Teledyne Technologies Incorporated
Q4 2008 Earnings Call Transcript

Published: 22 Jan 2009

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Teledyne Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (operator instructions). And 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, operator. Good morning everyone. This is Jason VanWees, Vice President, Corporate Development and Investor Relations at Teledyne Technologies. I would like to welcome everyone to Teledyne Technologies fourth quarter and full year 2008 earnings release conference call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne Technologies' Chairman, President and CEO, Robert Mehrabian; Senior Vice President and CFO, Dale Schnittjer; and Executive Vice President, General Counsel and Secretary, John Kuelbs. After remarks by Robert and Dale, 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 reply, both via webcast and dial-in will be available for about one month. Here is Robert.

[Robert Mehrabian:]

Thank you, Jason and good morning everyone. Before commenting on the specific results of the quarter, I'd like to make some introductory comments. We were very pleased to end 2008 with a strong quarter. Our positive results for the quarter were achieved despite the global economic turndown which has begun to impact some of our commercial businesses. In a few moments, I'll discuss some of the actions we're taking to mitigate the effects of the current economy. However, I'd first like to comment on our achievements in the fourth quarter and the full year 2008. In the fourth quarter, sales increased 9.3% and earnings per share increased 15.1%. We also achieved record operating margin of 15.1% in our Electronics and Communication segment and record margin of 11% overall for the company. For the full year, sales increased 16.8% and earnings per share increased 23.2 and operating margin expense at 91 basis points to 10.9. Given our strong cash flow during the year, we were able to close nine Bolton (ph) acquisitions for $250 million and make a voluntary pension contribution of $50 million, and yet conclude 2008 with a net debt to cap level of 37%. As mentioned in the earnings release, orders and sales in some of our commercial markets, but primarily in general aviation declined substantially in the fourth quarter. We absorbed cost of about $1.2 million in the fourth quarter in our operating segment, for total reduction in force of approximately 210 people. We had already taken some action in the third quarter, which brings the total number of employees that were reduced to 235. Going forward, we will continue to monitor our cost structure and take appropriate actions as needed. In addition, as a perspective cost saving measure, we are delaying our 2009 stock option awards until at least mid-year. Regarding our pension, while none of our pension in 2008 was invested in private equity, a speculated hedge funds or residential mortgage-backed securities, we nonetheless suffered a significant year-over-year decline in assets, despite the 50 million voluntary pension contribution mentioned earlier. Primarily due to this decline in assets, we expect approximately $0.31 or SFAS 87 pension expense in 2009, versus less than $0.01 per share of pension income in 2008. Furthermore, we expect $0.03 less in tax benefits in 2009 for a total of $0.34 of earnings head winds independent of our operations. I am not pleased to forecast for 2009, our first contraction in earnings since the year 2001. However, I firmly believe that our balanced mix of governments and commercial businesses, which have strong positions in defensible niche markets, will allow us to successfully navigate the current worldwide economic recession. I will now elaborate on the operating performance of our business segment, followed by Dale Schnittjer, who will discuss in more detail our financial performance and comment on our outlook for the first quarter and the full year 2009. Fourth quarter sales in our Electronics and Communications segment increased 15.9% compared to last year, with organic growth of 1.8%. Segment operating profit increased 28.4% and segment operating margin increased to 147 basis points to a record level of 15.1%. Full year sales in our Electronics and Communications segment increased 19.1% compared to last year from approximately 1.07 billion to roughly 1.28 billion. Full year segment operating profits increased 27.8% from about a $143 million to $183 million. The segment operating margin increased almost a 100 basis points to 14.3%. Our electronics and communications businesses generate approximately 70% of Teledyne's total sales. In this segment, our business serves lie within three separate market categories. First, defense electronics, which represents approximately 40% of the segment. Second, electronic instrumentation, which now represent approximately 45% of the segment. And third, avionics and other commercial electronics which represent the remaining 15% of the segment. In the fourth quarter of 2008, sales of defense electronics increased 14.6% compared to fourth quarter of 2007. Defense electronic sales grew primarily from acquisitions of Storm Products and Judson Technologies in the first quarter and Filtronic