Teledyne Technologies Incorporated
Q1 2009 Earnings Call Transcript

Published: 22 Apr 2009

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would like to now turn over your conference to our host, Mr. Jason VanWees. Please go ahead.

[Jason VanWees:]

Thank you, Anne. Good morning everyone. This is Jason VanWees, Vice President, Corporate Development and Investor Relations at Teledyne Technologies. I'd like to welcome everyone to Teledyne's first quarter 2009 earnings release conference call. We released our earnings earlier this morning before the market opened. Joining me this morning are Teledyne's 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. Also, 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 for the quarter I have some general observations about our market, our performance and our cost reduction initiative. The majority of our defense and government businesses performed well in the quarter, but their growth could not offset the contraction in some of our commercial businesses impacted by the global recession. As a result, total sales decrease 2.5%, earnings per share decline 26%. Nevertheless, first quarter 2009 earnings were consistent without outlook issued in January. I want to emphasize that I believe, we are ahead of the curve in appropriately sizing our commercial businesses given the current market reality. For example, we have already decreased our North American workforce by 478 or approximately by 6%. We've delayed our annual 2009 salary increases until 2010 and we have eliminated our grant of employee stock options in 2009. Finally, by the end of the second quarter, we expect to close or relocate five operating sites. To date, we have absorbed in our operating income as opposed to taking a non-recurring charge approximately 5.3 million of cost, 2 million of which occurred in the fourth quarter of 2008 and 3.2 million in the first quarter of 2009. These costs were associated with severance, facility relocations and top plan product line terminations. We believe that we have completed many of the necessary cost reduction actions, and currently expect only about $500,000 of such expenses in the second quarter. That being said, given the recent further deterioration in the general aviation, commercial aerospace and global infrastructure market, we expect 2009 to continue to be a very challenging year. However, the mix of our businesses, including the strength of our defense and government programs coupled with our aggressive costs controls should allow Teledyne to outperform in such an environment. And we now comment on the performance of our segments. First quarter sales in our electronics and communication segment increased 2.9% compared to last year from $301.3 million to $310 million, with a negative organic growth of 2.6%. Segment operating profit decreased 5% from $40.3 million to $38.3 million, and segment operating margin decreased 102 basis points. However, 45 basis points of the decline in margin is related to net pension expense and another 100 basis point is related to the cost reduction expenses that I noted earlier. Excluding these two items, operating margin would have been actually improved. In this segment, our businesses lie within three separate market categories. First, defense electronics which represents slightly more than 40% of the segment. Second, electronic instrumentation which represents another 45% of the segment; and third, avionics and other commercial electronics which represents slightly less than 15% of the segment. In the first quarter of 2009, sales of defense electronics increased 5.3% compared to the first quarter of 2008. Defense electronic sales growth primarily have resulted from the acquisition of Judson Technologies in the first quarter of 2008 and Filtronic PLC, U.K. based defense electronics businesses in the third quarter of 2008. Organic sales growth with the increase sales of government-funded research and electronic manufacturing services was less than 1%. Turning to our electronic instrumentation businesses, year-over-year sales increased approximately 10.9% from a 134.7 million to $144.9 million, with organic sales growth of 3.4%. Organic growth in instrumentation was comprised of approximately 23%. In marine instrumentation offset by 20.6% decline in sales of environmental monitoring and 15.7% decline in sales of industrial instrumentation. The decline in global infrastructure market has seriously impacted that the demand for our environmental and industrial instruments. While sales were very weak, total orders in the environmental and industrial product lines exceeded sales and we are optimistic that this businesses may receive some benefit from the American Reimbursement and Recovery Act, since our products are used in a mission monitoring analyzing carbon content in ambience air and waste water sampling and analysis. Teledyne's marine instrumentation businesses currently represent about $360 million or roughly 19% of total sale. Oil and gas exploration represents roughly 5% of total sales and oil production represents approximately 6% of total sales. The balance and the largest portion of our marine sales is derived from motion graphic research (ph), military and hydrographic surveys and other industrial markets. In oil exploration market, we are forecasting a contraction in full year sales in 2009 of about 20% especially way to the second half. However, we currently expect continued growth in the balance of our marine businesses serving the oil production, research, military and other industrial market. Finally in this segment, I'll discuss our avionics and other commercial electronics businesses. In the first quarter of 2009, sales from these businesses collectively decrease 23.5% compared to the first quarter of 2008, due to the continued decline in sales of commercial electronic manufacturing services for medical applications. This will exit in certain product line, as well as a decline in sales of avionics and weaker sales of other commercial electronic components such as relates with electronic test equipment. Turning to our Engineered Systems segment. In the first quarter of 2009, revenue increased 6.3% organically