Teledyne Technologies Incorporated
Q3 2013 Earnings Call Transcript

Published: 24 Oct 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Teledyne Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Jason VanWees. Please go ahead.

[Jason VanWees:]

Thank you, and good morning, everyone. This is Jason VanWees, Senior Vice President, Strategy and M&A at Teledyne, and I'd like to welcome everyone to Teledyne's third quarter 2013 earnings release conference call. We released our earnings earlier this morning before the market opened. Joining us today are Teledyne's Chairman, President and CEO, Robert Mehrabian; Senior Vice President and CFO, Sue Main; and Senior Vice President, General Counsel and Secretary, Melanie Cibik. After remarks by Robert and Sue, we will answer your questions. However, before we get started, 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 via webcast and dial-in, will be available for approximately 1 month. Here is Robert.

[Robert Mehrabian:]

Thank you, Jason, and good morning, everyone. Our third quarter sales of $571.6 million increased 4.4% compared to last year. GAAP earnings per share were $1.23 and were at all-time records for any quarter. Our commercial industrial businesses performed very well. As an example, our instrumentation segment generated organic revenue growth of 12.7%. Throughout 2013, and especially in Q3, we undertook more aggressive actions to optimize our business portfolio and lower our expenses, further reducing our exposure to weak end markets and high cost locations. In the third quarter specifically, we have pretax charges of $14.3 million related to severance and facility consolidations. Fortunately, such charges were offset by discrete tax benefits of $11.6 million. Charges will continue in the fourth quarter, and for the full year, we expect total pretax charges to be $22.4 million. Throughout October 2013, we have announced headcount reductions equaling 3.9% of our total workforce. This is in addition to a reduction of over 4% in 2012 or a total of over 750 of our people. Furthermore, within the next several months, we expect to complete facility consolidation, encompassing 15 sites, with a total reduction of over 375,000 square feet, which is 7% of our total footprint. As one might expect, our reductions in force and facility consolidation efforts have largely focused on defense-related businesses and our operations in high cost locations in the United States, such as in California, and in Canada and in Europe. Simultaneously, we continue to invest both internally and through acquisitions in our growing commercial markets. For example, in the past several weeks, we acquired 2 companies within our environmental and marine instrumentation businesses, adding new technologies and products to customers we already serve in some of our strongest markets. In the third quarter, sales to international and domestic commercial customers comprised approximately 75% of our total sales. Furthermore, given their greater profitability, these businesses contributed over 85% of our profit. I will now comment on our business segments, after which, Sue Main will review some of the financials in more detail and provide a new earnings outlook for the fourth quarter and full year 2013. Turning to our instrumentation segment. In this segment, which is our largest and most profitable, we provide our customers with one of the most comprehensive portfolios of marine technological products, ranging from connectors and communication devices to sensors, imaging systems and complete underwater vehicles. We also manufactured a broad range of environmental and electronic test and measurement instruments. International sales represented over 55% of the segment sales in the quarter. Third quarter sales increased 24.4% to $256.6 million with organic growth of 12.7%, mentioned previously. For the full year 2013, we expect instrumentation's revenues to exceed $1 billion. Sales of marine instrumentation increased 32.3% with organic growth of 19.7% due largely to strong sales of geophysical sensors for offshore oil exploration and continued growth in sales of interconnect systems used in offshore energy production as well as the acquisition of RESON, the world's leading supplier of commercial shallow water multibeam sonars. In addition, sales of complete autonomous underwater vehicles more than doubled. I'm also pleased to announce that we recently opened a new Teledyne oil and gas technology center in Daytona, Florida, adding needed space where our workforce has doubled in the last 7 years. In the environmental domain, sales from both process and air monitoring equipment and laboratory and field instrumentation increased modestly year-over-year. Electronic test and measurement system, comprised of Teledyne LeCroy, which was acquired last year, contributed $45.9 million of sales compared to last year's partial period sales of $34.2 million. While revenue prior to the acquisition was not recorded, full period sales increased compared to 2012. Operating profit, which included $1 million of severance and relocation charges in this segment, increased 25.5%. Turning to the Digital Imaging segment. This segment provides a broad portfolio of visibles, including LIDAR, which is laser-based, infrared, x-ray and ultraviolet sensors, cameras and software. Third quarter sales in the Digital Imaging decreased 2.7% compared to last year's. Sales of sensors and cameras for machine vision and medical application increased nicely compared to last year as did sales of infrared sensors and cameras for commercial and scientific applications. However, these were more than offset by lower sales to the U.S. government and reduced sales of LIDAR systems. Given strong orders in most of our commercial imaging product lines and an easier comparison, we expect to report reasonable year-over-year growth in this segment in the fourth quarter. Segment operating margin continued to improve and was at a record level despite absorbing $1.9 million in several severance-related expenses in the quarter and the continued burden of approximately 275 basis points of intangible asset amortization. Turning to the Aerospace and Defense Electronic segment. Third quarter sales decreased 5.7% to $143.1 million. Growth in sales of higher margin commercial avionics and electronic relays were more than offset by significantly reduced sales of microwave devices and interconnect, due in part to lower sales to the U.S. government. I should note that the majority of 2013 sales of defense microelectronic related parts and spares has been very weak compared to prior years. However, following the quarter end, we did finally receive our first order for some of these products used in airborne electronic warfare applications. In addition, as we mentioned in our second quarter's earnings call, I would like to remind everyone that the sequential decline in revenue in this segment largely related to an overseas program that concluded in second quarter of 2013. Operating profit and margin suffered as this segment experienced the greatest level of charges for severance and facility consolidations. In the third quarter, charges totaled $8.7 million, including an environmental reserve of $5.3 million. Turning to the Engineered System segment. Third quarter revenues decreased 18% as a lower -- as a result of lower government sales and a difficult comparison. Segment operating profit and margin also suffered in this segment due to higher pension expense and the absorption of $2.7 million in reduction in force and facility closure costs. While we're not optimistic about the outlook for Teledyne's government businesses in general, we continue to work on the development of an exciting commercial space-based digital imaging capability to be deployed on the International Space Station. We recently announced a Memorandum of Agreement with the German space agency, or DLR, for the first space-based imaging instrument that would be installed aboard the pointing platform, known as MUSES, which we are currently building. In conclusion, given our balanced business mix and ever-increasing commercial focus, I continue to be encouraged with our collection of high-technology industrial businesses. In addition, through ongoing transformation of our business portfolio, we have now made substantial reductions to our cost structure to position the company for continued success. Finally, we are pleased to increase our earnings outlook and we continue to expect 2013 to be our 12th consecutive year of GAAP and, I emphasize, GAAP earnings growth. I will now turn the call over to Sue Main. Sue?