PLC, U.K. based defense electronics businesses in the third quarter of 2008. Organic sales growth in defense electronics was about 1.4%. For the full year, sales of defense electronics increased 15% compared to last year, with organic growth of approximately 5%. Turning to our electronic instrumentation businesses, in the fourth quarter of 2008 year-over-year sales increased approximately 25% from 121.6 million to a $152.3 million. This was partially due to organic sales up 4.9% and acquisitions up in cost enterprise Storm Products and TSS International early in the year as well as Webb Research, Cormon later in the year. Organic growth in instrumentation was comprised approximately 16% in marine instrumentation combined with a 6.5% decline in sales of environmental monitoring and industrial instrumentation. For the full year, electronic instrumentation sales grew 32% with organic growth up 10.6%. Teledyne marine instrumentation businesses currently represent approximately $350 million of sales or roughly 18% of total sales were Teledyne. Currently, each of oil and gas production and oil and gas exploration represent approximately 30% of our marine sales or about a $100 million in each market. Over the next few quarters, we believe that our revenues related to subsea production will not be significantly impacted by the recent decline in the oil price. For example, our subsea equipment customers continued to have months of backlog and it is our understanding that many current large subsea projects coming on line were justified over the last several years at oil prices and on $40 per barrel. While current forecast for oil production continue to be positive for 2010 and 2011, we do have some concerns that certain higher risks deepwater infrastructure projects could be impacted in the long-term, if commodity prices remains low. Regarding the approximately $100 million of revenue related to oil exploration, we are forecasting a contraction in sales in 2009 of about 15 to 20%. Some of our customers are projecting lower capital expenditures as a result of lower commodity prices as well as greater costs in obtaining credits for the purchase of new exploration vessels. The remaining 40%, or $150 million of our marine sales are from oceanographic research, military, hydrographic surveys and other industrial markets. And we do not expect the reduction in oil prices to directly affect these end markets. Over the long-term, we continued to believe that our marine businesses are attractive because of three factors; first, following the current recession, greater demand for oil and gas especially the offshore projects will reduce dependence on Middle Eastern oil. Second, continued spending for strategically important subsidy defense programs will continue. And third, heightened environmental concerns will increase investment in oceanographic research and climatology. It's also worth noting that of this five businesses required in 2008 that participate in the marine markets, more than two-thirds of the sales of this businesses are from non-oil and gas related markets. Finally, for this segment I'll discuss our avionics and commercial electronics businesses. In the fourth quarter, sales of these businesses collectively decreased 6%. Primarily, due to decline in sales of commercial electronics manufacturing services were medical application. We have previously noted that this is an area that we are slowly exiting. For the full year 2008, sales of avionics and other electronics decreased only 2% also as a result of these electronic manufacturing services. This decrease was partially offset by 5.6% growth in our avionic businesses. Turning to our Engineered Systems segment; in the fourth quarter, revenue in this segment increased 9.3% organically compared to last year. The sales growth primarily resulted from increased sales related to gas centrifuge, service modules used to help in rich uranium for using commercial nuclear power plants. As well as increased sales of systems engineering and technical assistance or see those services for environment customers. Segment operating profit increased 7%, while operating margin decreased slightly from 9.1 to 8.9%. Full year sales in our Engineering Systems segment increased a healthy 20.2% compared to last year, from $301.7 million to $362.7 million, and full year segment's operating profit increased 33.6% from $26.2 million to $35 million with operating margin of 9.6%, an increase of 97 basis points form last year. As we've mentioned previously, we are aware of only 16 other U.S. based companies that have the same nuclear manufacturing certification or stamp as Teledyne. Combining sales of nuclear hardware, in our Engineered Systems segment, with sales of hardware (ph) interconnect safely related valve testing services and other products within our electronics segment. Teledyne currently has approximately $65 million worth of annual sales for the commercial and government nuclear industries. Given our unique capabilities and an estimated addressable market of approximately $2 billion, we're pursing a number of initiative to expand our nuclear business over time. I'll now not discuss our Aerospace Engines and Components segments, which as a reminder not surely