Teledyne Technologies Inc. Q3 2009 Earnings Call Transcript

Oct.22.09 | About: Teledyne Technologies (TDY)

Teledyne Technologies Inc. (NYSE:TDY)

Q3 2009 Earnings Call

October 22, 2009 11:00 am ET

Executives

Jason VanWees – Vice President, Corporate Development and Investor Relations

Robert Mehrabian – Chairman, President and Chief Executive Officer

Dale A. Schnittjer – Senior Vice President and Chief Financial Officer

John Kuelbs – Executive Vice President and General Counsel and Secretary

Analysts

Michael Lewis – BB&T Capital Markets

Mark Jordan – Noble Financial Group

Robert Kirkpatrick – Cardinal Capital

Stephen Levenson – Stifel Nicolaus & Co.

Chris Quilty – Raymond James

Margo Murtaugh – Snyder Capital

Howard Rubel – Jefferies & Co

Operator

Welcome to the Teledyne Technologies third quarter earnings conference call. (Operator Instructions). I'd now like to turn the conference over to your host, Mr. Jason VanWees. Please go ahead.

Jason VanWees

Thank you. This is Jason VanWees, Vice President, Corporate Development and Investor Relations at Teledyne. I would like to welcome everyone to Teledyne Technologies third quarter 2009 earnings release conference call.

We released our earnings earlier this morning.

Joining us today are Teledyne Technologies' Chairman, President and CEO, Robert Mehrabian, Senior Vice President and CFO Dale Schnittjer and Executive Vice President and General Counsel and Secretary John Kuelbs.

After remarks by Robert and Dale we will ask for your questions. However, before we get started our attorneys have reminded me to tell everyone that all forward-looking statements made this morning are subject to various assumptions, risks and caveats as noted in the earnings release and our periodic SEC filings and actual results may differ materially.

In order to avoid potential selective disclosures this call is being simultaneously Webcast and a replay both via Webcast and dial-in will be available for about one month.

Here's Robert.

Robert Mehrabian

Thank you, Jason, and good morning. Before commenting on the specific results of our individual businesses I have some general observations about our performance and our markets. Like most other companies that are partially leveraged to the industrial economy, our revenue declined in the third quarter.

It should be noted though our sales in the third quarter of 2008 were at all time high prior to the onslaught of the credit crisis and the subsequent recession which caused significant changes in demand in some of our commercial markets.

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

Given the performance to date and our current outlook, we expect total 2009 revenues to decline approximately 7% relative to 2008. On a full year basis the majority of our businesses are expected to have generally flat revenues compared to 2008. However, a portion of our businesses which represent approximately 30% of our sales are expected to decline over 20% collectively.

Specifically sales in our aerospace engines and component segments are expected to decline over 30%, instrumentation used in oil exploration and environmental monitoring almost 15% and other commercial electronics about 20%. The latter is partly due to the fact that we've chosen to exit certain commoditized commercial markets.

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

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

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

First, defense electronics, which represents approximately 45% of the segment; second, electronic instruments, which similarly represents another 45% of the segments; and third avionics and other commercial electronics which is now only 10% the segment.

In the third quarter of 2009 sales of defense electronics decreased approximately 1% compared to 2008. Today approximately half of our revenue in this market comes from sales of microwave devices and advanced interconnect product. Despite a cautious long-term view on defense spending we continue to believe that sales of these products will be stable.

We expect continued demand in the electronics warfare market and we've developed a number of new products for the radar and military communication markets such as radar soft systems and data links for UAVs.

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

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

Teledyne marine instrumentation businesses currently represent about [$350,000] million or roughly 20% of the company's total revenue. Oil and gas exploration represents a smaller piece of this, roughly about 4% and oil production represents about 6%.

The balance and the largest portion of our marine sales are derived from oceanographic research, military, hydrographic surveys and other industrial markets. The overall decline in marine instrumentation sales was due to a 50% year-over-year reduction in sales of geophysical sensors to the seismic oil exploration market.

While we expect oil exploration sales to increase in the fourth quarter relative to our third quarter, oil exploration related sales are nevertheless expected to decline approximately 12% year-over-year. Finally, in our avionics and other commercial electronics sales in this business is collectively decreased slightly over 22% compared to last year, primarily due to decline in sales of avionics and other commercial electronics comported such as relays for electronic test equipment.

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

In the aerospace engines and components segment sales decreased approximately 34% compared to last year. Year-over-year sales of OEM engines declined approximately 70% while aftermarket parts and services declined only 15%.