[Susan L. Main:]

Thank you, Robert, and good morning. I will first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our fourth quarter and full year 2013 outlook. Regarding third quarter earnings per share, I wanted to note that earnings included $14.3 million of pretax severance and facility consolidation expenses, offset by $11.6 million of discrete tax benefits. Turning to cash flow. In the third quarter, cash flow from operating activities was $49.5 million compared with $18.3 million for the same period of 2012. The higher cash from operating activities primarily reflected the absence of any pension contributions in the third quarter of 2013. Free cash flow, that is, cash from operating activities less capital expenditures, was $31.8 million in the third quarter of 2013 compared to $3 million last year or $30.8 million in 2012, excluding voluntary pension contributions. Capital expenditures were the $17.7 million in the third quarter compared to $15.3 million for the same period of 2012. Depreciation and amortization expense was $23.1 million in the quarter compared with $21.5 million last year. We ended the quarter with $554.4 million of net debt, that is, $643.1 million of debt and capital leases less cash of $88.7 million, for a net debt-to-capital ratio of 29%. Turning to pension and stock compensation expense. In the third quarter of 2013, gross pension expense was $4.3 million compared with gross pension expense of $1.7 million in the same period of 2012. Stock compensation expense was $3 million in the third quarter of 2013 compared to $2.3 million in the third quarter of 2012. Finally, turning to our outlook. Management currently believes that GAAP earnings per share from continuing operations in the fourth quarter of 2013 will be in the range of $1.21 to $1.24 per share. We expect full year 2013 earnings per share of approximately $4.64 to $4.67, an increase from our prior outlook of $4.50 to $4.55. The 2013 full year effective tax rate is expected to be 28.3%, excluding discrete items such as nonrecurring tax benefits or adjustments. Finally, we expect additional severance and facility consolidation cost in the fourth quarter of 2013 of $3.7 million and $22.4 million of severance and facility consolidation cost for the full year of 2013. I will now pass the call back to Robert.