represent our aircraft piston engine business. Sales in this segment decreased approximately 26%. Year-over-year sales affect, their market parts and services declined about 15% in the fourth quarter. The decline was consistent with the declines in other economic cycles. For example, during the 2001 and 2002 recession, aftermarket sales declined about 20% compared to 12%. However, during the previous recession, sales of our engines to the OEM customers reported positive comps in each sequential year. During the fourth quarter of 2008, sales of new engines to OEM aircraft customers declined approximately 50%. This decline was the first material reduction in our OEM engine sales in nearly 20 years as sales of new aircrafts dramatically decreased due to availability of credits and reduced consumer discretionary spending. During the fourth quarter, we reduced to foreclosed in this segment by approximately 14% and we have continued monitored this market very closely. During the quarter we reported an operating loss of $2.8 million, primarily as a result of the large decrease in sales. Full year sales in this segment decreased approximately 5% compared to last year, surely as a result of very weak sales in the fourth quarter. Operating profits for the year declined almost 57%. Finally, in our Energy and Power Systems segment, sales in the fourth quarter of 2008 decreased 8% compared to last year primarily due to lower sales of commercial hydrogen generators, partially offset by sales of military turbine engines. Fourth quarter operating profits remained flat at $3 million. Full year sales in this segment increased a healthy 23% compared to last year, due to increased deliveries of turbine engines and government power systems. Full year operating profit increased 62% approximately as a result of higher sales and operating margin include 279 basis points. In conclusion, we are very pleased with the results of this quarter as well as the full year. However, we're also cognizant of the rapid deterioration in the global economy that affects some of our end markets. Nevertheless, as I mentioned earlier risks to Teledyne are somewhat mitigated by a number of factors including first, our balanced mix of government and commercial businesses that produce highly engineered products which are not easily commoditized. Second, good visibility and a healthy backlog in many of our government businesses. And third, ample liquidity and a proven track record of continuously improving our operations and successfully integrating acquisitions. 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 and full year not covered by Robert. Then I will give an update on pension costs and discuss our 2009 outlook. In the fourth quarter cash provided from operating activities was $7.5 million compared with cash provided from operating activities of $43.3 million for the same period of 2007. The lower operating cash flow was primarily due to voluntary pension contributions of $30 million in the quarter, higher aircraft product defense installment payments of $18.2 million and increased working capital requirements, partially offset by higher net income, the contribution from recent acquisitions and lower income tax payments of $12.4 million. Free cash flow for the fourth quarter was a negative $6 million compared with $33.7 million of free cash flow for the same period of 2007. Capital expenditures were $13.5 million in the fourth quarter compared to $9.6 million for the same period of 2007. We ended the year with $312.8 million of net debt. Our balance sheet remains strong with a net debt-to-capital ratio of 36.7%. Our credit facility has $590 million of bank commitments and does not expire until July of 2011. As noted in our press release depreciation and amortization expense for the fourth quarter of 2008 was $10.9 million compared with $9.1 million in the fourth quarter of 2007. For the full year of 2008, free cash flow was $78.5 million. Excluding the $50 million of voluntary pension contribution in 2008, free cash flow for 2008 would have been similar to 2007. Full year 2008 capital expenditures were $41.9 million and total depreciation and amortization expense was $47.3 million. For reference, intangible asset amortization was $15.7 million in 2008, an increase of $9.3 million or $0.16 per share from the full year 2007. Moving to pension, in the fourth quarter of 2008, FAS 87 and FAS 158 pension expense was $2.4 million. This compares to FAS 87 and FAS 158 pension expense of $3 million in the same period of 2007. Pension expense allocated to contracts pursuant to cost accounting standards or CAS was $2.7 million in the fourth quarter of 2008 compared with $2.6 million in the fourth quarter of 2007. As Robert mentioned earlier, the value of our pension assets declined significantly in 2008. Primarily due to this decline in assets, we expect pension expense that of recovery of allowable pension costs under CAS of $18.3 million or $0.31 per share in 2009 versus $200,000 of income in 2008. For reference, 2009 expense is based upon an assumed rate of return of 8.25% and an assumed discount rate of 6.25%. On stock option compensation expense, in the fourth quarter of 2008 for the requirements of SFAS No. 123(NYSE

