Teledyne Technologies Inc (TDY) 2012 Q3 法說會逐字稿

Welcome to the Teledyne Technologies Third Quarter Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions, and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Mr. Jason VanWees. Please, go ahead.

Thanks, Tom. Good morning, everyone. This is Jason VanWees, Vice President of Strategy and M&A at Teledyne Technologies. I would like to welcome everybody to Teledyne's Third Quarter 2012 Earnings Release Conference Call.

We released our earnings earlier this morning, before the market opened. Joining us are Teledyne's Chairman, President and CEO, Robert Mehrabian; Senior Vice President and CFO, Dale Schnittjer; and Senior Vice President, General Counsel and Secretary, Melanie Cibik. After remarks by Robert and Dale, we will ask for your questions.

Again, before we get started our attorneys have reminded me to tell you that all forward-looking statements made this morning are subject to various assumptions, risks and caveats, as noted in the earnings release and our periodic SEC filings. And, of course, actual results may differ materially. In order to avoid potential selective disclosures, this call is simultaneously being webcast, and a replay, both by webcast and dial-in will be available for approximately one month. Here, is Robert.

Thank you, Jason, and good morning, everyone. Third quarter sales are $547.4 million, increased 10.3% compared to last year, and was an all-time record for Teledyne. Earnings per share of $1.14 increased 25.2%, and was also an all-time record despite $3.8 million of nonrecurring acquisition related charges in quarter.

Our performance in the current economic environment reflects first, our successful strategy; second, the balance of our business portfolio, both end markets and geography; and third, our consistent operating discipline. With regards to strategy, we continue to shift our company to acquisitions and internal investments, toward fire technology, and higher margin in (inaudible) markets, such as offshore energy, high end digital imaging and analytical and electronic test and measurement instrumentation.

As an example, gross margin increased approximately 300 basis points compared to last year, and was also a record for Teledyne. The shift in our portfolio was accelerated by four strategic acquisitions, so far this year, as well as a majority control investment in Optech, a leading 3D laser imaging company. As we seek to drive growth for new proprietary products and gain market share, R&D expense increase 175 basis points.

Finally , our latest acquisition, Teledyne LeCroy, first, makes the Teledyne truly premium product in its market. Second, extends our portfolio of analytical and chemical test instrument into electronic test and measurement. Third, provides and ideal outlet for our unique technology in indium phosphide, and high frequency analog and mixed signal design devices developed at Teledyne Scientific, our R&D laboratories.

Turning to our business portfolio, we are not immune to worldwide economic conditions, and did, indeed, experience weaknesses in certain markets and geographies. However, the overall balance mix of our businesses and growth in those end markets, and which we have made significant investment, helped us overcome many of these challenges. For example, even excluding the contribution from acquisitions , overall sales to Europe only modestly contracted, given the strong sales growth of marine instrumentation in the region.

We also continue to experience growth in Asia, largely driven by increased sales of marine instrumentation and avionic systems. Within our digital imaging sales of Teledyne DALSA increased year-over-year, including and Asia, as growth in specialty x-ray sensors, and micro-electromechanical or MEMS, production more than offset weakness in machine vision, especially in the semiconductor domain.

Finally, I would like to discuss our operating discipline. In areas where we experienced some economic challenges, we needed to size our businesses appropriately as those markets weaken. For example, low margin contract manufacturing for defense applications, and gas-sensor systems used in domestic power generation is declined considerably compared to last year.

In response to contractions in this business and others, Teledyne embarked on a facility consolidation and variety of [lean] initiatives that account for a total work force reduction, year-to-date, of over 300 or approximately 3.5%. I will now comment on our business segment, after which Dale Schnittjer will review some of the financial. In more detail, and provide an earnings outlook for the fourth quarter and the full year 2012.

Turning to our instrumentation segment, this segment comprises our highest margin group of businesses, and serves the offshore energy,, including deep water exploration and production and global infrastructure markets. And we now, also, serve the global electronic industry via Teledyne LeCroyInternational sales are presented about 50% of the segment sales in the third quarter.

Third quarter sales into instrumentation segment increased 23.4% to $192.8 billion dollars. Teledyne LeCroy, a leading manufacturer of high-end oscilloscopes and electronic protocol solutions, performed well in the quarter contributed $34.2 million of sales in just two months.