[Robert Mehrabian:]

Thank you, Sue. We would now like to take your questions. Operator, if you're ready to proceed with questions and answers, please go ahead.

[Operator:]

[Operator Instructions] And we'll go first to the line of Tyler Hojo with Sidoti & Company.

[Tyler Hojo:]

Just firstly, I was hoping that maybe you could discuss what some of the cost savings will be from some of the restructurings that you've talked about and will take place in Q4 here.

[Robert Mehrabian:]

Thank you. We -- first and foremost, most of the emphasis in cost savings has been in our defense electronics and electronic manufacturing businesses. We have relocated facilities from California to Tennessee and combined our facilities, that's a reduction of almost 110,000 square feet of space in California, a facility that at one time employed about 350 people. We've also changed our structure in our microwave businesses that depend on government funding. Those are in Northern California. We've done consolidation of several facilities. We expect that these businesses combined will help us achieve much better margins going forward in our government-related businesses. Finally, I should note that as part of one of our acquisitions, we inherited a precision machining operation in the United Kingdom which served the aerospace industry. We were not planning to hold that business for long and we finally decided to shut it down in the quarter. We still do have a very good composites business in the United Kingdom, which we intend to keep, that serves the aerospace industry. So overall, most of our emphasis has been to reduce our breakeven point in our government-related businesses and improve the margins in those businesses as we go forward.

[Tyler Hojo:]

Okay, but maybe I could just follow on to that. Where the bulk of these -- where the bulk of the focus was, was the Aerospace and Defense Electronics segment. Where do you think margins can go in that segment? I think on an adjusted basis, they were just shy of 13% in the quarter.

[Robert Mehrabian:]

Yes, I think on an adjusted basis, you're right. They may be a little less than 13%, but I would say between 12% and 13% without adjustments.

[Tyler Hojo:]

Okay, great. And then just maybe 1 last question. Just in regards to guidance, do you have an update in regards to kind of organic growth outlook for sales for the year?

[Robert Mehrabian:]

I think the sales -- I mentioned this at the last earnings release also, I think for the full year, our organic is going to be between 1% and 2%, probably a little closer to 2%. As you know, it was okay in Q1 until we took a little bit of a pullback, essentially flat, minus 1% organic in Q3. We expect to recover it in Q4 back to 1% to 2% and finish the year at 1% to 2%. Considering how difficult an environment the government businesses are, not just for us but for everyone else, we're happy with this because we're really depending on our commercial businesses that we've developed in the past several years to contribute most of the earnings for the company.

[Operator:]

We'll go to the line of Jim Ricchiuti with Needham & Company.

[James Ricchiuti:]

Maybe as a follow-up to that previous question, can you give us a sense as to what your organic growth rate is in the commercial business this year?

[Robert Mehrabian:]

Overall, as I mentioned, in the Q3 period, it was about 6% overall. Our international was up pretty nicely, better than that. But I would say about 6%.

[James Ricchiuti:]

And so for the year, as a whole, Robert, is that -- should we think of organic growth in the commercial business in that mid single-digit area?

[Robert Mehrabian:]

Yes. Maybe a little higher than 6%, but that's a good estimate.

[James Ricchiuti:]

Okay. I also wanted to just follow up on a comment that you made about the Digital Imaging business. You alluded to some reasonable growth perhaps coming back in Q4, where do you see that coming from?