[Robert Mehrabian:]

Thank you Dale. We'd now like to take your questions. Operator, if you are ready to proceed with the questions and answers, please go ahead. Operator

[John Harmon:]

Hi, good morning.

[Robert Mehrabian:]

Good morning, John.

[John Harmon:]

A couple of questions, please. I guess first of all regarding your avionics business; you talked about how much it was down versus how much it is in typical recession. Do you think the business is bottomed yet or not... just not when do you think it could bottom?

[Robert Mehrabian:]

Yeah John, I guess that first, I am sure you meant our general aviation engine business, because we have a separate avionic business that is a little different. In the general aviation engine business, I am not sure what's going to happen. The set of economic conditions we're facing today are unprecedented, none of us have really faced such conditions previously that we are facing today. And our best estimate is that our OEM engines will stay around where they were in the fourth quarter; and our aftermarket engines and parts will be down about 20%, 25%. Having said that, as you know, we have also in our parts businesses, we have primarily two macro-type (ph) competitors that produce parts for our engine. One of those competitors, superiors, declared bankruptcy only very recently. And some of the pressure on some of our parts businesses from that source that this should come off in due course.

[John Harmon:]

Okay.

[Robert Mehrabian:]

You have another question, John?

[John Harmon:]

Yes, thank you. And similar type of question

[Robert Mehrabian:]

Well, we've been kind of getting out of that business over a period of time. We... at one time, we have almost $50 million, $60 million worth business there. That level is now... in the fourth quarter, it was down to about several million dollars, less than five. And some of that product that in micro-electronics will keep doing that, but some of the products that's in primarily for electronic manufacturing services, we're just sustaining a little bit of that to help our customers transition to new suppliers, but that's not an area of that we want to really be in.

[John Harmon:]

Thank you. And just finally one financial question, Dale

[Dale Schnittjer:]

Sure. The big drivers in the fourth quarter was related... the biggest driver was related to the pension contribution of $30 million and then we also had an increase in working capital requirements, which was another component of that and those are the two largest components, it was... we also had aircraft product liability payments of about $18 million, and then we had some tax credits associated with the additional pension payments. So, that's a big major component.

[John Harmon:]

That helps. Thank you very much.

[Robert Mehrabian:]

Thank you, John.

[Operator:]

And our next question comes from the line of Steve Levenson with Stifel Nicolaus. Please go ahead.

[Stephen Levenson:]

Thank you. Good morning.

[Robert Mehrabian:]

Good morning, Steve.

[Stephen Levenson:]

And forgive me, I've been on another call at the same time, I hope I am not asking duplicate question. But do you think recent acquisitions can offset the group clients in your instrumentation sales related to oil exploration?

[Robert Mehrabian:]

We... I think overall, most of the acquisitions that we made in that domain were relatively small. If you take the whole company has a whole, I think that may be true. I don't know if they will offset the oil exploration in and out themselves, but they should help.

[Stephen Levenson:]

Okay, thanks. Would you have to guess as to what price oil has to rise to for offshore exploration to pick up?

[Robert Mehrabian:]

I can't, but I'll tell you Steve, I didn't think the oil prices at $140 were sustainable. And I also don't think they are sustainable at 40. So I think there is going to be movement sooner or later to somewhere at the higher level. But I can't... I don't know how our customers calculate what that level should be. Part of it has to do of course with the availability of credit, because oil exploration customers are building both an equipment them with our new streamers and most of that is with borrowed capital, so there is a combination.

[Stephen Levenson:]

Okay, thank you. As far as the acquisition pipeline, are things looking better as pricing better and opportunities or do you think it will be similar to what it was in 2008?

[Robert Mehrabian:]

I think in 2009 things might... valuations of course are going to be coming down at least the way we see it right now. In 2008, we found some very attractive deals for us. And on the average, we... on the nine acquisitions that we made, on the average we paid about 8.5 times EBITDA, but as we previously said, once we get those acquisitions and we integrate them successfully, their earnings go up and EBITDA multiple that with that being paid in some future dates comes down to about 6.5. So hopefully we'll find things that would be attractive.

[Stephen Levenson:]

Thank you very much.

[Robert Mehrabian:]

Thank you, Steve. Operator

[Michael Lewis:]

Good morning.

[Robert Mehrabian:]

Good morning Mike.

[Michael Lewis:]

Okay. Robert, I was wondering just to help us kind of set some expectations here. If we look out for the full year 2009, and we look at what has been revised out here with regards to your expectations versus what consensus was, would you say that we should expect to see the top-line revenue growth in the low single-digit range right now based on what you know now in the market and the set that as the bottom and hopefully see some upward revisions going forward. How would we trying a laid on that?

[Robert Mehrabian:]

Yes Mike, let me start with the top-line, there is so much uncertainty out there that I... we never really have the guesses there, but probably to just the responsive to your question, it could be minus 5% to plus 5% reasonably flat at this. But that can change depending on the... that's my best estimate at this time, because the uncertainty right now is overwhelming. And in terms of the bottom-line, we've been here before, of course it's been a long time, we've had seven years of improved earnings quarter-over-quarter. I think it was 28 all time, including this fourth quarter. It's the first time that we are predicting earnings decline in seven years. And we've been here before, we will slowly work our way out of it as we have previously. The $0.08 a share per quarter that we're getting from pension, the headwind and then we got $0.03 of one-time tax benefit that we are not getting. So that's about $0.35, it's almost $0.09 a share. The $0.03 is really in the first quarter that we're getting hit. Then if you take everything else and put them aside. And you look at our piston engine business, in the fourth quarter of last year, we made about $3 million. In the fourth quarter of this year we lost 2.8 million. If you add those two together that's about $0.09. We think the first quarter is going to be a little worse may be. We know it's going to be a little worse. So if you take $0.12 on just piston engine over the year $0.12, $0.14, that's really the decrement we see. So you've got about $0.35 of pension, whereas nothing to do with our operating conditions. As we go forward, we look to see whether we should be making more pension contribution, we've got the one-time tax and we've got let's say $0.14, $0.15 of engine business maybe a little more. That's it, the rest of it we're going to deal with it.