Sales of marine instrumentation increased 7.2%, driven by organic sales growth of interconnects for subsea oil production, and hydro graphics (inaudible) systems, as well as two small [bolt-on] acquisitions. Marine instrumentation continues to be a key strategic market for Teledyne. In addition to the subsea oil and production market, Teledyne continues to grow in the hydrographic survey domain.

We recently launched new products for ocean floor mapping, and now possess imaging and 3D scanning sonar systems from the acquisition of BlueView, as we continue to be a leader in our autonomous underwater vehicles for survey applications. In addition to sales growth, orders were robust in each of our major marine market, with total instrumentation orders at 1.4 times sales in the third quarterDespite global economic uncertainty, international sales of the environmental instruments were stable.

However, domestic sales in environmental instruments declined due to reduced capital expenditures from the US power producer, weaker municipal spending, and consolidation and cost-cutting from pharmaceuticals companies. However, we did see some recovery in orders with a book-to-bill ratio of 1.08 for environmental instrumentation, as a whole. The decrease in segment operating profit and margin largely reflected the $3.8 million of acquisition-related costs in the quarter, and additional depreciation and intangible asset amortization as a results of purchase accounting for the three acquisitions in this segment.

Turning to the digital imaging segment,this segment provides a broad portfolio of visible, including LIDAR, infrared, x-ray, and ultraviolet sensors, cameras and software. Third quarter sales in digital imaging increased 13.8% compared to last year, with the revenue growth primarily due to consolidated results of Optech. As I mentioned earlier, sales of x-ray sensors and MEMS production more than offset weakness in our machine vision systems, which are leveraged to grow both capital expenditures.

Sales of infrared sensors, cameras and optics also increased, collectively, but were offset by reduced sales from low margin government-funded research programs. Segment operating profit and margin improved, but continue to reflect over300 basis points of intangible asset amortization, reinvestment of all of our profit from Teledyne Scientific R&D Center, and the reclassification of Canadian R&D tax credits from above-the-line segment income to below-the-provision for taxes.

Turning to aerospace and defense electronic segment, third quarter sales decreased 4.1% compared to third quarter of 2011. Sales of high margin, commercial avionics, aircraft batteries and electronic [revising] increased 4.7%,while sales of microwave devices and interconnects increased 4.8% due to acquisition of VariSystems. The overall decline in total segment sales, primarily, resulted from significantly decreased revenue from low margin government electronic manufacturing services.

Segment operating margin improved to a record level of 14.7% given the continued mix-shift of proprietary commercial products, as well as strong execution in our microwave businesses. Turning to our engineer system segment, third quarter revenue increased 11.2% and operating margin improved 145 basis points. We were pleased to achieve enough revenue from increased manufacturing program a new missal defense contract to more than offset the anticipated reduction in services for systems engineering and technical assistance for [SEDA] program, as well as declines in nuclear program.

While we see some sequential weakness in this segment in the fourth quarter of 2012, we expect that full-year sales will be roughly flat with 2011. In conclusion, I am very encouraged with our balance business mix. Our evolving portfolio of high technology in (inaudible) businesses, the greater focus on instrumentation and imaging, a decreased dependence on government programs, and our increased global presence. I am also pleased with our execution in both investments and growth, but also necessary cost reductions.

As a result, we expect 2012 to be our 11th consecutive year of GAAP, and I emphasize GAAP, earning growth. We also continue to seek acquisitions, and earlier this week increased our financial flexibility beyond new-term loans, which open an additional $200 million of availability on our credit facility. Finally, while the next several months and the following year are fraught with uncertainties political, economic and budgetary we will continue our successful strategy, and further emphasize our operating discipline. I will now turn the call over to Dale Schnittjer.

Thank you, Robert. Good morning. I will first discuss some financials for the quarter not covered by Robert. And then I will discuss our fourth quarter and full-year outlook.

First, regarding earnings per share, while the third quarter of 2012 included $3.1 millionof net tax credits, it should be noted that the comparable period in 2011, also included net tax credits of $2.4 million. Turning to cash flow, in the third quarter cash provided from operating activities, from continuing operations was $18.3 million compared with $52.9 millionfor the same period of 2011. The lower cash from operating activities primarily reflected a voluntary $42.8 millionpre tax cash contribution to our pension plan.