[Robert Mehrabian:]

First, we think Digital Imaging will grow maybe 3% to 5% in Q4 versus the prior year and Q3. Most of that should come in our DALSA visible camera businesses. We have -- we're doing reasonably well in flat-panel display inspections. As you may know, we make somewhere between 60,000 and 70,000 cameras in DALSA annually, and that business has picked up, especially in Asia Pacific. We are not as optimistic about our LIDAR businesses. They have not done as well in the previous quarters. But we think DALSA will do probably another $6 million to $8 million better in Q4, and most of that is in Asia Pacific and most of that so far has been in the flat-panel display inspections. We also are positive about our work in the x-ray domain, even though some of those revenue increases probably will come later next year.

[James Ricchiuti:]

And one final question. LeCroy typically, as I recall, the December quarter was seasonally a good quarter. Are you seeing that trend continuing? And are you seeing just some improvement in the underlying market for oscilloscopes?

[Robert Mehrabian:]

Let me back down on the underlying oscilloscope market. Year-to-date, I think LeCroy is down about 2% versus what, at least, our market intelligence says. The market as a whole may be down as much as 10%. The market is, we believe, stabilized now, especially LeCroy has done well in Asia Pacific and somewhat okay in Americas. EMEA is where most of the slowdown has been, that's been significant. We think in Q4, we're forecasting maybe 2% to 3% improvement in revenues.

[Operator:]

We'll go to the line of Mark Jordan with Noble.

[Mark C. Jordan:]

A question on the -- follow-up here on the defense and electronics and aerospace. I mean, if you look historically, the operating margins in that sector had been in the 22% to 24% range. Obviously, currently, with restructuring that's going on and the resizing of the business, you're well below that. My question is once you get into 2014, your consolidation moves are -- have been completed, you've restructured that business. Can the Aerospace and Defense Electronics business, longer term, be a 20%-plus up margin contributor?

[Robert Mehrabian:]

Mark, I guess I'm a little confused. In the Aerospace and Defense Electronics, as you know, we have an aerospace business, which is our controls business, which does serve the aviation market, which is doing really well. I think there the margins are closer to what you indicated. But when you add the defense businesses to that, historically, the operating margins in that business have been around 12% and at really good year, that might go up to 13%. We think with the cost that we have taken out, especially in Q3 and some in Q1 and more that we'll take in Q4, those margins should stabilize back down to the historical 12%, overall.

[Mark C. Jordan:]

The volume in the -- in that sector dropped down. You've been running in the $160-plus million level on a quarterly basis, coming in this quarter at $143 million. Is this business, with the restructuring moves, just fundamentally in the $140 million, $150 million range on a normal basis?

[Robert Mehrabian:]

Yes. I think, going forward, we probably expect it to be in the $150 million range, Mark.

[Mark C. Jordan:]

Okay. On the pension front, you obviously took a very conservative stance lowering your discount rate to 4.4% versus 5.5% last year. Given a very strong equity market here, do you see that rate having the potential to move upwards slightly, all things being equal, if you were looking at today being the end of the calendar year?

[Robert Mehrabian:]

Yes, I totally agree with you on that. I think the rates will go up a little bit. Obviously, we won't know until December. But right now, it looks like it's going to go up.

[Operator:]

We'll go to the line of Michael Ciarmoli with KeyBanc.

[Michael F. Ciarmoli:]

Maybe if we can, just a little bit more on the instrumentation segment. The weakness in LeCroy, you mentioned the EMEA region, but clearly, that asset has been underperforming, I guess, since the acquisition. And it also looks like one of the other acquisitions, RESON, has underperformed a bit. And is there anything else happening there just besides broad macro weakness? I mean, can you give us some context into the pricing environment, maybe the competitive environment?