compared to last year. The sales growth primarily resulted from increased sales related to gas centrifuge service module, used to help in rich uranium for using commercial nuclear power plants, as well as increased sales in space program such as NASA's H1 (ph) which will be used to return humans to the moon by 2020. Segment operating profit was flat at $8.1 million. Operating margin rate decrease 58 basis points solely as a result of increased net pension expense. In the first quarter, our Engineered System segment was awarded a $52.6 million contract, if all options are exercised from the space and naval warfare systems command to design and build marine glider systems. Given their relative low cost, minimal power usage and longevity at sea, the navy plans to use fleets of gliders to acquire critical portion of graphic data in the order to improve battleship, battle space effectiveness. This contract was the result of combining the strength of multiple Teledyne business units. While our Engineering Systems segment will perform the systems engineering, Teledyne web research in our marine electronics business will provide the glider. Slocum Glider is a torpedo-shaped autonomous underwater winged vehicle that measures about 1.5 meters and use this changes in buoyancy along with its wings and tail- fin steering to move through the water. I will now discuss our aerospace engines and components segment which has a reminder now solely represents Teledyne Continental Motors or Aircraft System Engine businesses. Sales in this segment decreased 44.1% in the first quarter compared to last year. Year-over-year sales of OEM engines declined approximately 50%, while aftermarket parts and services declined approximately 40%. Starting in the fourth quarter of 2008, sales of new engines to OEM aircraft customers declined 50%. As previously stated, this decline is the first material reduction in our OEM engine sales in nearly 20 years, as sales of new aircraft dramatically decreased due to a difficult credit environment and reductions in consumer discretionary spending. At the moment, we do not expect a significant increase in sales of OEM engines throughout the year. On the other hand, while the aftermarket was also very weak in the first quarter, we were encouraged to see a return of order activity late in the quarter and are taking proactive steps to capture increased market share. During the first quarter, we had reported an operating loss of $4.3 million primarily as a result of the large decrease in sales. Finally, in our Energy and Power Systems segment, sales in the first quarter of 2009 decreased 24.4% compared to last year due primarily to lower sales of commercial hydrogen generators and military turbine engines, with the later being primarily a timing issue. First quarter segment operating profit was breakeven. In conclusion, we're very 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, a balanced mix of government and commercial businesses that produced highly engineered products which are not easily commoditized. Second, good visibility and a healthy backlog in many of our government businesses. Third, a significantly reduced cost structure through the focused actions in Q4 of 2008 and Q1 of 2009.And fourth, ample liquidity and a proven track record of continuously improving our operations and successfully integrating the acquisition. 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, and I will discuss our 2009 outlook. In the first quarter, cash provided from operating activities was negative $7.6 million, compared with cash provided with operating activities of positive $22.6 million for the same period of 2008. Free cash flow for the first quarter was negative $20.7 million, compared with $13.9 million for the same period of 2008. The lower cash flow in 2009 was solely due to pretax (indiscernible) of $80 million that we made in the first quarter of 2009. Excluding the after-tax impact of our pension contribution, free cash flow for the first quarter seasonally our weakest quarter was $27.9 million, an increase of 84% from last year and 134% of first quarter 2009 net income. Capital expenditures were $13.1 million in the first quarter, compared to $8.7 million for the same period of 2008. Depreciation and amortization expense was $11.7 million, compared with $10.7 million last year. For the full year of 2009, we expect capital expenditures approximately 35 to $40 million, and depreciation and amortization expense of approximately $50 million. We ended the quarter with $339.8 million of net debt. Our balance sheet remains strong with a net debt to cap ratio of 39.4%. Our credit facility has $590 million of bank commitments and does not expire until July of 2011. Next on pension expense. In the first quarter of 2009, gross pension expense was $5.6 million, compared with gross pension expense of $2.3 million in the same period of 2008. Net pension expense after recovery of allowable costs pursuant to government, cost accounting standards of cash was $2.5 million in the first quarter of 2009, compared with no expense or income in the first quarter of 2008. Moving to stock option compensation expense; in the first quarter of 2009, stock option compensation expense was $1.6 million, compared with $1.9 million in the first quarter of 2008. Now let me turn to the 2009 outlook. Management currently believes that GAAP earnings per share in the second quarter of 2009 will be in the range of 64 to $0.68. Consistent with our January 2008 outlook, we expect full year 2009 earnings per share of approximately $2.70 to $2.80. However for the full year of 2009, we now anticipate approximately $22.5 million of gross pension expense. Net pension expense after recovery of allowable pension cost from our cash covered government contract is now expected to be $10.1 billion or $0.17 per share in 2009, compared with $200 billion (ph) of pension income in full year 2008. Primarily as a result of the $80 million voluntary pension contribution made in February, net pension expense for 2009 was reduced to $0.17 per share, down $0.31 per share in our prior outlook in January. I will now pass the call back to Robert.