Adjusted free cash flow, that is cash from operating activities, less capital expenditures, plus the after tax value of the pension contribution was $30.8 millionin the third quarter of 2012 compared to $43.2 million last yearCapital expenditures were $15.3 millionin the third quarter compared to $9.7 million for the same period of 2011. Depreciation and amortization expense was $21.5 million in the quarter compared with $16.7 million last year.

We expect to invest approximately $76 million in capital expenditures in 2012. Also, for the full year 2012, we expect depreciation and amortization expense to be approximately $80 million, with the amortization expense portion at approximately $30 million or about $0.55 per shareWe ended the quarter with $623.5 million of net debt. That is $647.7 million of debt and capital leases, less cash of $24.2 million, for a net debt-to-capital ratio of 34.2%.

Next, on pension,net pension income, after recovery of allowable cost pursuant to government cost accounting standards, was $1.4 million in the third quarters of 2011 and 2012. On a full-year basis, the pension impact for 2012 is expected to be flat compared to 2011, primarily, due to planned amendments [accrued] in late 2011, andthe impact of voluntary cash contributions offset by a reduction in a discount rate for 2012 to 5.5% versus 6.15 % for the majority of 2011.

Moving to the outlook , management currently believes that GAAP earnings per share, from continuing operations in the fourth quarter of 2012 will be in the range of $1.06 to $1.10. We expect full year earnings per share from continuing operations of approximately $4.22 to $4.26. For reference, our GAAP earnings outlook includes $7.1 million, or roughly, $0.13 per share of nonrecurring charges related to acquisitions.

These charges include inventory step-ups and legal and advisory expenses , but exclude on-going amortization associated with these transactions. Stock option expense is expected to be $8.7 million in 2012 compared to $5.8 million in 2011. This is because no employee stock options were granted in 2009, which caused expenses to be relatively low during the 2009 through 2011 period.

Additionally, stock option expense will likely be higher due to an expected increase in the fair value per share of stock options. Finally, the 2012 full-year affected tax rate is expected it to be 29.5% compared to 32.9% for 2011, primarily due to greater tax credits, and a larger foreign tax rate benefit in 2012. I will now pass the call back to Robert.

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

(Operator Instructions). Our first question, today, comes from the line of Jeremy Devaney with BB&T. Please, go ahead.

Good morning, Robert. Thanks for taking the questions. Wanted to start out with what you are seeing on the M&A front. You recently did the term loan restructuring and opened up an additional $200 million. It gives you $400 million in total capacity for acquisitions or other capital investments. What are you seeing in terms of pricing Where are you willing to take net debt-to-capital Just some more color there

Sure, thanks, Jeremy. First, we at any one time, we have a large number of acquisitions that we are looking at in our pipeline. Probably, today, I would say we are looking at, maybe, over 50 potential acquisitions, which would be approximately over $5 billion, altogether. Obviously, that tunnel narrows as you come down. So at the present time, we might be actively looking at three or four. In terms of the debt-to-cap and our cash flow for the year is going to be very healthy. It will be over $150 million. Our debt-to-EBITDA ratio, EBITDA-to-debt ratio is about 2.2, right now. That will go down as we generate more cash. We could probably go above that. We are at 34% debt-to-cap, right now. That,, again will go down as we generate more cash. But 34%, 40% is reasonable for a company of our size.

In terms of pricing, what are you seeing on those transactions You usually give some pretty good color on pricing, but also if you could just give a little follow-up commentary. You said cash flow for the year will be over $150 million. Does that including the pension contributions that you are you saved, thus far, this year

No. That would be excluding pension.. By the way, Jeremy, as you know, our pension contributions are voluntary. We don't have to do that. In terms of pricing , on the average, depending on whether it is in instrumentation, digital imaging and now, test on measurement, we paid somewhere between 6.5 to 8.5, 9 EBITDA multiple to enterprise value. We probably would like to stay below nine, if we can. Our average is about 8.5. That would be the range we would like to stay. Except if it's a really strategic acquisition, especially in our instrumentation, and in our digital imaging. We might go higher than that.

Lastly, and then I will get out of the way, here. Within instrumentation, you've got a lot of exposure to the oil and gas end market. Baker Hughes rig counts have really been rolling over this yearWe have heard some new entrants step into the market on hydro graphic, under-sea base. What are you seeing in terms of demand and pricing, competition A little bit more color in that end market would really be appreciated.