[Robert Mehrabian:]

Yes. I think in LeCroy, I'm not sure if I would agree that it's underperforming. If you took the Q3 of last year and compared it to Q3 of this year, the revenues have actually gone up versus last year's Q3. They have gained share in the market. They introduced the High Definition Oscilloscopes, which have become kind of the new standard for the market. They have introduced the 65-gigahertz oscilloscope, which has been very successful in the market, and have actually demonstrated a 100-gigahertz oscilloscope at the end of the last quarter. And they're working on the indium phosphite chips in collaboration with Teledyne Scientific. So overall, I would say it is not underperforming. We're very pleased with these operations. They're improving margins continuously, and we expect them to be one of the highlights of our portfolio as we move forward. Coming back to RESON, which is the multibeam imaging system that we bought, that you're right. Market there has been a little slower primarily because they're more dependent, have been historically, on the European market. But again, there we're doing a number of things that would be beneficial in the long term for the -- our imaging, underwater imaging businesses. We're taking the RESON software and using it in 2 of our other underwater imaging systems, the BlueView, which we acquired last year and hold them, and we're now combining all of those under a marine imaging systems business, which would have probably the most broadest range of imaging products, underwater imaging products, with a strong future potential. So I think RESON, because of the European effect, has had some slowdown. But we're very bullish about the future of our whole underwater imaging businesses.

[Michael F. Ciarmoli:]

Okay, that's fair. And then just the last one, I think someone was alluding to it earlier, but if I look at your kind of the adjusted segment margins collectively in that 13.6% range, how should we be thinking about kind of some margin expansion leverage across the portfolio as we look into '14? I think you guys, in the past, have characterized that it's maybe 25 basis points or 50. I mean, can we see an acceleration of some of the leverage in this model given some of the cost-cutting and cutting of overhead and optimizing the facilities?

[Robert Mehrabian:]

Yes. I think, in the long term, we anticipate margin expansion across all of our businesses combined. In the short term, I think we will probably hold segment operating margin around 12%. In some of our other businesses -- some of our business like instrumentation, they can go over 17% once we get through this. And -- but on the other hand there, we think that overall, 12% now, maybe a little better than that next quarter. And then going forward next year, we should be able to improve our margins consistently.

[Operator:]

We'll go to the line of Robert Kirkpatrick with Cardinal Capital.

[Robert Benjamin Kirkpatrick:]

First of all, Robert, thank you for re-signing up for another few years. I noticed you filed your contract this morning.

[Robert Mehrabian:]

Thanks, Rob, I don't know what to say to that.

[Robert Benjamin Kirkpatrick:]

Well, you could give us a little bit more color then on the Boeing contract that you announced the other day in the avionics side.

[Robert Mehrabian:]

Yes, Rob, on the Boeing contract, historically, what we've done is we have supplied data acquisition systems and Wireless GroundLink products to our customers as a customer purchased product. Now what's happening -- and for -- in the Boeing part. For Airbus, we historically supplied it through Airbus. But what this new contract does for us is it kind of strengthens our position with our major customer, Boeing, especially in 737 and 747. In those markets, we may enjoy 70% market shares today in the products we provide, that will go up to 100%. And in the out years, next year, with probably more R&D for the -- introducing the new products. But in the out years, that might help add another $50 million of revenue to our controls business, which is about a $120 million business and very profitable. More importantly, it cements our position with both of our major customers now, both Boeing and Airbus. And it complements what we are already do in our Wireless GroundLink, where we have over 5,000 installed units in various commercial aircraft. So it's -- we're very excited about this opportunity to be a sole source over the long term.

[Robert Benjamin Kirkpatrick:]

Great. And then back on the restructuring, to follow on to the questions that were asked earlier, what made you take -- it seems as though you took incremental steps that maybe hadn't been anticipated 6 months ago or something like that. What was it that made you decide to take those incremental restructuring steps?

[Robert Mehrabian:]

Well, Rob, what really happens is that restructuring, as you know, is disruptive to a business enterprise because you have unsettled employees, you have -- you want to do your consolidations rapidly. We took a hard look at our businesses after Q -- the first half of the year. We said, "Look, we've got to do what we have to do in Q3 and a little bit in Q4 to do all of this and put it behind us, so we go into 2014 with a much lower cost structure." So in Q3, we actually just accelerated it. The big environmental charge that we took, that really was not planned. It just happened. That was -- the facility was vacated and the soil was examined. Our consultants estimated the cost of excavation and cleanup. And once that happened, well, we obviously are obligated to take the charge. But we also accelerated our drop -- reduction in force. We took about $5.3 million in charges in reduction in force in Q3. We'll probably take $2.4 million more. So for the year, 2013, we should approach about $9.4 million, $9.5 million. And I like to put that drop behind us, so that as we move into 2014, we kind of have our business disruptions behind us and we can focus on growing our businesses.