At the moment we don't expect a significant increase in sales of OEM engines in the rest of 2009. On the other hand while the aftermarket was weak in the third quarter we've been taking aggressive steps to capture market shares and aftermarket sales increased sequentially in both the second and the third quarter of 2009. During the quarter we reported operating profit of $1.2 million compared to $1.5 million for last year.

Finally, in our energy and power systems sales in the third quarter decreased about 6% as a result of lower sales of commercial hydrogen generators and aviation batteries, partly offset by increased sales of power systems for government applications.

Third quarter operating profit increased 4.5% and margin increased 178 basis points. To conclude, as we've noted in our earlier calls we expect headwinds in 2010 relating to manufacturing of gas centrifuge service modules as well as some of our lower margin missile defense engineering services.

In addition, at this time we can't predict the timing of meaningful improvements in some of our short cycle commercial markets; however, despite the challenges that we and others face in the current environment our balance sheet is at the strongest level in over a year, our pension is almost 90% funded, with recorded record earnings per share and we reported record cash flow.

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

I will now turn the call over to Dale Schnittjer.

Dale A. Schnittjer

Thank you, Robert and good morning. I will first discuss some additional financials for the quarter not covered by Robert. Then I will discuss our 2009 outlook. On cash flow, in the third quarter cash provided from operating activities was $46.9 million compared with cash provided from operating activities of $51.8 million for the same period of 2008.

The lower operating cash flow in 2009 was primarily due to greater pre-tax pension contributions partially offset by the impact of higher net income and lower aircraft product defense and settlement payments.

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

Free cash flow for the third quarter was $37.6 million compared with $41.9 million for the same period of 2008. Adjusting for pension contributions net of taxes free cash flow was $60.1 million in the quarter.

For the first nine months of 2009 free cash flow, excluding net pension contributions, was $119.4 million. Capital expenditures were $9.3 million in the third quarter compared to $9.9 million for the same period of 2008. Depreciation and amortization expense was $10.2 million in the quarter compared with $12.6 million last year.

For the full year of 2009 we expect capital expenditures of approximately $35 million to $40 million and depreciation and amortization expense of approximately $44 million. We ended the quarter with $292 million of net debt, the lowest level since September of 2008.

Our balance sheet remains strong with a net debt-to-capital ratio of 33.4%. Our credit facility has $590 million of bank commitments and does not expire until July of 2011. Moving to pension, in the third quarter of 2009 gross pension expense was $5.7 million compared with gross pension expense of $2.4 million in the same period of 2008.

Net pension expense after recovery of allowable costs pursuant to government costs accounting standards was $2.6 million in the third quarter of 2009 compared with zero dollars of net pension expense in the third quarter of 2008.

For the full year 2009 net pension expense is expected to be $10.1 million compared to $200,000 of net pension income in 2008. The increase in pension expense is largely due to the amortization of market loss as experienced in 2008. Next, on stock option compensation expense, in the third quarter of 2009, stock option compensation expense was $1.3 million compared with $1.9 million in the third quarter of 2008.

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

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

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

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

Robert Mehrabian

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Michael Lewis – BB&T Capital Markets.

Michael Lewis – BB&T Capital Markets

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

Robert Mehrabian

Right now where we stand is we have reduced our workforce by 9.5%. We probably can take more cost out in a number of our businesses. On the other hand, I think in some of our businesses, where like in our engineered services businesses, the reductions have been commensurate with reductions in programs.

So if those programs start coming back we will increase in numbers there, but on the other hand in our fixed cost structure, our intention is to maintain as long as we can even when the markets return. So I think the answer is we could probably take more cost out. At this time we're studying that, depends on what the 2010 revenues look like. But we can take more out.

Michael Lewis – BB&T Capital Markets

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

Robert Mehrabian

No, I think, Michael, we can get them back. The job market out there as you know is very weak and I think we can get them back and at least when we can afford to get them back. It's unfortunate, it's just totally unfortunate.

It's not just us, it's the unemployment picture across the country is just not good. I think it was yesterday or the day before, 23 states indicated higher unemployment last month than they had previously. So I think there's the available levered market should be there when we need it.

Michael Lewis – BB&T Capital Markets

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

Robert Mehrabian

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

Operator

Your next question comes from the line of Mark Jordan – Noble Financial.

Mark Jordan – Noble Financial Group

A couple of questions around pension and debt reduction, it looks like you paid made pension contributions of $106.4 million for the first nine months. Could you talk about your strategy for pension contributions, voluntary pension contributions as opposed to debt reduction? Obviously you're very heavy on the contributions side.