[Robert Mehrabian:]

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

[Operator:]

Thank you. (Operator Instructions). The first one is coming from the line of Michael Lewis. He is with BB&T Capital Markets. Please go ahead, your line is open.

[Michael Lewis:]

Thank you very much. Good morning, Robert and Dale. Two questions, first question here is that I noticed this morning that CCOMM put out and word intention notice that's going to a would you guys another 7.5 million for more R&D on the Phase III of the Adaptive Focal Plane Array program that you've been working on. Now this has been an ongoing program. I think you're doing it over at the Teledyne -- Rockwell pickup (ph) acquisition. This has been ongoing for sometime now. I'd like to just get an update on your progression of this product and also what do you think the total potential value will be on this program if you were to enter into a full rate production on FTAs within, say the next 24-36 months.

[Robert Mehrabian:]

Thank you, Michael. We have been awarded the take three (ph) options on the Adaptive Focal Plane Array program. As you know, AFPA is combined arrays of MEMS, these are micro-electro-mechanical systems and tunable optical filters with that infrared focal planes for detecting target by sensing their special signature. Right now, we had -- we'll design and fabricate and deliver some prototype cameras to the army. Full March end (ph) technology probably will go to from our DARPA it will go to MVSC (ph) and in the army of course. Full rate production still I think is a little in the future. We need to do a little more work, but I think we are optimistic. So, I can't directly answer your question, in terms of what this would mean to us in the long-term, but we are very optimistic about the progress we are making.

[Michael Lewis:]

Okay. That's fair, but all-in-all it is a significant program if it were to enter full rate production, is that correct?

[Robert Mehrabian:]

Yes. And it's really into the forefront of the technology in that domain.

[Michael Lewis:]

Okay. And then I'll shift gears here real fast. With regard to margins, Engineered Systems did come in about 100 basis points above what I was looking for. Now this was offset by the zero margin that we saw in Energy & Power Systems. Can you walk us through the moving parts in a little more detail on those two segments? And also what's your expectation for the full year in each one of those areas that'd be very helpful?

[Robert Mehrabian:]

First Q1 2008 operating margins, total was about 10.5%. If you look at this year Q1, we have done negative about 200% basis point in TCM. Our charges were about 75 basis points, and the remainder about 55 to 60 basis points is a decline in our -- because of our pension. We have some upside from our cost controls so we ended up with margins on the level of 8%. Now if you -- if I take your question vis-à-vis systems -- Engineered Systems, our margins are about 9.1% in Q1. That was lower than the first quarter of 2008 which was about 9.7%. I think we're going to see some decline in our margins as we go through the year. I think we'll end the year at some rate about 8.5% in margins in that domain. Moving to Aerospace Engines, as you know we lost money there because of the significant decline in our revenues. What we are aiming for is to see if we can move through the year and achieve breakeven profitability late -- in the later quarters of this year because of our cost reduction efforts and because of our efforts to capture more of the active market share. And finally I think in our Energy & Power Systems, we should become profitable specially since we -- we will have increased revenues from our turbine engine businesses. And of course in Electronics and Communications we're trying to maintain our margins with respect to last year with the exception of the fact that we do have higher pension expense and we have to pay for that. And in the Q1 of course we had our charges most of which was in that segment. I don't know if that answered your questions properly, Michael.

[Michael Lewis:]

No that was very helpful and I'll get out of the way now. Thanks very much.

[Robert Mehrabian:]

Thank you Michael.

