Teledyne re groups, sUAS sensors part of their future.

With U.S. defense spending likely to drop, Thousand Oaks-based Teledyne Technologies, a $1.6 billion military-industrial conglomerate, is rearranging itself to bolster its commercial camera sensor lines and shift toward the defense spending that’s farthest from the chopping block.

Just before the end of 2010, Teledyne sold its Continental Motors division, a maker of piston engines for small commercial aircraft, to a Chinese firm for $186 million in cash. A few days later, it bought Dalsa Corp., a Canadian firm that made the sensors in the satellite cameras used to snap Google Earth’s photos, in a deal valued at $341.1 million.

“We do have a long-term concern about the stability of all government spending,” said Jason VanWees, Teledyne’s vice president of corporate development and investor relations. “We are today marginally more attracted to the outlook, at least for the next few years, of commercial markets.”

In the first nine months of 2010, Teledyne reported $1.3 billion in net sales and $83.9 million in net income. Taken with several other recent transactions — including the June acquisition of Camarillo-based Optimum Optical Systems for $5.7 million — the firm’s latest moves appear to be positioning it to compete for government contracts on sensors used in unmanned drones and satellites, programs that are less likely to suffer in coming years. And it will now have a range of sensors for commercial applications, such as systems that automatically scan products on an assembly line for defects. With Continental Motors no longer in the mix, Teledyne will be a purely electronics and engineering firm.

“I think they’re correctly looking at the handwriting on the wall for military and defense spending to drop significantly for a number of years,” said Rick Whittington, principal at JSA Research. “They’re looking at reconstituting the company to focus on commercial and industrial.”

Here’s a closer look at each transaction:

Dalsa Corp.

Ever since the Rockwell Scientific acquisition that brought Teledyne to Thousand Oaks in 2006, the firm has been building up its infrared sensor offerings to defense and scientific customers in the federal government. Through a series of smaller buys, it has snapped up the electronics technology to rotate, pan and zoom sensors and stabilize them on wind-tossed drones and quivering satellites.

But Teledyne has no offerings in the visible light spectrum, which is where a lot of the closer-to-earth business is. Dalsa does, and “is a new foothold, if you will, in visible and commercial,” VanWees said.

While Dalsa’s sensors are in a few high-profile applications like those Google Earth photos, the company’s bread and butter is machine vision — the cameras that keep watch over assembly lines and other industrial processes and scan for problems or defects. VanWees said Teledyne will investigate whether its infrared sensors can be integrated into those roles, and whether Dalsa’s visible light sensors could sit alongside its infrared ones in military and space applications.

“One of our products is a shortwave infrared camera, and we think that has applications for machine vision,” VanWees said. “And almost everywhere there’s an infrared sensor [on astronomy equipment such as the Hubble Space Telescope], there’s a visible sensor, and we don’t make those.”

Stephen Levenson, managing director of equity research at Stifel Nicolaus & Co., which makes a market in Teledyne stock, said Dalsa’s addition to the Teledyne sensor lineup makes the firm a “one-stop shop,” which could mean offering better bids on complete sensor packages.

“They’re certainly on their way to the full compliment of product offerings,” he said. “They’re in higher-growth, higher-margin businesses than the ones they just divested.”

That’s important because it’s almost universally agreed that defense spending is going down. The two wars the U.S. fought for most of the past decade are drawing down. And Whittington speculates that President Barack Obama might demand defense spending cuts in exchange for downsizing domestic programs during horse-trading with a new budget-minded Republican majority in the House.

“Americans feel pretty safe right now, and they want their economy to be strong,” Whittington said. “That means defense cuts.”

Defense is still important to Teledyne. Defense electronics make up almost half its electronics segment, which itself counts for more than 70 percent of the company’s revenue. The good news to Teledyne shareholders is that many of those components go into intelligence, surveillance or reconnaissance programs — “which is one area of the budget that continues to grow,” said Levenson.

“When you think about ultralight [unmanned aerial vehicles] getting tossed around in the wind, being able to stabilize the image so you can watch as though it was on a pole mounted in the ground — that’s a pretty good trick,” Levenson said. “It takes a very high level of engineering.”

Continental Motors

Mobile, Ala.-based Continental Motors was a division of Teledyne that makes piston-based engines for general aviation aircraft and employs about 400 people. The buyer is AVIC International, a Beijing company that says it wants to take advantage of China’s nascent market for small planes.

The business had been hit hard by the U.S. economic downturn but was starting to recover. That probably made it a good time to sell to the Chinese, Levenson said. Continental’s engines were already being exported to China, where they go into Cessna Skycatcher planes made there.

“It makes some sense that since the Chinese are building the plane, they’d want to have the engine technology. It’s been kind of a slow-growth business, and Teledyne’s MO is that when things start to get commodity-like, they exit,” he said.

Driving up the price was the fact that general aviation is expected to boom in China, where there are now just 900 planes in operation compared with 200,000 in the U.S., according to Teledyne.

Teledyne has weathered the recession fairly well, bringing profits back up after cutting hundreds of jobs. But its shares remain in the mid-$40 range, a long way from their above-$60 peak in 2008.

According to Thomson/First Call data, four brokers following the stock are giving a mean price target of $52.50. Half of six analysts rate the stock a hold, with the remainder split between a buy and strong buy.

“I like the stock,” said Whittington, who does not own shares. “It’s been a mediocre performer, but it should do better in the period ahead here.”