What impact in 2010 will this $100 plus million in contributions year-to-date make in terms of reduced pension expense? And finally could you size what that remaining 10% unfunded statutory liability is in terms of absolute dollars?

Robert Mehrabian

Let me take a part of it then and hand the latter part to Dale. First I must note that over the last 18 months that the $170 million about – contributions have not been just this year but have been over the last 18 months – and so I think as we said, we're now 90% funded. What we've decided to do going forward, Mark, is even if we don't have to make a pension contribution, in order to stabilize our pension, we've decided on a go-forward basis to make equivalent contributions to the withdrawals that are being made in terms of paying for our retirees.

And that is approximately $35 million to $37 million a year. So we think on a going-forward basis, if we can do that then we even if we don't need to, I think it's a prudent thing to do in the long term. Just balance the outlays to what we can to the contribution.

Now going back to the 10% magnitude of what that 10% PBO shortfall is, I'll turn it to Dale.

Dale A. Schnittjer

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

Mark Jordan – Noble Financial Group

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

Dale A. Schnittjer

Well if the stock market you alluded to the fact that there are three things that really affect the pension contribution. One is the assets at the end of the year, another one is the rate of return that we project for the next year, and the third item is the discount rate and currently our outlook well, our 2009 assumptions are 8.25% for the rate of return and 6.25% for the discount rate.

And the discount rate is driven by or mirrors the AA corporate bonds and AA corporate bonds are currently 50 basis points below this 6.25% so if we had – if we look at a reduction in the discount rate we might see a little bit of improvement in 2009, but that's probably a nickel or less. I meant 2010.

Mark Jordan – Noble Financial Group

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

Dale A. Schnittjer

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

Mark Jordan – Noble Financial Group

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

Dale A. Schnittjer

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

Mark Jordan – Noble Financial Group

Okay, so this is really all true ups from out of year type of events, so clearly one time in nature.

Dale A. Schnittjer

That's correct.

Robert Mehrabian

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

Operator

Your next question comes from the line of Robert Kirkpatrick – Cardinal Capital.

Robert Kirkpatrick – Cardinal Capital

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

Robert Mehrabian

One for example is the semiconductor market. And since March, the book-to-bill ratios in that have been improving and in August the estimate is that they just went over one, but I must note that if you – even with that improvement if you put year-over-year August comparisons our 2009 sales are still 30 plus percent lower than 2008. So we're not seeing any V here, what we're seeing is the trough that's slowly turning positive. That is one.

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

Finally, the other thing that's happening there that's to our favor is that people are trying to do a lot more processing on the ocean floor rather than pumping oil to the surface and, for example, separating oil and water. And that again favors us.

And lastly in the oil exploration market, the technology that we're using for our – while the predictions are that exploration will go down, we're kind of holding our own because most of the technology that we use for our major customers is less than two years old and the streamers give the best results out there. So we look at market trend and then we look at whether we have advantages in the products that we are offering.

Robert Kirkpatrick – Cardinal Capital

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

Robert Mehrabian

No.

Robert Kirkpatrick – Cardinal Capital

Great, thank you so much.

Robert Mehrabian

Not at this time.

Operator

Your next question comes from the line of Steve Levenson – Stifel Nicolaus & Co.

Stephen Levenson – Stifel Nicolaus & Co.

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

Robert Mehrabian

Yes, if we can find it. I was trying to answer Michael's question from the perspective that when we say we broadened our net, which we have, it's not that we're going to go way outside our field of expertise; we're looking at things that may be larger or smaller.

Our focus has always of course been to make our businesses stronger, but we would not be shy if we were to find something larger that we can bring both fit to what we do as well as bring some of our capabilities in operation management.

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

Stephen Levenson – Stifel Nicolaus & Co.

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

Robert Mehrabian

Partly, yes, but you know when you use stock then you have to start thinking about that you're using – especially since our stock is not where it used to be, you're using more richer currency to buy it. So you have to offset that with synergies.

For example, if it's a public company you have to in addition to the operations improvement, you start thinking about how much of the corporate expenses you can take out and so on. But it's a more expensive currency this stock, as you well know.

Stephen Levenson – Stifel Nicolaus & Co.

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

Robert Mehrabian

Well, we've already begun some early discussions. We probably would begin discussions some time in 2010 with some urgency because we certainly don't want to wait until the end. Now if we don't buy anything obviously our debt's going to be very low. On the other hand we need our line of credit.