[Operator:]

And our next question comes from the line of Mark Jordan, he is with Nobel Financial. And please go ahead, your line is open.

[Mark Jordan:]

Thank you, good morning Robert and Dale. On February 13th you put out a press release saying that you are going to be taking a charge for piston issues of 18 million, it'll be reflected in the first quarter. Have not heard nor seen any commentary in the release, what is the status of that charge?

[Robert Mehrabian:]

As you know Mark what happened because that charge came after our earnings release, but before we filed our K, we were obligated to take that charge into Q4 of 2008. So, that decreased our earnings for 2008 from $3.30 to $3.05.

[Mark Jordan:]

Okay.

[Robert Mehrabian:]

So it decreased from $3.35 to 3.05. So putting that aside, what the status of that is, we have identified about 10,000 cylinders that we intend to replace. We have at the current time relocated over 50% of those cylinders. At the same time, we've had to restart production, go through supplier in our shop of the cylinders that did not have the problem. So, we had to go back and start the whole production like line after scrapping about 3000 to 4000 cylinders that we had in storage. And we're making good progress. Right now we've produced about 4000 of the new cylinders and we are allocating them as quickly as we can to our customers that need the replacement. We're optimistic that we'll get ahead of that curve. At the same time, we also have to produce cylinders for our existing revenues in our own engines and after-market. So I think in the next six months, we should get a pretty good handle on this issue. I will remind you that just finally that the cracking that we've observed is not an issue that occurs immediately. It happens after we've had a significant number of powers on the engine. So what we've been trying to do is give a early preference to some of our key customers that run their engines many more hours than others. But we don't think this is going to be a big safety issue us yet. We are ahead of the curve so far. I don't know if that answered your question Mark.

[Mark Jordan:]

That is -- just a brief follow up on that then. Your perception here since you're kind of ahead of the curve, you don't see any you haven't seen any accidents or incidents that we call as, product liability type of -- anything beyond just the replacement needs?

[Robert Mehrabian:]

No, not that we can foresee at this time.

[Mark Jordan:]

Can we talk a little bit about interest expense. You it was just 1.1 million in the quarter which were on your debt position of 361 million would imply about a 1.2% annualized rate. Was there some -- something in there that lowered the cost or should we extrapolate that -- out that cost given the low interest rate environment.

[Robert Mehrabian:]

I'll let Dale answer that.

[Dale Schnittjer:]

We're currently at about 1% borrowing cost at LIBOR plus 50 basis points. And then there is a little facility fee in that expense also. We would be at 1% area as long as we stay at the current ratios that we're maintaining.

[Mark Jordan:]

I'm sure everybody wish if they could borrow that rate. And then on the corporate expense line that's taken a step down 6.8 in the quarter is that just a function of the bonus or the stock moves that you've made in other efficient fees and is that a consistent run-rate we should assume for the balance for the year?

[Dale Schnittjer:]

I think it will be a little above that, that's little favorable in the first quarter. We might be closer to 30 million for the year.

[Mark Jordan:]

Okay. Thank you very much.

[Operator:]

Your next question from John Harmon. He is from Needham & Company and please go ahead.

[John Harmon:]

Hi, good morning.

[Robert Mehrabian:]

Good Morning, John.

[John Harmon:]

I'd like to get to our details on one comments you made. I mean you talked about being ahead of the curve in terms of expense reductions does that mean that you anticipated on further difficulties because of the economic slowdown in your businesses in Q2, and you cut cost ahead of that, and the cost that you did make in Q2 if I can follow-up? Did you make some at the beginning of the quarter or at the end of the quarter. How much additional cost reductions can we see in the June quarter?

[Robert Mehrabian:]

Right now, I know you meant Q1. But we started cost reduction efforts in Q4 of '08 because early on we knew that our piston engine business was having problems with orders. And we took about somewhere in the neighborhood of $2 million cost reduction cost our own expenses in Q4 of '08. In Q1 of '09 throughout the quarters, we spend about $3.2 million for our cost reduction efforts. And then of course we have a little bit less for Q2 of '09, we have about 500,000 less because of facility closures. Right now, the way we look at it, John is that what we've done here and the salary freeze that we have put in place at least until April of 2010. We should be able to maintain our margins assuming the global economy doesn't deteriorate further. Of course I don't know how that's going to go. But assuming it doesn't get worse, that's why we were able to maintain our earning outlook for the year. But if we think to get worse, obviously we'll go back and take more cost out.

