Teledyne Technologies Incorporated
Q3 2008 Earnings Call Transcript

Published: 25 Oct 2008

[Operator:]

Go ahead please. You are connected to the conference Mr. VanWees.

[Jason VanWees:]

Good morning. 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'd 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 Executive Vice President, General Counsel and 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 earnings release and our periodic SEC filings and of course actual results may differ materially. Also, in order to avoid potential selective disclosures this call is simultaneous being webcast and a replay both via webcast and dial-in will be available for about one month. Here is Robert.

[Robert Mehrabian:]

Thank you, Jason, and again our apologies to everyone. We don’t know what happened to the lines at AT&T. Let me start, before I comment on some specific results for the quarter, I 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 overcame 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 of 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 3 recently completed acquisitions not only complement existing Teledyne businesses but each company at strategically important system level capabilities to our current product offerings. Furthermore, because of the successful integration of previous acquisitions our technical capability in addressable market continues to expand. As an example, during the quarter Teledyne Scientific & Imaging, which we acquired in September of 2006 was awarded five 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 the anticipated pressures on government spending we intend to manage the company cautiously. Accordingly, we have 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 (inaudible) markets. We also protect sufficient liquidity so that if certain markets weaken further we could capitalize on opportunity acquisitions to strengthen and expand our longer term market position. 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 a span of over 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 a $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 Communication 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. In 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 represents 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 electronics 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 UK-based Defense Electronics business in the third quarter of 2008. The acquisition of Filtronic Defense business adds expertise in receiver subsystems and digital signal processing and consistent with our strategy to provide more highly integrated microwave system 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 a $112.8 million to $131.4 million. This was due to strong organic sales growth of 12.6% and acquisitions 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 acquisitions of asset of Webb Research added autonomous underwater vehicle systems to our existing collection of marine sensors and navigation subsystems. Webb’s ocean gliders which use changes in buoyancy for propulsion consumed very little power and performed mission over several weeks or months. Teledyne Webb primarily serves the oceanographic research and military market. In fact, while offshore oil and gas exploration and production represent approximately two-thirds of the market for our marine products the other one-third of marine sale are now derived from oceanographic research, military, and other industrial markets. Earlier this month, we also acquired Cormon Limited. Cormon designs and manufactures sand and corrosion sensors as well as floor integrity monitoring systems used in oil and gas production. Cormon monitoring systems are designed to accelerate hydrocarbon production, reduce operating cost, and extend asset life for oil and gas operators. In addition this acquisition has created an opportunity for us to provide more integrated (inaudible) system to our customers. Finally, I will discuss our avionics and other commercial electronics businesses. In the third quarter of 2008, sales from these businesses collectively decreased abut 2.8% compared to the third quarter of 2007. This was primarily due to continued decline in sales of electronic manufacturing services for medical applications and I have mentioned before that this area that we are slowly decreasing our efforts in. Turning to our Engineered Systems segment, in 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 module used to helping reach 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 of Mechanical Engineers renewed this segment’s Nuclear and Pressure Vessel Certificates of Authorization leading to N, NPT and U stamps which allow Teledyne to manufacture vessels and various components for nuclear facilities. In addition, in September our Engineered Systems segment was awarded and $155 million ID/IQ prime contract from the Missile Defense Agency to continue our SETA services through 2009. Segment operating profit increased almost 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 Continental Motors, our aircraft piston engine business. Sales in this segment was flat compared to last year as a modest increase in sales of after market parts and services was offset by lower engine sales to aircraft OEMs. Operating profits 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 forecasted aircraft demand from certain OEMs. We continue to monitor this business carefully and I have already taken certain actions including relocations of a product lines and selected reductions in force. Finally, in our Energy and Power Systems segment revenue in the third quarter of '08 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 the constrained credit market 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 produce 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.