[Michael Lewis:]

Okay, that's actually very helpful, Robert; thank you for that. And with that said, so it sounds like if we look at and isolate in on EC&C for example in electronics. The margin in the quarter was 15% and obviously very tough market. Now I would... do you recall from private quarters, you said that maybe it's 14% the sustainable LIBOR, are you going to stay with that 14% margin expectation in that segment once into this the larger segment it does contribute the most to EPS?

[Robert Mehrabian:]

Well, I think the margins might come down a little bit only partially, because we're taking some of the pension in the segment. So you are going to get about 100 basis points that has nothing to do with the operations, it's going to be a pension hit. The pension contribution that we take into segment, and if exploration doesn't go down... those are a very high margin business. If exploration doesn't down too much, we should hold the margin at least in the first quarter minus the pension. I would say it will go down to maybe 13, maybe a little bit low or top primarily because of this pension hit.

[Michael Lewis:]

Okay, that's very helpful. And than just one final question, I'll get out the way. Prior question for Dale

[Dale Schnittjer:]

We are not currently looking towards stock buyback. We are... as Robert mentioned earlier, we're probably looking at to pension more closely and the debt is approximately net debt is approximately $300 million regard to the line of $590 million. We'll try to keep that open for acquisitions and pension, and we generate $100 million plus of cash a year, so we are not too worried about at this time.

[Michael Lewis:]

Okay, thank you.

[Operator:]

And our next question comes from the line of Mark Jordan with Noble Financial. Please go ahead.

[Matthew Crews:]

Hello, yes gentlemen; this is Matthew Crews standing in for Mark. Just... most of my questions have been answered. One question is

[Robert Mehrabian:]

Yeah, we are right now... the contract is contributing about $35 million at quarter, maybe have a little uptick, but about... I am sorry... I had said quarter, I meant the year. Somewhere between 35 and 40 million for the year.

[Matthew Crews:]

For 2008?

[Robert Mehrabian:]

No, 2009.

[Matthew Crews:]

Okay. So that's baked into it. Okay, so that's the expectation for 2009, thank you. And one second question, I think it is pretty much been answered already, but in terms of outlook for 2009 and the seasonality, I am just trying to sounds like the first quarter is going to look a little bit more hit with the tax, the tax issue, and then you have a little bit of headwind in the back half. Is that going to mean little bit more about seasonally flat, flat versus previous year's, I think you had more of a trend to positive trend-line through the four quarters?

[Robert Mehrabian:]

Yes, you know Matthew, I think in the... our visibility at least to the piston engine businesses are not these good right now. So, we only are looking at the first quarter, things may deteriorate or they may stay the same or get better. I think right now we are looking at relatively flattish quarters going forward, maybe that be a slightly Q2, Q3, Q4 relatively flat with the Q1 at the high end of Q1 as you can see from our projections. But we are going to try very hard to improve as we go along. We will take whatever action we have to. I got to say even our earnings... if you adding the $0.35 that we are getting from pension and tax or $0.34 I should say. We are projecting and $3.4 to $3.14 in earnings next year, which is only margin will be down from this year considering all the problems worldwide economy. So right now, the answer is what we're projecting is a relatively flat here, but that might change.

[Matthew Crews:]

Great. Thank you very much.

[Robert Mehrabian:]

Thank you Mathew. Operator

[Robert Kirkpatrick:]

Good morning.

[Robert Mehrabian:]

Good morning Robert.

[Robert Kirkpatrick:]

Staying with the pension for a moment, could you walk us quickly what the map on the contributions would be? If you were to contribute another $50 million, what would be the incremental impact going forward on your pension expense?

[Dale Schnittjer:]

The incremental impact is basically the 8.25% return on $50 million, partially offset by the interest expense. And that's $0.05 plus, five to a little more.

[Robert Kirkpatrick:]

Okay. And would you ever considered contributing shares to the pension plan, which I believe your former parent chose to do in the fourth quarter in their pension plan?

[Dale Schnittjer:]

We have had some discussions, but we have not made a decision at this point in time.

[Robert Kirkpatrick:]

Any attraction of funding those shares would be what?