Sure, Jeremy. On the onshore, it is a little soft. On the marine side it is exceptionally good. In the next five years it is estimated that capital equipment investments in the offshore would be about $135 billion. 57% of that, about $77 billion are going to be in deep sea, which will be 4,000 feet, 5,000 feet and deeper. That's where we are really focused on. So we anticipate that we will do well in that domain. We are also developing new products, high powered connectors based on some of the technology that's coming out of our R&D centers high pressure, high temperature probes, or temperature and pressure measurement , ultrasonic [flow] preventer, [ground] position sensors, and a whole range of other things. I think, overall, we are going to do fine. We also, as you mentioned, people are entering the survey market, but some other companies are exiting the survey market. There was a company announcement, yesterday that gave up on their glider program, that we were competing with because we won all of the programs. Overall, we feel good about that domain.

Thank you very much, Robert.

Thank you.

Our next question, today, comes from the line of Mark Jordan representing Noble Financial. Please, go ahead.

Good morning, Robert. Question relative to the governmental contract manufacturing operations that, I guess, is in Kentucky, That's been kind of a troubled area for you very weak this quarter. Could you size that operation, and is that one of the areas where you've been doing the contraction What is your longer term strategy for that asset

Thanks, Mark. We have three electronic contract manufacturing facilities. We have a small one in New Hampshire. We have a large one in Lewisburg, Tennessee, close to Kentucky but it is Lewisburg. The third one was is in Los Angeles area. We have announced that we are going to shutdown our Los Angeles operations. And that's been where most of that's our microelectronic packaging business.

It has really two major products. One product is solid state relay. We are moving that to our electro mechanical relay facility, which is about 20 miles away. That will -- that it's a healthy business for us. The packaging business, frankly that whole business has declined about 50% in the last four years. And we will move the remainder of that and combine it with our Louisburg operation. We are going from three facilities to two facilities, and all of our EMS combined between Lewisburg and the small facility in New Hampshire. Will then contribute $100 million to our top line . We are, obviously, are not happy with the contraction we are seeing. But it is what it is, and we have taken the necessary steps.

Okay. Relative to the instrumentation segment, with the acquisitions that you have made there and look [really being sizable], what is a -- what would be a normal targeted operating margin for that business, after the acquisition-related expenses drop off

Mark, I think because of some of the tangible amortization that would continue, our margins may come down a little bit. But I think some where between 18 % and 20% is a good range for us. That business,that 's GAAP, but that is a long-term aim for. This quarter if you take the $3.8 millionwe spent on acquisition costs, one-time acquisition costs, we probably are going to be closer to 18%.

Final question, relative to the engineering systems, your guidance of basically flat for the full-year would imply a low $70 million number, which is a real dropoff from the Q3 performance. Could you talk about what -- what inflated the third quarter, and what is happening to draw the fourth quarter down to the low $70 million range

In the third quarter, we had strong sales in some of our historical NASA programs. We also had some really good contract manufacturing in delivering gun mounts to [LETORO] combat ships. Those kind of busted the quarter for us. I think, it is becoming more normalized. We would be lower in manufacturing in Q4. $70 million, $72 million, you are right on there. For the year, we should be flat year-over-year. Frankly, we also have some upside in our objective simulation modeling and simulation business. The upside we are $20 million. The downside in the quarter, really, was from our [SEDA] programs, which are -- which used to be sizable, but continuing into next year we expect those to be around $7 million, or so. So the contractions are coming from the [SEDA] program.

Thank you, very much.

Thank you.

Our next question comes from the line of Tyler Hojo with Sidoti & Company. Please, go ahead.

Good morning. Just going back to Jeremy's line of questioning on R&D. Last quarter, I think you called out an incremental expense within the instrumentation segment for reservoir monitoring. Just wondering if there was any continuation of that in this quarter

No, Tyler. The reservoir monitoring system that we developed is now being installed in Brazil as a test bed, and we are anxious to find out how well it works. If that system works , That's going to be a very important contributor to our oil exploration and production business. Most of the increase in our R&D in the quarter has been in really two areas, three areas. One our x-ray imaging, because we are developing very sensitive imaging systems for major customers, medical supply customers . Second, as you know, we have an uncooled infrared sensor program in our Canadian DALSA operations in Vermont. That is absorbing more R&D. And then lastly, because of the LeCroy acquisitions, we are developing our indium phosphide semiconductor processes to be able to displace the (inaudible) at the very high end high band width domain for those products. Most of our increases are targeted in those areas.