[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, a higher aircraft product defense and settlement payments of $6 million, partially offset by 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 to $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 do not foresee any liquidity concerns at this time. Our current facility has $590 million of commitment and does not expire until July 2011. Furthermore, all of the banks in our credit facility 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 pensions, in the third quarter of 2008 SFAS-87 and SFAS-158 pension expense was $2.8 million or a negative earnings per share impact of $0.04. This compares to SFAS-87 and SFAS-158 pension expense of $3 million or a 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 CAS 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 list of contributions. Now on stock option compensation expense, in the third quarter of 2008 per the requirements of SFAS No. 123-R, stock option compensation expense was $1.9 million or a negative earnings per share impact of $0.03 compared with $1.8 million or a 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 is 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 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 engine and parts as well as increased interest expense given the recent increase in LIBOR. We expect full year 2008 capital expenditures of approximately $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 the full year of 2007. For the full year of 2008, we currently anticipate approximately $9.6 million or $0.16 per share in pension expense under SFAS 87 and SFAS 158 or $200,000 of net pension expense after recovery of allowable pension cost from our CAS covered government contracts. Full year 2007 earnings included $11.9 million or $0.21 per share in pension expense under SFAS 87 and SFAS 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 options issuances during the year and estimated fair value of stock option grants. I will now pass the call back to Robert.

[Robert Mehrabian:]

Thank you. We would 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.

[Operator:]

(Operator instructions) And our first question is from the line of Mark Jordan with Noble Financial. Please go ahead.

[Mark Jordan:]

Good morning everyone. 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 am also cognize 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 gauge what the quarterly pension expense might be in 2009?

[Dale Schnittjer:]

Mark you are right. With the volatility that is out in the markets, it is too early to know exactly where we will be at year-end. However, if we assume 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 an 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 expect headwinds of approximately $0.10 per share or you know $0.025 a quarter and of course, if the assets performed worse than that we would have a little more headwind. If we had a higher discount rate or stronger asset performance or additional discretionary contributions it might be a little less than that.

[Mark Jordan:]

But from a – at this point in time psychologically we should assume a headwind of about $0.10 versus this year?

[Dale Schnittjer:]

That is about as well as we could guess today.

[Mark Jordan:]

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?

[Dale Schnittjer:]

Yes, we have and it is about $0.02.

[Robert Mehrabian:]

Did you get that, Mark? Operator.

[Operator:]

And our next question is from the line of – our next question is from John Harmon with Needham. Please go ahead.

[John Harmon:]

Hi, good morning.

[Robert Mehrabian:]

Good morning John.

[John Harmon:]

Just a couple of questions. One, I believe previously you bought some other businesses from Filtronic. These or the new businesses are they things that are nearby that you can integrate. I think these new ones are in the UK or do you have existing facilities that you can integrate them into?

[Robert Mehrabian:]

Yes, you have a good memory there John. We bought the Filtronic solid state business in the United States and we actually collocated 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 – they are not very close to any of our other facilities and shipped to [ph] UK. On the other hand, we now have approximately 5 facilities in the UK and those are being integrated in terms of the financials being able to have somebody to provide those overall and some of the other activities but physically they are not collocated.

[John Harmon:]

Okay, thank you and you mentioned some cost reductions in your avionics division, given the economic environment it would probably be prudent just to restrain spending. Across the board is there anything else that you are doing companywide or in other areas?

[Robert Mehrabian:]

This, the cost reduction in the general aviation as I mentioned, we are seeing some slowdown in our engine, piston engine sales to OEMs and some parts orders are down. So, we have taken some – we have consolidated the product line, we have reduced workforce. We are very careful on our capital expenditure across the board in the company and we have also taken some other limited actions in some of our businesses in addition to aviation. In terms of our aviation, avionics supply to the commercial market we haven’t seen a lot of effect except from the Boeing strike and we have some revenues shipments that are on hold at the present time and so that is hurting us a bit. But I think overall, in our avionics businesses we are not seeing the kind of effects right now that we see in our piston engine business.

[John Harmon:]

Thank you. Maybe just one quick one. Usually you give a book-to-bill ratio or give it when it is asked.

[Robert Mehrabian:]

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

[John Harmon:]

Great, thank you very much.

[Robert Mehrabian:]

You bet.

[Operator:]

We have a question from Steve Levenson with Stifel. Please go ahead.

[Steve Levenson:]

Thank you. Good morning.

[Robert Mehrabian:]

Good morning Steve.

[Steve Levenson:]

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

[Robert Mehrabian:]

Hi, I can absolutely confirm that.

[Steve Levenson:]

Great thanks. 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?

[Robert Mehrabian:]

You know that is a good question Steve. I think initially it had to do with gas because the price of aviation fuel 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 some of these planes are being bought with some financing especially on the OEM side. And as financing becomes difficult then we see some softening there and if people are not flying enough then there are not overhauling their engines or buying engines and parts from us as much. So, we are very cautious with that business right now.