[Operator:]

[Operator Instructions] We'll move on to the line of Chris Quilty with Raymond James.

[Chris Quilty:]

Robert, I wanted to follow up with 1 item from earlier in your speech. You indicated that the international business, which I think has been an area of focus growth, was I think 65% -- sorry, I got those numbers wrong, the percentage growth did not match with the percent of the profit contribution, which implied that you're seeing lower margins in your international sales. And is that due simply to the mix of products or are there other issues that you need to address with some of the international sales?

[Robert Mehrabian:]

Let me go back. First, what I said before, and I think you were on, right on, between our international sales and our domestic commercial sales, we were up significantly. And in our international sales, we were up about 14% year-over-year. International sales in 2000 -- if you went back a few years, they were in the 20% range. Last year, they went up to 39%. And in Q3, they're about 45% of our total. Actually, they're high-margin sales because most of it is focused on our marine and environmental and aviation, which is the controls that I just mentioned. So overall, international sales, I would say, are higher margins. We were a little worried awhile back, for example, in our environmental product sales in China because of the domestic content requirement. And interestingly enough, in the air quality monitoring and water quality monitoring, they have kind of reversed their direction and are seeking much higher precision instruments, which serves us so very well. So I think overall, we're bullish about our international businesses.

[Chris Quilty:]

Got you. I think you also mentioned that with regard to the long-term operating margin trend, you're seeking to improve margins consistently. I assume that's sort of the standard 100 to 200 basis point per year improvement that you've been delivering historically.

[Robert Mehrabian:]

I think, Mark -- Chris, you know me. If I went there, I'd be kind of getting outside of my comfort zone. I would say 50 to 100 basis points a year is what I'm looking for. We're starting our operations reviews in about 15, 20 minutes with all of our businesses here. So I'm going to urge them to go as high as you said. But between 50 and 100 would be where I would say we are.

[Chris Quilty:]

Okay. And I know, generally speaking, the operations and maintenance budget isn't as big of an issue for you with regard to the overall defense spending. Nonetheless, do you expect with sequestration and the government shutdown, you might see some kind of an impact on fourth quarter? And perhaps could you quantify overall what sort of an impact sequestration and shutdown might have had on your '13 results in Aerospace, Defense?

[Robert Mehrabian:]

Yes, I would say, overall, Chris, if you look at our government businesses, we -- throughout the year for 2013, I'm going to say, it's going to be down about 11%. It was more down in third quarter. It was down more like 14%, but it will moderate out to about 11% for the year. I think in the fourth quarter, our revenues are going to improve over the third quarter in general for a variety of reasons. We are -- but then I also -- look, I have to tell you, in the long term, I am not comfortable with our government procurement policies. And that's why starting several years ago, we kind of switched tactics and started very aggressively moving into industrial growth markets because you well know the current administration is emphasizing areas in government spending that we are not participating in.

[Chris Quilty:]

Understand. Also with the Boeing announcement, if I recall, historically, that was always buyer-furnished equipment, not an OEM sale. When did that transition happen where you're selling directly to Boeing now?

[Robert Mehrabian:]

Historically, you're exactly right. We were selling to Airbus directly, but not Boeing. This is a brand new development for us. What is more important to us is that it moves us from where we owned most of the market in that domain to 100% of the market, we own those aircraft, which is very attractive for us. So this is very new with Boeing. Historically, we have done a little Boeing for a niche but primarily through the customers. And we still have our Wireless GroundLink, which you are very familiar with, Chris. That's still furnished to the buyers at last right now. And as I said, we have about 5,000 of those installed.