Okay. Helpful. Just going back to reservoir monitoring, and you mentioned what you developed is with the customer. Any idea on timing or potential revenues that could come from that product

In the short-term, really, we have to succeed. The system has to succeed. We probably find out whether this [test] is successful over the next few months. I don't know what the revenue (inaudible) from that would be. Over the long-term, it could be as significant as our streamer cable business that has really been very healthy for us. it could be as high as $50 million or $60 million and grow. Reservoir monitoring is becoming very important as people try to get -- be more successful in getting oil out from the sea floor, and applying trying to determine pockets are declining, and which pocket they can pressurize and get more of.

Helpful. And just lastly from me, I was just wondering if you could maybe comment, Robert, on the LeCroy acquisitionHow is that tracking Obviously, you are going to get another month in there for Q4, but is it tracking according to internal plan

Yes. We are very excited about that. They are probably going to be slightly below their revenues for last year. The whole oscilloscope market, across the board, is done, but they are gaining shares. Because they do have the very high end , high band width oscilloscope that goes to about 65GHz, and then they also just introduced a very exciting new product which is a 12 bit oscilloscope in the midrange, which has 16 times the resolution of the competitive products. Now, of course, in the long-term, Tyler, as we discussed, our indium phosphide technology would enhance the high band width, significantly.

Okay. Great. I will hop back in the queue. Appreciate it.

Thank you.

Our next question comes from the line of Steve Levenson with Stifel.

Thanks. Good morning.

Good morning, Steve.

Just a question about voluntary contributions. I have heard this on a few other calls this quarter, and I guess the question is what is the pension -- the funded level of the pension plan, and is this being done to reduce the potential pension expense in the future, or is there some other advantage to Teledyne to do it this way

There is really, Steve, three reasons. First, as we looked at our long-term pension obligation, we decided to take a number of steps to reduce that. First, we modified the way the pension is calculated from an average of five, average of higher five years to each year, and that has reduced our pension exposure over the long-term at about 8%. We also have people in our pension -- by the way, Steve, as you recall , we stopped putting new employees into our pension plan in 2004.

So this is all the long tail stuff

That's it. Exactly. When you look at the long tail, we have three people in our pension program. First, those who are actively working today. Those who left the pension, but are vested, and those that are receiving pension. So the vested ones are not receiving pension, but they can receive pension in the future. All we have done is put out the program to offer them payment based on calculations [ERISA] calculations, if wanted to take a lump sum at the present time

Okay.

And that's helpful. And lastly, the problem that we have is that, right now, at 5.5% discount rate, which is what we use for 2012, our pension right now is funded over 100%, 101 %, 102 %, presently. The discount rate is going to go down. There's no question about that. The issue is how far down As the discount rate goes down, today, it might be 4.6%, 4.65%,it will drop the power funded ratio by almost 10%. So part of the contribution is to take some of that head wind away, becauseour present calculations show that next year versus this year we going to have a head wind of $0.15 a shareSo everybody that you are hearing from our doing some of the same things we are. Take the long-term down, long-term obligations down if you can, and make sure that you counteract some of the head winds, because of the decrease in the discount rate that is coming.

Got it. That's a great help. Thanks.

Thanks, Steve.

On the imaging side, there obviously have been a lot of new products introduced. Can you tell us if those are intended to go after competitors where you had a hole in the line, or if these are new proprietary products or if they are upgrades

By and large, they are new proprietary products and upgrades. In the x-ray domain, this is also a very successful x-ray product line with large panel [CMOS] x-rays. They have very high resolution. When you have very high resolution, as you well know, you can lower the dosage,and the amount of dosage you apply. Actually, they have products that are so sensitive that you can use them dynamically during the operation. That's during an operation you can watch to see where the instruments the physicians' instruments are. That's a new product.