[Steve Levenson:]

Okay, thank you. 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? Robert Mehrabian 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 3000 floats right now operating across the oceans in the world. The gliders are both just oceanographic as well as for military application. The measurements are similar. You measure density, current, 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 this gliders is that we intend to add some of our other sensors with that we have, acoustic sensors that we have and for visualization to this gliders. So, it is a mixture of both defense as well as oceanographic research.

[Steve Levenson:]

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

[Robert Mehrabian:]

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

[Steve Levenson:]

Okay, thank you. Do those devices use synthetic aperture sonar are you involved in that product at all in that program?

[Robert Mehrabian:]

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 they use the power that is in the gliders to change the buoyancy to be able to dive and come up. And that is why they last weeks or months in the water. Synthetic aperture sonar uses significantly higher amount of energy than some of the other sensors that are on these gliders.

[Steve Levenson:]

Got it. Thank you. 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 frequency?

[Robert Mehrabian:]

Yes, that is a very good observation. There are two things that have happened. First, we are not seeing the equity players in the market. You know, there was a time when every time you saw a potential acquisition, a significant participation – number of participants were from the equity market. We are 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 on the market before the end of the year. And we see some of that effect. And then finally while the strong US dollar is not helping our revenues overseas and certainly it is not helping us in the 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 is a combination of two or three things happening.

[Steve Levenson:]

And the pipeline.

[Robert Mehrabian:]

Our pipeline is always reasonably healthy, but we usually we 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.

[Steve Levenson:]

Very good. Thanks very much.

[Robert Mehrabian:]

Thank you.

[Operator:]

Question from Mike Smith with BB&T Capital Markets. Please go ahead.

[Mike Smith:]

Good morning guys.

[Robert Mehrabian:]

Good morning Mike.

[Mike Smith:]

A couple of 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, what are you seeing there and kind of what are your expectations?

[Robert Mehrabian:]

I think 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 is 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 adapted to using our generators as standby power – hydrogen generators. So, it is mixed, but overall I can say our orders right now where we stand versus where we were last year at this time are down.

[Mike Smith:]

Okay 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?

[Robert Mehrabian:]

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 usually absorb 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 is really affecting us is – and a lot of military businesses obviously. The part that is really affecting us right now is avionics. It is not very large, but it is significant in terms of our earnings. It is maybe a couple of pennies in our earnings right now.

[Mike Smith:]

And let me slide another one here in 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 sequential again. So, we didn’t reach the new margin level for that segment?

[Robert Mehrabian:]

I think it is 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 the – I think we have more like an 8.5%, we may finish the year over 9% because of the strong first 3 quarters, but we think next quarter it 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 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 have 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.

[Mike Smith:]

Right thank you.

[Robert Mehrabian:]

Thank you.

[Operator:]

We have a question from Chris Quilty with Raymond James. Please go ahead.

[Chris Quilty:]

Good morning Robert.

[Robert Mehrabian:]

Good morning.

[Chris Quilty:]

A question for you. You mentioned on the defense electronics strength in the imaging area. Can you elaborate on that a little bit?

[Robert Mehrabian:]

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 Webb et cetera but in the military domain, which is what you are talking about that is one. The second is that we have now developed two colored infrared camera that we supplied to our customers and those have been well received and that is 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 have been delivering significant amounts of these eye protection systems for the air crew and we are starting to work for the army. So, there is a combination of some space, satellite (inaudible) battlefields and other areas. Second is what we do with the two-colored infrared cameras, I mentioned the spectacles. 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 is a range of programs. We are very pleased with that acquisition.

[Chris Quilty:]

Okay, and also the news earlier this week that they are canceling the Armed Reconnaissance Helicopter, I remember five years ago when the 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?

[Robert Mehrabian:]

No significant impact to us.

[Chris Quilty:]

Okay. Also with regard to the environmental 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 pickup because they realize they like clean air? Any follow up on that?

[Robert Mehrabian:]

Yes, we did have a run up. In the Q3 actually that moderated significantly. We maybe up 2% on the different area of 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 are 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. So, it is a mixture.

[Chris Quilty:]

Got it. In the Systems Engineering business you had talked I think last quarter about the fact that now you got the $92 million follow on contract for the gas centrifuge service modules. 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 business or is it going to be in some way lumpy?