[John Harmon:]

Thank you. And just one more question please. I believe I'd asked this last quarter but I'm -- at what point do you think you will finish exiting your medical contract manufacturing of this last quarter or get it down to a steady state level?

[Robert Mehrabian:]

I think that we have a number of areas where we work in medical manufacturing. First, we have some programs in micro-electronics that relate to essentially implantable devices. Then we have some programs that we are in at our medical manufacturing in Lewisburg. I think, if you look at our Lewisburg medical manufacturing that's primarily been providing power supplies and power controller systems for things like positron-emission tomography systems that -- we should be out of that business by the end of this year. On the micro-electronics side, we will probably have some running business there for a while longer. But our primarily efforts was to get out of the Lewisburg Medical Manufacturing, EMS business primarily because we started shifting that business towards our military effort which have been very good. First quarter, we had a uptick of almost 15% in that business.

[John Harmon:]

That's great. Thank you very much.

[Robert Mehrabian:]

Thank you.

[Operator:]

Next question from the line of Steve Levenson. He's with Stifel Nicolaus. Please go ahead, your line is open.

[Stephen Levenson:]

Thank you. Good morning Robert, Dale and Jason.

[Robert Mehrabian:]

Good morning.

[Stephen Levenson:]

Curious, do you think total income in automotives will be back to breakeven by the end of the year, not for the full year, but possibly in the backend?

[Robert Mehrabian:]

Steve that's our plan at this time. That's where we've taken a lot of cost out. We have the largest workforce reduction in terms of percentage is been in that business. I think approximately 14%. We are seeing, as I mentioned earlier, we're seeing a little more activity in our aftermarket, and if you looked at our aftermarket, we have just in the Continental United State, we have about a little over a 100,000 of installed engine. The average and I'd say offered the average hours that those are flown are between a 100 hours and months. Let say 50 hours a month. And those have to be go through an overhaul every 1200 hours to 2000 hours. Even if we get a reasonable fraction of that, one would say that about 5 to 10% of those engines need overhaul or rebuilt engines or new engines. So our focus is shifting to the aftermarket and we got to capture some of that market and hope to do more of that during the year. The last two years we've focused on OEM engines. So, if we can do that, we should be able to breakeven by the end of the year.

[Stephen Levenson:]

Do you think that exchange program, not the warranty but the engine exchange program will have an impact too or are you seeing one yet?

[Robert Mehrabian:]

No, that do you mean the cylinder program?

[Stephen Levenson:]

No, no, there is I believe your advertising?

[Robert Mehrabian:]

Oh, yeah, yeah, yeah. I think we have seen some order pickups there. And we're going to do a whole bunch of more of those things as the year goes on.

[Stephen Levenson:]

Great. Thank you. On the acquisition pipeline, given the fact that you've got good borrowing availability. Are your plans to continue that program and what do you see in the pipeline? Do you think its current administration tax considerations that might drive it or what else?

[Robert Mehrabian:]

Let me start with the tax and not with the administration. We had a little tax uptick in Q1 of 2009 thanks to our California legislators. And that cost us about $300,000 and in this environment, tax increases are really contrary to any kind of an economic growth. But having said that, going back to acquisitions, we always have acquisitions in our pipeline. We made nine small ones last year, so we're kind of adjusting those and trying to integrate those. But we do have some in the pipeline. If anything comes up that is attractive and the prices are a little more moderated, I should say now we will make acquisitions; but right now our focus is on cash generation. As much as we can because, as Dale mentioned, our line of credit will expire in mid July of 2011 or mid 2011, and the borrowing costs are going to horrendous; at least if the a current economic environment persists, our borrowing cost may go from 25 to 50 basis points over LIBOR to up to 300 basis points over LIBOR. So we are right now a little more focused on cash generation Steve.

[Stephen Levenson:]

Okay. Thank you.

[Robert Mehrabian:]

Thank you.

[Stephen Levenson:]

Last one is what are you going to do with your third-generation thermal imaging sensor?

[Robert Mehrabian:]

We have on the third Gen as you know, that we were ranked -- our proposal was very highly ranked both technically and in management. We lost that on price alone. That was disappointing to us. But however, we are now hearing that we can expect to receive some additional fundings in that domain to ensure that we can be competitive in the low rate initial production phase. And so we're a little more encouraged about that and we're actually investing some of our own money in that program to get ahead of the curve. And so we're optimistic that we'll be able to be competitive at the next phase of that program.

