trying to keep the workforce together with reduced work time. Is this basically a strategy as you had just mentioned to keep that business marginally profitable here during the seasonally weaker fourth and first quarters and therefore, you have just cut the cost to keep everything in the black?

What we are trying to do is we are trying to, Mark, keep as much of our -- and by the way, this is not unique to that workforce. Across our businesses, especially our commercial electronic businesses, we are doing that all over the place, going to shorter work weeks, shutting down plants for whole a week at a time, taking longer holidays mainly to keep as many of our people employed as we can because, frankly, we don't have overseas plants, we just have some small plants in the UK. All of our workforce, almost all of the 8000 or so is in this country and if we can keep our people working and have some of the others take some voluntary shorter weeks, etc., I think that is healthy both for our Company and for our country. So we are doing that not just in aerospace engines but across all of our businesses, commercial businesses.

And then just as a point of clarification, that would be what your goal would be to try to maintain that operation in the black during the seasonally weak Q4, Q1?

If we can, yes, as much as we can. There are unforeseen circumstances that come about, but so far, the last two quarters, we have managed to stay in the black.

Thank you.

Thank you, Mark.

(OPERATOR INSTRUCTIONS). Michael Lewis, BB&T Capital Markets.

Thank you for taking my follow-up. Robert, you talked a little bit about some unique capabilities that you had in the integrated engineering portion of your missile defense work. Can you kind of expand on that and give us some of your thoughts there on what exactly those capabilities are?

Why don't I do this? Why don't I have -- first, I can tell you what they are a little bit. Some of it has to do with being able to do architectures that are service-oriented. Some of it has to do with modeling and being able to dissimilate hardware in the loop work, which is really being able to model with hardware without using the hardware. We are pretty good at those kinds of things. We have invested in software development that has also been helpful, but if you are interested in going more in depth in that, I will be happy to have our guys give you a short briefing on that.

That would be great. And then just -- I appreciate that. Then just two quick housekeeping questions for Dale. Dale, I was wondering if you could give me the ending backlog in the quarter and then also just to confirm, where should I be modeling my Q4 tax rate? Am I at 38% to 39% in the quarter? I am just a little confused there.

We are currently looking in the fourth quarter at about 39%, that's right, for the tax rate. And on the backlog, what number?

I should tell you, Michael, that we haven't -- we haven't received all of our guidance from IRS yet. So we don't know if there might be any more tax credits or not the rest of this year. So until we hear that, I think Dale is right on; it is going to be about 39%.

Yes, I would rather model it high and be conservative.

I like that. Model it low, high on the taxes and low on the EPS.

The backlog is about $830 million.

Thank you very much, guys. Have a great day.

Thanks, Michael. Operator, if there is nobody else on the line to ask questions, I want to thank you and I will let Jason conclude our conference call.

Thanks, Robert. Again, thanks, everyone, for joining us today. If you do have follow-up questions, please feel free to call me. My number is n the earnings release and again, all the news releases are available on our website, Teledyne.com. Operator, if you could give the replay information and conclude the call please. Thank you.

Certainly. Ladies and gentlemen, this conference will be made available for replay after 10:00 a.m. today until November 22 at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701, entering the access code 109276. International participants dial 1-320-365-3844 and again, that access code is 109276. And that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.