[Dale Schnittjer:]

Well, we think that our stock price currently is at a position where we would get some improvement in the coming quarters as we get through this current announcement of having a drop in our year-over-year earnings per share. So, we think that we would see some improvement in the stock price and it would probably outperform the rest of the equity market.

[Robert Kirkpatrick:]

Okay. And your guidance that you have for the year implies what for a free cash flow number for 2009?

[Dale Schnittjer:]

It's a little north of $100 million.

[Robert Kirkpatrick:]

Okay. And then finally, if Robert could maybe talk in a little more detail to the merger and acquisition environment in terms of deals that were able to be completed in Q4. Those they weren't, how sellers are adjusting to lower valuations and whether or not, as a result of the difficult economic times there are more opportunities arising. Thank you.

[Robert Mehrabian:]

Yeah, Rob there is... interestingly there is a value disconnect between seller's expectations and market's realities. I think there is a historicist look there it could kind of a delayed reaction. Frankly, last year we made nine acquisitions as I mentioned. And we spend about $250 million. There were couple of acquisitions that we competed for and the prices just got totally out of range... our range. And somebody else was willing to pay a higher price, they got it. And there was a couple that the expectations were so high compared to the market's realities that the sellers pulled the properties off the market. So, until the disconnect there and reality sets in, I expect that the opportunities but not wholesale buying opportunities, we're obviously always looking.

[Robert Kirkpatrick:]

And in the interim, does that cause you to hold more cash on the balance sheet or do you tend to pay down your debt and then have the ability to re-borrow it?

[Robert Mehrabian:]

Yeah. We do either or both actually. Last year, as Dale mentioned, we contributed to our pension. We'll probably do some more this year. We already have to as part of our expected contribution. We have to contribute $37 million next year in 2009. We may offset and putting more money there. We'd as again, they all said we are expecting to increase over $100 million in free cash. So, we will do opportunistic deals and contribute to the pension and generate cash and we're not very concerned about that.

[Robert Kirkpatrick:]

Okay. And then just a final question, back to Dale on the 100 million in free cash flow, that assumes no voluntary pension contributions, correct?

[Dale Schnittjer:]

That is correct. That's just the 37 --

[Robert Kirkpatrick:]

Just the 37.

[Dale Schnittjer:]

Robert now already mentioned.

[Robert Kirkpatrick:]

Super. Thank you so much, gentlemen.

[Robert Mehrabian:]

Thank you, Rob.

[Operator:]

(operator instructions). And we'll go to the line of Chris Quilty from Raymond James & Associates. Please go ahead.

[Chris Quilty:]

Good morning, gentlemen.

[Robert Mehrabian:]

Good morning, Chris.

[Chris Quilty:]

A question for you the defense electronics business, it looks like you grew about 5% organically in 2008. What's your expectations for the sort of organic growth outlook in 2009 and what if any other programs were budget theory decisions that might impact that either positively or negatively?

[Robert Mehrabian:]

Chris, I think 2009 our organic growth will probably be around 3% maybe a little higher, maybe a little lower, relatively flat. In terms of budgetary considerations, we are not expecting any big surprises in the short or intermediate term that will affect us. The 2009 budget is fairly well set right now and part of 2010 is also set. If there are changes, for example, if you look at future combat system, if there is some... the emphasis in for example building more armored vehicles or in favor of communication networks, robot sensors that will... that would be favorable to us, because we don't build trucks and hardware, we build more communication stuff. Our microwave components we expect to grow. Our electronic manufacturing services, we expect to grow. We've had some very good orders this year and those are very healthy. We expect some growth in our imaging business that we have, Teledyne Imaging, these are earning from the Infrared Imaging business. So, all in all I don't see a big issue for us with the budget. If they cut-us something like, if they reduce the F-22, yeah that might affect us, but they still have to upgrade other aircrafts. So all in all I see a relatively flat, maybe a little uptick in defense electronics organically.

[Chris Quilty:]

Okay. And just specifically on the F-22, I mean they are finishing up the last lot of production. I am assuming your estimates don't include any additional lots, although it looks like Congress is lobbying pretty hard to add some additional aircraft here in the last week?

[Robert Mehrabian:]

Yeah. We don't really... that's uncertain to us within our estimates. I think last 10, which is the one we're talking about here that might cause thus... if that goes away, it might cause a cause of to lose maybe $2.5 million orders in 09, if they were not to extend it.

[Chris Quilty:]

Okay. So that's the one that they only provided half the funding?

[Robert Mehrabian:]

Yes.

[Chris Quilty:]

Okay. And on the... you mentioned with the exploration business, that its high margin business and consequently a bigger impact on the bottom-line. Is that higher margin business and the core defense business?