[Stephen Levenson:]

Great, thank you very much.

[Robert Mehrabian:]

Thank you.

[Operator:]

And our last question from the line of Chris Quilty. He is with Raymond and James -- and I'll take that back after him we have another one here so go ahead Chris.

[Chris Quilty:]

Thank you. Gentlemen got a quick question, in January when you provided the earnings guidance of 270-280 I think you were including about $0.31 of pension hit due to the cash payments. You're now only expecting $0.17. Was there something that got incrementally worse since January that would have prevented you from raising guidance by that 14% differential?

[Robert Mehrabian:]

Thank you Chris. I'll take a part of it and then pass the harder part to Dale. The easier part which I'll take is that if you take the $0.17 that we're discussing here, about -- we spent about $0.06 on cost reduction in the first quarter. So between 17 and 31 that's $0.14; half of that went to our cost reduction efforts, we are going to have another penny probably in Q2 and the remainder I will pass to Dale.

[Dale Schnittjer:]

The reminder, it sort of relates to the fact that the commercial businesses are as Robert mentioned earlier continued to be a question on -- there is still uncertainty in, where they are going and the general aviation market particularly GCM continues to be fairly weak. So, that would be the difference.

[Chris Quilty:]

Okay. And a follow up question; it sounds like during their conference call yesterday Lockheed bailed on the F-22. Can you give us your input on, what if anything you had in your expectations this year and now for contribution from that program?

[Robert Mehrabian:]

If you don't mind, I'd like to combine the F-22 and F-35 together, because they're obviously trade there. We do have revenue on the F-22 and we do expect that we'll lose some of that revenue because of the program of -- what's happening to it. On the other hand we have our product on F-35, a lot of products onto F-35 actually more than we have on F-22. We have cyberoptics, transceivers, ejection seat sequencers, microwave keyboard (ph) et cetera. Because of the boarder range of our products on F-35 including as I said various microwave assemblies, we think that even though the prices that we are enjoying that are lower, we think that overall with the increase in anticipated higher production of the F-35 that the future -- where we look those two platforms together we think the future would actually be favorable to us in terms of revenue.

[Chris Quilty:]

Okay. And final question for you, we haven't spoken since Secretary Gates outlined his fiscal '10 defense budget blueprint. We obviously haven't seen line item budget yet but can you give us at least your quick read on things there -- how the developing budget may or may not help you?

[Robert Mehrabian:]

Let me just start with a broader comment on that. Right now, reading that carefully and its various components from satellites to communication to the various platforms, to ship building et cetera. We don't see much adverse effect on Teledyne. We talked about the F-22 and F-35. If you look at the cancellation of the transformational satellite and increased production of Advanced Extreme High Frequency Satellite, that should be up for us because we have more products in that. And some of our SMART-T Secure Mobile Anti-Jam Reliable Tactical-Terminal et cetera those would be all good for us. In terms of cancellation of Search and Rescue and VH-71 Presidential helicopters that should have no effect on us. The only area that we are a little cognizant of, is in the midst of defense domain. In the midst of defense domain our anticipations are if we are reading this correctly that there would be some decrease in that budget, it could be 10 to 15%. Now having said that we have a variety of programs, we enjoy about $160 million worth of sales in that domain. Some of it is mid-course -- ground based mid-course event. Some of it is system engineering and technical assistance, something -- some of it is in integrated testing and so on. If as Secretary Gates, mentioned if the GMD is going to be shifting from a focus of deployment -- traffic capability based deployment through integration and testing that's good for us. Because that's what we do and we do it well. We don't have any product that relates to airborne laser or multiple kill vehicles seriously and we think some of our CDAC (ph) programs would go down proportionate to the overall missile defense budget decreases. So having said that I mean if there might be it's an a missile defense will not have much effect in our defense electronic sales. So if you add all of that up and I could talk about this story and so on. Right now the way we read the whole thing is it shouldn't have much of an effect on Teledyne because of some merchant suppliers status that we have and the sophisticated products that we produce. They're going to be needed in different existing platforms if other platforms are cancelled.

[Chris Quilty:]

Thank you, gentlemen.

[Robert Mehrabian:]

Thanks Chris.

[Operator:]

One more additional question from the line of Michael Lewis. He is with BB&T Capital Markets. Please go ahead.