That's been a really good increase year-over-year for it. The second area is Optech, which is our [LIDAR] imaging system, three dimensional laser imaging system. And that has been in the market for a while, but they are also developing new products coupled to some of our underwater products, because they can do strong [lead]; they can do three dimensional pictures of the shoreline, as well as some underwater. And then we have BlueView that can [couple it] a deeper water. Finally, the big, new product for us is going to be our uncooled infrared, which we are developing. I guess that one, you say, is for competition in the future. And that is really going to be competitive to foreign foundries that are dominant.

For example, [Sofradir] or

They would be (inaudible), most probably. Some of our onshore foundries in the US, they do have some [Itard] restrictions. I have to mention one last thing, and that is in our fundamental work that we are doing here, in our imaging businesses in California, we had a whole set of programs in two color cool dimensions. We just introduced a strained Superlattice camera into the market which is .

That was just the other day. Right

Yes, we think that's the first of its kind. It is a totally new technology, and should perform up to 130 Fahrenheit. So you don't have to cool it too far down. And it should be lighter and less expensive.

Thanks for all of the detail.

Thanks, Steve.

And next we will go to the line of [Kevin Giovanni]. Please, go ahead.

Good morning, Robert.

Good morning.

I just want to look first at the environmental instrumentation business. I think you pointed out it was pretty steady internationally and down domestically. You pointed to a couple reasons. Is that something we can expect as a longer term trend where there are one-time factors there Just directionally where do you see that business going

Under domestics, let me start with the domestic front first. Municipalities are having a difficult time in meeting their budget and their pension . The other thing is, the hostility toward the core production that you see you have seen over the last three years has kind of dampened capital expenditures in that domain. And we have a lot of instruments that go into measuring particulate, measuring air quality, (inaudible), etc.. So that is unfortunate. Depends on what happens after the election; either it will pick up or it won't. But on the other hand, we have roadside monitoring programs, go to sleep and wake up materials that are doing well.

When you go to the foreign area, our sales to China are relatively healthy. We have introduced new water monitoring products that are used for measuring flows in rivers , water quality and air quality products. So, you're right. The foreign is stable. Domestic is slow. And we think that, over the long-term, it depends whether the emphasis on taking out a lot of coal production and other utility productions down. That might affect us negatively if that remains the way it is.

Okay. Thanks. That's helpful. And then looking at the defense and markets, as well as NASA , what kind of scenarios are you looking at occurring from the fiscal sequestration issues.

I am going to take the guy's word from last week. Sequestration is not going to happen, right Even though these guys backed off afterwards. We are taking into our (inaudible) our defense businesses are going to contract. Defense, right now, contributes about 31% of our revenues,but less than 25% of our profit. You heard me talk about closure of one of our electronic manufacturing services, which is all defense, frankly. We are not hopeful about defense. On the national side, this administration has dismantled the NASA manned space program period. So we see shrinkage there.

On the positive side, in that domain, we do have a new program which is we put announcements on which is it is an earth imaging system that would be located on the international space station. We are now working with partners to develop a strategy. We have about $18 million from [NASA] on that. If we can get that imaging system up with some partners, and we begin to enjoy some of the fruits for that, that would be healthy for us. But by and large, other NASA programs were not helpful. On the other side, we do have in our imaging group, we do have strong programs,but in Europe, as well as James Webb Telescope. It is like everything else in our businesses, mixed up business is helping us where things are going down and other things are going up. That's always helpful to us.

Okay. Great and a last one, any update on the [ICP] implementation The [RPI]

Yes. It's going well. We are doing it in a very measured way. We are only doing it in part of our businesses. It is not SAP. It is a Microsoft business it's a Microsoft exchange product. I hate to do advertisements for anybody else. But having said that, we've put a pilot system in, and we will put it in our instrumentation businesses. And if that works,and our [AB] or LeCroy DALSA engineer systems and scientific imaging. Those already have their system. This is not going to be across all of Teledyne.

Okay. Thanks.

Thank you.

And we will go to the line of Jeremy Devaney with BB&T. Please, go ahead.

Hey, guys. Thanks for taking a follow-up. First wanted to -- earlier Robert, you mentioned onshore versus offshore, that you have a higher concentration in the offshore. I was wondering if you could break that out for us What percentage of the oil and gas business is currently offshore versus onshore

I am trying to get a number out of my guys, but I would say our offshore is probably about 80% to 90% of the total, closer to 90%, less onshore. Onshore we do have some products connected products that came, Jeremy, with VariSystems. It is in the tracking domain. They are doing okay, but most of our work is offshore.