[Robert Mehrabian:]

No. The higher margin exploration business is in marine exploration for oil and gas, the deportation exploration. And that's about 200 basis points higher than our general electronics and communication businesses.

[Chris Quilty:]

Okay. And question on the fourth quarter loss in the aerospace engines business, does that include severance cost or other onetime items?

[Robert Mehrabian:]

Yeah. As I mentioned, just to summarize we have about 235 of for associates leave the company between the third and fourth quarter; 210 are those in the fourth quarter. The total costs associated with the severance Chris was $1.3 million, 1.1 of which was in the fourth quarter. Now, I have to note that not all of that was in piston engine. There was a significant number that also we reduced in some of our commercial communication business in electronics and other areas. But the most significant part of that reduction was in piston engines. And so that charge more, a lot of people has taken there and there were some other onetime charges that we took there. So, but I think when you lose that 26% of your business from 41 to about $30 million in one quarter, it's very hard to bring your cost inline. And you don't want to cut so deeply that when the market comes back, you don't have the capability to produce product.

[Chris Quilty:]

And do you think you'll be in a full year profit position in that business in 2009?

[Robert Mehrabian:]

I am hoping, I think first quarter we will be lucky for a breakeven, we might lose some money.

[Chris Quilty:]

Okay, and then improvement throughout the year?

[Robert Mehrabian:]

Yes. I don't know... I wish I knew it. There is just so much uncertain things the world right now, I just don't know.

[Chris Quilty:]

Okay. And you also mentioned that the environmental and instrumentation business, I think sales were down; I can't check my notes here 1%or 2% this year. What you attribute that to and what's your thought on the outlook for the year ahead given all of the emphasis on environmental issues with the new administration?

[Robert Mehrabian:]

Yes, let me just give you the numbers first. In the environment, we couple environment and process instrumentation together, industrial instrumentation together. In the Q4, they were down about 6.5%. For the full year, they were relatively flat, maybe a little up. Now they address a whole bunch of different markets. Some of it has to do with air quality, monitoring, some of it has to do with water, and a significant portion of that business is also international. What... some of the declines that we've seen are because some of the infrastructure projects in the states and some even overseas in the states certainly because of the declining tax receipts. They're not spending as much money in water cleanliness, other infrastructure projects. On the other hand, if the current attitude and promises prevail especially in the stimulus plan that's been discussed. All the green initiatives, energy initiatives, water infrastructure, environmental, in clean up initiatives, science and technology, all of those would have positive effects to this businesses. But we'll have to wait and see whether it's those actual investments are realized or not. So the way we are looking at it's right now, is we are looking at it as business as we see it. And not adding in any additional revenue from new sources.

[Chris Quilty:]

So, is it fair to assume your implied guidance here is for relatively flat in 09?

[Robert Mehrabian:]

Yes, essentially flat.

[Chris Quilty:]

Okay. And I just... because I can't add up the numbers quickly here. I mean if you were to rename the company, Telegreen (ph) and put yourself as an environmental company. If you add up this and the nuclear center fusion, what would be the total exposure that you would have towards clean energy, alternative energy, throw in the energy systems business also I guess?

[Robert Mehrabian:]

First let me say, I am not going to do that. Teledyne is not one of the companies we call the named issuers (ph). But having said that, if you add that environmental stuff that we are doing, which maybe higher than 25 to 150, trying the nuclear, you'll get it (ph) north of $200 million. You're throwing hydrogen generators and other $20 million, you put in some of our imaging businesses that are space based for climates and monitoring et cetera. I could get a case, going upto... north of $200 million, $250 million. But let me just say this. In today's environment I will take our mix up businesses over a lot of other companies that are solely dependent on one's sake or another's. We have a healthy mix up 45% to 50% government and 50% commercial businesses. As one of our businesses like piston engines goes down, we can put the emphasis on the other stuff make acquisitions, fix them, focus on our operational excellence, and come out of this whole healthier than we were in. So maybe I have answered your question about being green, but that's not going to be our ticket out of it. It's going to be a really hard work and emphasis on improving operations.

[Chris Quilty:]

If the valuations are there, please sell those businesses.

[Robert Mehrabian:]

Okay.

[Chris Quilty:]

Thank you gentlemen.

[Robert Mehrabian:]

Thank you Chris. Operator

[Howard Rubel:]

Thank you. Robert, first of all I think it's green like money. So and that's what you've done for the most part for running the business.

[Robert Mehrabian:]

Thank you.