[Robert Mehrabian:]

Hi Michael.

[Michael Lewis:]

Hey, thank you for taking a second question here. Just and its actually a follow-up to Chris's question. I'll start first with the Gates recommendations, what about the ISR area since that was pretty much the -- the expectation was set that would probably increased about 2 billion based on his commentary. Where are you going to play with regard to capabilities there?

[Robert Mehrabian:]

I think that maybe favorable to us because of our large format, focal plane arrays that we make. Also, we have content on multiple UAV systems, which would be carrying IRS sensors, and we think overall that will be positive for us.

[Michael Lewis:]

Okay. And then last quarter, I think the expectation with regard to stock options were said that you're going to hold-off on options until the second half. Now it looks like we've eliminated them all together. And it coincides with Chris' question on the pension, if we're taking some of that expense out, where is it being offset. How come we don't see that as upside and just a stock options?

[Robert Mehrabian:]

Yeah the options frankly, if you turmoil (ph) its just a couple of pennies over the year because we're expressing prior year stock options as we go. You're only with third of the new options would be expense. So its not much, its a couple of pennies. And what we have seen is actually since January. We've seen a much weaker domain or the domain for our engines and our avionics businesses. And right now, we're cautious about what's going to happen as we go through the rest of the year. Credit is still tight, airlines are not doing well. There are a lot more aircraft cancellations as you look at them or the cancellations. So we're a little cautious on that Mike. We've seen a down draft in our avionics business of almost 20% and then combine that with engine business of 44%. That's a little scary, so we're being cautious.

[Michael Lewis:]

Okay, in other words, just a little bit of a question for you.

[Robert Mehrabian:]

I wouldn't say that.

[Michael Lewis:]

Okay. Thank you very much.

[Robert Mehrabian:]

Thank you, Michael.

[Operator:]

And John Kulki (ph) from Jefferies & Company. He has a question. Please go ahead.

[Unidentified Analyst:]

Good morning. Thank you for taking my question. I was curious to know if there is an annual run-rate in savings that you can attach to the cost reduction efforts you've been implementing the last quarter, this quarter into Q2 of this year.

[Robert Mehrabian:]

I mean there is a timing issue. But I would say, it would be the payback on this cost reduction should be a matter of months rather than year. As we spend over $5 million and personally expect to have the cost reductions kind of make that up in the remainder of the year. We kind a counting on that. Overall I would say, we've taken our cost everything said or done, our cost should have gone down over $25 million annualized.

[Unidentified Analyst:]

That's quite impressive. And then I had a question about the general aviation engine business, with declines of 50% OE 40% after-market. I'm sure inventories are something that are a challenge to manage in this environment. I wanted to talk a little bit about that and as well maybe touch upon receivables to the Aircraft OE's. I would imagine in any cases cognizant (ph) a bit financially stronger than many of your customers and if there is any risk that we needed to think about it.

[Robert Mehrabian:]

There is always risk, last year one of our OE's went bankrupt and we took a charge on that. We are very cognizant of our accounts receivables, and we monitor those very carefully and don't let people get too far out on the curve. Some people we might put on a pay as you go basis. So, things can happen but its not going to be devastating because we just don't let that account receivables get out of hands. In terms of inventory, I think what we have done is we've started pouring about that a late last year and I think our inventories overall are trending down rather than up. And it's -- we're not producing as much product and trying to produce, only products for which we get all days. So I think in terms of our delinquencies or account receivables or day sales outstanding, we're in pretty good shape, we feel okay.

[Unidentified Analyst:]

Great, that's very helpful. Thank you, very much

[Robert Mehrabian:]

Thank you.

[Operator:]

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

[Robert Mehrabian:]

Thank you, operator. I'll now ask Jason to conclude our conference call.

[Jason VanWees:]

Thanks, Robert. Again thanks to everyone for joining us this morning. If you have any follow-up questions, please feel free to call me on the earnings release. Goodbye. Operator if you could do the replay please. Thanks.

[Operator:]

Yes, I will. Ladies and gentlemen, this conference will be available for replay after 10 'o'clock am today until May 22nd of 2009 at midnight. You may access the AT&T executive playback service at anytime by dialing 800-475-6701 and entering the access code of 983733. Again it's 800-475-6701 and entering the access code of 983733. That does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference service. You may now disconnect.