And that brings us to an interesting question . I wanted to turn a little bit to organic growth, and VariSystems is a great place to start. Sequentially, VariSystems looks like it was off pretty heavily, $9.3 million. last quarter versus $5.8 million this quarter. Could you help walk us through the organic growth rates on your business, across the four segments. Engineer systems is the only one that grew organicallyI'm having a little trouble reconciling M&A strategy going forward, and risks of that versus the organic growth of the business.

Oil and gas is up about 10%, so it offsets, more than offsets VariSystems, which is the onshore. In general, I will give a big picture. We are probably down about a percent, organically, 1%, but a lot of that we took hits in our EMS business, as I discussed before. Our imaging businesses are modestly up . Our instrumentation businesses are modestly up. We think that I don't we made 42 acquisitions. And frankly, since we haven't had many failures, I don't think there is a lot of risk there. We are pretty good at that. You've got to do what you've got to do. If you look at all the earnings coming out of different companies today, people are contracting. Those that can will do acquisitions in key areas, strategic areas and growth. Those that can't won't and will suffer the consequences.

I totally hear you on your M&A history. You certainly have the track record. You guys have done an exceptional job. But even when we look at the DALSA acquisition, you mentioned it may be down slightly year-over-year. The growth rate came in about 4.7% year-over-year on the quarter. Are you seeing any challenges with forecasting some of these acquisition targets given the current environment

Actually DALSA, Jeremy, was up a little bit, maybe a little over a percent, year-over-year. Total year is up. Next year they will be up. Next year they are going to be up. They have exceptionally good products. The x-ray imaging business was up over 20% quarter-over-quarter. I don't see it. Yes, they are probably going to have -- if manufacturing doesn't pick up, especially in the [semi-] domain, we probably will have some challenges in vision systems for semiconductors or flat-panel displays or whatever, and on the other hand, we provide all the systems for handheld devices, and inspection of iPads and other things. I think DALSA is going to do fine. I'm not worried about DALSA. My worry is, frankly, focused on the U.S. Economy.

You are absolutely right. I misspoke. It was, actually, LeCroy you said was going to be down for the year, and it was up 4.7% in the quarter. I misspoke.

Yes. they had a very good first two months. Year-over-year, their first two months were very good. They were over 20% over last year. Maybe it is because they are coming to Teledyne, and we are always conservative and cautious. Maybe they are being a little conservative. Right now, I think they are going to do fine.

Thanks for taking the follow-up questions, guys.

Thank you.

Our next question comes from the line of Mark Jordan, Noble Financial Your line is open.

Thank you. Just a quick follow-up . Robert, philosophically, you have been funding all of your acquisitions with bank debt and cash flow generated from operations for a number of years, now. Do you see that changing and/or under what situation would you look to the equity markets to bolster your borrowing and acquisition power

Mark, it is easier to fund it with cash, as you well know. Acquisition made with your stock are very difficult to make them accretive, as you also know. On the other hand, if there was an extraordinary situation where it was a big enough acquisition, and it is where we want to grow, we would do it with shares, and shares and cash combination. I am not going to exclude that. On the other hand, it would have to be a really good acquisition that we can make work, because we don't like to do dilutive acquisitions, haven't done it, so far. It might be temporarily dilutive for a few months, or six months, but all of our acquisitions, so far, have been accretive. That's the best answer I can give you on that.

Thank you.

Thanks, Mark.

(Operator Instructions).

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

Thanks, Robert. And again, thanks everyone for joining us. Certainly, if you have follow-up questions, please feel free to call me at the number listed on the earnings released. And again, the releases are available on our website, as is the replay of this call. Operator, if you could conclude the call, and give the dial-in information for replay, we would appreciate it. Thank you, again.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Today's conference is available for replay at 11.25 this morning and running through midnight on November 25th. You may access the AT&T executive playback service at anytime by dialing 1-800-475-6701 and entering the access code of 255948. International participants may dial 320-365-3844. Again, please enter the access code of 255948. That does conclude our conference for today. Thank you for your participation and using the AT&T executive teleconference. You may now disconnect.