Right now our interest rates are very low. It's LIBOR plus 75 at the bottom to 125 at the top of the grid. So we're paying 1%, 1.5% right now. We expect that that will go up certainly.

Stephen Levenson – Stifel Nicolaus & Co.

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

Robert Mehrabian

We think – in general, we think that part of our defense, electronics that deals with microwave and sub systems specialty, that's a good area. And the second area that we're still high on is the oil production, oil and gas production especially in deeper waters where we have a distinct advantage.

For example, we probably have 90 plus percent of the optical interconnect market in that domain. And as people start going deeper in the ocean and start thinking about doing more processing on the ocean floor rather than pumping the oil up, that favors us. So those are two areas, Steve, that I would pick examples.

Another area might be in the underwater autonomous vehicles. At Teledyne Brown Engineering and Teledyne Web along with RTS and hydro, we were successful in getting this big glider contract from the Navy.

And we think that's a good area for us. We currently have, for example, a glider that's going across the Atlantic and it's 50 – 80% of the way across the Atlantic using lithium batteries. So we have a lot – we're gaining experience there. And we think that's another good area for us.

Operator

Your next question comes from the line of Chris Quilty – Raymond James.

Chris Quilty – Raymond James

So on the leading economic indicators you didn't mention the price of oil hitting a year high. Is that not causing an uptick in some of the energy exploration?

Robert Mehrabian

I think it will in the long term. Right now if you look at the projects that are happening – and I know you're talking about exploration. The production projects were started two, three, four years ago when oil was $40 a barrel, so those are okay.

The exploration side usually lags the price of oil by six to nine months. I think as the oil price goes up of course that's going to be helpful. On the other hand, you and I know that oil price going up is partially relative to the fact that the dollar's going down, right?

Chris Quilty – Raymond James

Yes.

Robert Mehrabian

And that in terms of real dollars it may not be going up as much. But having said that, we still are bullish about our oil exploration business, primarily because the technologies that our primary customer has are really advanced and superior to the competition and so our factory is operating fairly regularly in that domain.

Chris Quilty – Raymond James

Now, you mentioned you do feel good about the defense electronics market. When you look at either the FY10 defense budget or the redeployment of troops to Afghanistan, is there anything specifically that you like in the budget or certain programs that you think you're going to benefit from?

Robert Mehrabian

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

Chris Quilty – Raymond James

Otherwise, it wouldn't be you, Robert.

Robert Mehrabian

In terms of liking, we don't – yes, in Afghanistan obviously some of our communication, mobile communications products are going to be useful. Let me – but on the bigger picture, we have a negative impact from the F-22.

But on the flip side we have a very positive impact from the F-35 and if they make larger quantities of that that would more than offset the F-22. If you go to the EA18-G, that's favorable for electronic warfares and including travelling wave [tube].

If you look at some of the scaling back as you've written frequently on the JTRS, that's actually not bad for us because that means that the legacy system operates are going to be there in which we participate.

If you now flip to the other side of the budget, you look at what the administration has done to, primarily to GMD, ground-based [midcourse] defense, they've dropped over 50% of the funding from 2.5 their request to less than a billion, 2.1 billion to less than a billion.

And they're going to reduce missiles [fielded] from 34 to 30. Of course you know about Europe. And they've essentially also stretched out the campaign. That's going to have a negative effect on us. Today we enjoy about $130 million in total in missile defense in different areas. Some of it is SETA work of course.

We're expecting with the budget the way it is, we're expecting a 30% decline in that. So that could go from 130 to 90 for us. Now some of it is low margin stuff, especially in the SETA area, but that's a negative.

So if I were going to talk about a positive and a negative, I think our engineering systems – engineered systems business – is going to take a hit in the defense budget. On the defense electronics we see some upside and stability.

Chris Quilty – Raymond James

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

Robert Mehrabian

Yes. We do have the gas centrifuge, yes, and that was – that's right now we have revenues of over $30 million this year in that area. The way things are looking with the loan guarantee and kind of DOE even backing out of the small amount of R&D funding that they promised USEC, we're expecting a nine-month or so delay.

We think our revenues would go from maybe $36 million down to $6 million next year. That's unfortunate because as you well know, if you look across the world probably the two newest enrichment plants are in Iran.

Chris Quilty – Raymond James

Well, maybe we can do our work over there.

Robert Mehrabian

Well maybe.

Chris Quilty – Raymond James

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

Robert Mehrabian

Not so far, Chris. It's had the opposite effect, unfortunately. What's happened is that the municipalities who are under severe budget constraints are shifting some of the monies that they would spend in wastewater cleanup, for example, and projects and waiting for the stimulus money.