[Chris Quilty:]

Okay, and given there's been some pretty steady long-term growth in the aviation and avionics markets, is that an area where you might look to make some more investments? And specifically, when you look at the next-gen $40 billion investment by the FAA in the industry, is that going to drive growth for your business?

[Robert Mehrabian:]

It's a heavily consolidated market, as you well know. But I think where we are making an investment is in your favorite area. Not exactly satellite imaging because that's so expensive, but we are going to make investments in the international space-based imaging, which we talked about before. You may not consider that avionics and it's probably not, but it is looking down from above, and we think that's probably where we'll make most of our investments because the other areas are fairly consolidated.

[Chris Quilty:]

Okay. And final question on that last point, interesting program there with the space-based sensor. But is that a one-off or are there follow-on opportunities that you see in that same domain?

[Robert Mehrabian:]

First, the platform that we're putting on, what we're building right now, which we'll deliver in '14 and fly in '15, it's home for 4 instruments. And we've announced one of them, which is with a German aerospace, which is DLR. A second one, which is a larger instrument, it's an instrument which are hyperspectral instrument. That we will be developing in collaboration hopefully with NASA. And we have room for 2 other instruments, there are potential customers being lined up for that. But more importantly, I think there's opportunity, Chris, for us to put other pointing platforms on the space station as we go forward. So it's not one-off. And frankly, it's a much more attractive proposition than trying to fund a satellite, put it up and then get the data down and fund all of that cycle. It's a much more financially attractive proposition, especially with our capabilities. We already have so many instruments, what you need further than the visible domain in space. So we feel comfortable that this is going to be a good growing business for us.

[Operator:]

We'll go back to the line of Michael Ciarmoli with KeyBanc.

[Michael F. Ciarmoli:]

Just a follow-up on tax. You mentioned for the full year, you'd have a 28.3% rate before discrete items. Should we expect any tax items in the fourth quarter though? And then can you give us a sense of what the tax rate for '14 might look like?

[Robert Mehrabian:]

I think the 28.3% for our base tax rate is a good number. I don't know what '14 would look like, but it would be somewhere between that and maybe 30%, 31%. As our job, foreign production and foreign manufacturing increases, especially in Canada and U.K. and some in Europe, our tax rates have been going down and we are fortunate in that regard. But I think 28.3% is a good number for Q4.

[Operator:]

We'll go to the line of Steve Levenson with Stifel.

[Stephen E. Levenson:]

Just one more follow-up on the Boeing contract. Is that a result at all of partnering for success? And is there any way you think that might further expand?

[Robert Mehrabian:]

Well, what it does is, Steve, it consolidates our position. Even though we had the majority of that market through our customers, which were the airlines, you always get competition. By going directly and being able to go to 100%, that helps us in that area quite a bit. And now, frankly, it helps Boeing improve their margins. It's a cost-saving vehicle for them. But it also allows us to put -- to upgrade our systems, both for the data acquisition system as well as for the, basically, the data storage system. And I think it's a good thing for us because it kind of firms the market for us for the next 10 to 12 years.

[Stephen E. Levenson:]

And do you think that helps with other upgrades to buyer-furnished equipment where somebody may not be using your system now but may replace what's onboard with your system to make it consistent?

[Robert Mehrabian:]

Yes. I think going forward, that's exactly what we're hoping. I will add that they just -- we're adding content to the network file server. And I will also add that one of the biggest market drivers that we enjoy there is our Wireless GroundLink, which obviously takes data from these devices and downloads to the operating center of the airline. And that kind of -- harmonizing that with these 2 devices is an advantage that we'll enjoy going forward.

[Operator:]

I see no additional questions in queue at this time.

[Robert Mehrabian:]

Thank you, operator. Appreciate your participation. I will now ask Jason to conclude our conference call. Jason?

[Jason VanWees:]

Thanks, Robert. And again, thanks, everyone, for joining us this morning. If you do have follow-up questions, please feel free to call me at the number on the earnings release. And again, all our earnings releases are available on our website, teledyne.com. Operator, if you can conclude the conference call and give the replay information, we'd appreciate it. Thank you.

[Operator:]

Ladies and gentlemen, this conference will be available for replay after 10