[Howard Rubel:]

Just a couple of follow up. Could you just talk a little bit more about, sort of the order of rates and as you look at January or as you talk to customers, do you see any change excluding the piston market for the moment that tells you that we're better often just last?

[Robert Mehrabian:]

Actually Howard, I think if you look at book to bill ratios, we have about 95... we have 95%. We were in the fourth quarter. But the fourth quarter was an unusual call, people were very cautious. In engine, we were significantly below that. In the next four days, as we always do, we will be going through every single business unit; all our business leaders are here. We go to every single business, every market, every operation and probably come out at the other end knowing a lot more than we do. We just obviously went through our business plan in the last four to five months. But things have been changing so rapidly that some of the projections keep shifting on us. If some of our government business is obviously we know what's going to happen in the intermediate term. But some of our short cycle businesses, where we book and burn two, three weeks, four weeks, it's hard to predict. Right now, I would say we are a little behind book to bill, but that can change.

[Howard Rubel:]

I mean there is... and very sympathetic with that. I think we've all tried to get a handle on it. And as you've looked at... I mean aside from piston, which again I am going leave, where obviously the demand is far below what the traditional run rate has. Can you point any markets, where it's just so far below what normal would be, where there should be some balances de-stocking mostly through the system, I mean...

[Robert Mehrabian:]

I am trying. I just.... I really can't Howard, because nothing's dramatically come down in our other businesses other than engines. There's been some downtick in some of our environmental businesses, a little in our avionics business in which we serve the aerospace market that you cover so extensively that needs some push outs. But since we don't have a huge exposure to domestic airlines that only 10% or so, we are not seeing really big declines there either, we're seeing some. But we haven't seen any dramatic changes in our other businesses.

[Howard Rubel:]

Just two final things one with Dale; with respect to the way you account for pension, do you use three year smoothing or is this direct recognition for the plan?

[Dale Schnittjer:]

We do use smoothing, Howard.

[Howard Rubel:]

Is it three years or--

[Dale Schnittjer:]

This moving is for three years on the return, but it's more on the loss. It's like nine and the half years on the losses.

[Howard Rubel:]

I understand what you are saying. I appreciate that. And then, Robert to return to turbines for a minute. There is been a lot of opportunity in the military market for some of the small or gas turbines that you build. Have you been able to capture any opportunity there? Or are you still waiting?

[Robert Mehrabian:]

We have had a significant number of features and development programs. All across, all are those are opportunities that hasn't been a lot of production. The closest promising thing that we have in that domain is the Japanese have a new decoy and actually they are going to use it for surveillance too, where we've qualified one of our engines on. And it's called the UVRS. And that's the nearest opportunity we have. But we have a large number of research and development programs ongoing. I have high expectations in the coming year in that business. On the other side of the ledger, Howard is that we are seriously looking at small piston diesel engines. Because as you know in a lot of the small UAVs they are using diesel engines. And those engines do not perform well at all. The lifecycle to come down and fix them is measured in hours, less than 10 hours, 12 hours. And I think that's an opportunity for us. So we're looking hard at that whether we should be investing and getting in that market since we have such strong capabilities in the piston engine domain.

[Howard Rubel:]

Thank you very much. I agree.

[Robert Mehrabian:]

Thank you, Howard.

[Operator:]

And we have a follow-up question from Michael Lewis with BB&T. Please go ahead.

[Michael Lewis:]

Dale, just a follow-up on one of Rob's questions earlier. A little more you're talking about free cash flow expectations, you said around account receivable slightly above 100 million. Now did that did that not include the 37 million that you are expecting for pension contributions next year?

[Dale Schnittjer:]

That did include the 37 million for pension contributions next year.

[Michael Lewis:]

Okay. Thank you very much.

[Robert Mehrabian:]

Thank you, Michael.

[Operator:]

And that is all the questions we had at this time. Please continue.

[Robert Mehrabian:]

Thank you operator. I appreciate that. I now ask Jason to conclude our conference call.

[Jason VanWees:]

Thanks Robert. And again, excuse me, thanks everyone for joining me this mornings. To your follow-up questions, please call me at the number listed on the earnings release. And always all news releases are available on our website teledyne.com. Operator, if you could conclude the call and give the replay information, we'd appreciate it.

[Operator:]

Certainly. Ladies and gentlemen, this conference will be available for replay after 10 AM today, through February 22nd at midnight. You may access the AT&T teleconference replay system at anytime by dialing 1800-475-6701 and entering the access code 967227. International participants dial 320-365-3844. Those numbers again are 1800-475-6701 and 320-365-3844; access code 967227. It does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.