We haven't seen much of it. I guess if I searched really hard I could dig up maybe half a million dollars here or there, but we haven't seen any. There's supposed to be several billion dollars in wastewater projects, and it just hasn't materialized.

Chris Quilty – Raymond James

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

Robert Mehrabian

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

Operator

Your next question comes from the line of Margo Murtaugh – Snyder Capital.

Margo Murtaugh – Snyder Capital

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

Robert Mehrabian

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

Dale A. Schnittjer

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

Margo Murtaugh – Snyder Capital

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

Robert Mehrabian

About $75 million is in the Systems Engineering and Technical Assistance Program. About $30 million is in ground-based missile defense and there's about $23 in integrated testing of missile defense. But I have to say, all of what we do is in engineering services and modeling. But it's all of it is in the engineer system segment.

Margo Murtaugh – Snyder Capital

And is the margin on that like the margin for the segment or is it a little lower?

Robert Mehrabian

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

Operator

Your next question comes from Howard Rubel – Jefferies & Co.

Howard Rubel – Jefferies & Co.

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

Robert Mehrabian

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

The other area that is making some headway in is at Aberdeen Proving Ground. We've captured a lot of good programs there recently and we have bids out both in the [cambio] area as well as in the communication area.

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

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

Howard Rubel – Jefferies & Co.

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

Robert Mehrabian

I think right now we have issues there in terms of both the market and some recalls and God knows we may always have these recall issues and high insurance. What we'd like to do there is keep that market and not lose money. Maybe make a little money for a while until the markets return.

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

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

Howard Rubel – Jefferies & Co.

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

Robert Mehrabian

There you go.

Operator

Your next question is a follow-up from Mark Jordan – Noble Financial Group.

Mark Jordan – Noble Financial Group

Just following up on the last question, relative to continental, we've see in some of the local news articles that through the balance of this year at least you're going to short work weeks furloughing the weeks around the holidays. At least on the news articles they're saying you're trying to keep the workforce together with reduced work time.

Is this basically a strategy, as you had just mentioned, to keep that business marginally profitable here during the seasonably weaker fourth and first quarters, and therefore you just cut the costs to keep everything in the black?

Robert Mehrabian

What we're trying to do is we're trying to, Mark, keep as much of our, and by the way, this is not unique to that workforce across our businesses, especially our commercial electronic businesses. We are doing that all over the place, going to shorter work weeks, shutting down plants for whole week at a time, taking longer holidays, mainly to keep as many of our people employed as we can because frankly we don't have overseas plants. We just have some small plants in the U.K.

All of our workforce, almost all of it, 8,000 or so is in this country. And if we can keep our people working and have some of the others take some voluntary shorter weeks, etc, I think that's healthy both for our company and for our country. So we're doing that not just in aerospace engines but across all of our commercial businesses.

Mark Jordan – Noble Financial Group

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

Robert Mehrabian

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

Operator

Your last question comes from Michael Lewis – BB&T Capital Markets.

Michael Lewis – BB&T Capital Markets

Robert, you talked a little bit about some unique capabilities that you had in the integrated engineering portion of your missile defense work. Can you kind of expand on that and give us some of your thoughts there with what exactly these capabilities are?

Robert Mehrabian

Why don't I do this? First, I can tell you what they are a little bit. Some of it has to do with being able to do architectures that are service oriented. Some of it has to do with modeling and being able to dissimilate hardware in the loop work which is really being able to model with hardware without using the hardware.

We're pretty good at those kinds of things. We've invested in software development that's also been helpful. But if you're interested in going more in depth in that, I'll be happy to have our guys give you a short briefing on that.

Michael Lewis – BB&T Capital Markets

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

Dale Schnittjer

We are currently looking in the fourth quarter at about 39% for the tax rate.

Robert Mehrabian

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

Michael Lewis – BB&T Capital Markets

Yes, I'd rather model it high than be conservative.

Robert Mehrabian

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

Dale Schnittjer

And the backlog is about $830 million.

Robert Mehrabian

I want to thank you and I'll let Jason conclude our conference call.

Jason VanWees

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

Operator

Ladies and gentlemen, this conference will be made available for replay after 10 o'clock am today until November 22nd at midnight. You may access AT&T Executive Playback Service at anytime by dialing 1-800-475-6701 entering the access code 109276. International participants dial 1-320-365-3844 and again, that access code is 109276.

And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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