[Robert Mehrabian:]

I think it is going to be continuing for the next 2 years. Maybe at the level of about $30 million next year and maybe a similar number in 2010. I think at some point, of course these are 550 plus modules that we are building. At some point that program would come to an end but important thing that has 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 stamped authorization for that and so we think in the long run we can play in the nuclear domain after this contract, but the contract that we have goes another couple of year at least beyond this year.

[Chris Quilty:]

Okay, 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 have kind of gone through it by different segments.

[Dale Schnittjer:]

I didn’t give it but it is about 12.8% in the third quarter.

[Chris Quilty:]

12.8% companywide.

[Dale Schnittjer:]

Right.

[Chris Quilty:]

Got it. Thank you gentlemen.

[Robert Mehrabian:]

Thank you Chris.

[Operator:]

We have a question from Mark Jordan of Noble Financial. Please go ahead.

[Mark Jordan:]

Good morning again. A question first of all relative to the enhanced 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?

[Robert Mehrabian:]

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 have had a kind of 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 reserve your first dollar coverage your expenses for legal fees don’t come from that directly. You take it directly from your operation. So that is one. Our first dollar coverage goes up to about $20 million. So, I think that is what happened in this quarter.

[Mark Jordan:]

So, this basically reflects just a timing mismatch and that therefore (inaudible) “recoup” that in later periods?

[Robert Mehrabian:]

Partly, but we are 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 will have some expenses in this current quarter also.

[Mark Jordan:]

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

[Robert Mehrabian:]

Yes, let me start with the first one. We have – we are in discussions in a number of DOD primes about potential insertion of our two-color cameras and of course there is that system development and demonstration phase of the army infrared engine program that is in competition, but initially they said they were going to have two participants and 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 is going to be healthy for us, whether we can win a big contract; I am not sure at this time because we are new to the field. Let me go to the drifter. That is 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 modem [ph]. So, we are waiting, we haven’t heard anything about it. We are still waiting for a decision on that.

[Mark Jordan:]

Final housekeeping if I could. The minority interest is that just the now the 14.8% of ODI that is still outstanding?

[Robert Mehrabian:]

Basically that is true. That is a just little bit to energy systems.

[Mark Jordan:]

Okay, thank you very much.

[Robert Mehrabian:]

Thank you Mark.

[Operator:]

And we have a question from Steve Levenson with Stifel. Please go ahead.

[Steve Levenson:]

Sorry, 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?

[Robert Mehrabian:]

The answer to that – that is a very good observation .The answer to that is yes. And we are developing products for especially space centers. As you know which would be – which would have some danger from lasers.

[Steve Levenson:]

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

[Robert Mehrabian:]

That is a good assumption.

[Steve Levenson:]

Okay, thanks very much.

[Robert Mehrabian:]

Thank you.

[Operator:]

We have a question from Mike Smith with BB&T Capital Markets. Please go ahead.

[Mike Smith:]

Hi, just a follow up here. On the centrifuge contract. I believe that when the – when you announced the awards you said you are going to ramp up to about 200 jobs. So, we assume you are fully ramped on that now and you are producing x units per month or per quarter?

[Robert Mehrabian:]

The answer is right now I would say the number of jobs are closer to 140 and we just are finishing our first month. So, we are in the process of ramping up. I think we will deliver 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 are procuring for this, but we have all the capabilities now in place. It is a 140,000 square foot facility, maybe a little more, fully approaching 200 and so. Fully equipped and ready to go.

[Mike Smith:]

Okay. On the tax credits, I believe you said that was included in the guidance and I believe the press release said that you are forecasting a 39% tax rate on the year am I – is that correct?

[Dale Schnittjer:]

The 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.

[Mike Smith:]

Right thank you.

[Robert Mehrabian:]

Thank you.

[Operator:]

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

[Robert Mehrabian:]

Thank you operator. I will now Jason to conclude our conference call.

[Jason VanWees:]

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 on the earnings' 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.

[Operator:]

Thank you. Ladies and gentlemen, this conference will be available for replay after 10 a.m. today until November 23rd 2008 at midnight. You may access the AT&T executive playback service at any time by dialing 1800-475-6701 and entering the access code 955-934. International participants may dial 1320-365-3844. Again those numbers 1800-475-6701 and 1320-365-3844 with the access code 955-934. And that does conclude our conference call for today. Thank you for participating and using AT&T executive teleconference service. You may now disconnect.