Teledyne Technologies Inc (TDY) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Teledyne second 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. If you should require assistance during the call, please press the "*" followed by the "0". As a reminder this conference is being recorded. I'd now like to turn the conference over to your host Mr. Jason VanWees. Please go ahead, sir.

Good morning everyone. This is Jason, Director of Corporate Development and Investor Relations at Teledyne. I'd like to welcome everyone to Teledyne Technologies's second quarter earnings release conference call. We've released our earnings earlier this morning before the market opened.

Joining me today are Teledyne Technologies' Chairman, President and CEO Robert Mehrabian, Vice President and CFO Dale Schnittjer, and Senior Vice President, 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 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 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 replay both via webcast and dial-in will be available for about one month. Here's Robert.

Thank you, Jason and good morning. Since our second quarter earnings release was issued earlier this morning I won't go through all the details but I'd like to make a few introductory comments. By any measure this was an outstanding quarter for Teledyne. Despite the continued headwind in pension expense and aircraft product liability insurance costs, earning per share increased year-over-year for the 10th consecutive quarter. There was substantial sales growth both organically and through acquisitions. Furthermore, operating margin in our electronics businesses increased significantly despite greater pension expense.

Given our strong performance to date, and our anticipated contribution from our recent acquisitions we're raising our full year 2004 earnings outlook by almost 20%. Turning to our growth strategy, our strategy is focused on two things. First, to strengthen and expand our core electronics, instrument and systems engineering businesses through targeted acquisitions and successful integration. And second, to pursue our operational excellence and margin expansion initiatives to continuously improve our earnings.

Our goal is to create a more focused set of businesses that are truly superior in their niches. In our electronic instrumentation business, we completed the acquisition of Isco Incorporated, late in the second quarter. At $79.4 million in net consideration, Isco was our largest acquisition to date. The acquisition of Isco added leading technology in the waste water and water analysis market, as well as added significant critical mass to our environmental instrumentation businesses.

Furthermore, Isco's liquid chromatography systems and media provide an exciting entry for Teledyne into the high-growth, drug discovery and biotechnology instrument market.

As for our defense electronics business, just after the second quarter, on July 2nd, we completed the acquisition of Reynolds Industries and on July 8, we announced the anticipated acquisition of the defense electronics business of Celeritek Incorporated, which is subject to approval of Celeritek's shareholders and other customary closing conditions.

Reynolds is a leading supplier of specialized high voltage connectors and subassemblies for defense, aerospace and industrial applications, as well as a unique pilot helmet mounted display components and subsystems. Reynolds technology and product offerings are complementary with a number of our existing defense electronics businesses ranging from microwave products to ejection seat sequencers. While our acquisition strategy is not aimed at maintaining a particular mix of government versus commercial businesses, taking into consideration the Isco and Reynolds acquisition, our mix will remain approximately 45% government and defense and 55% commercial.

Returning to the second quarter, Teledyne made significant progress both in revenues and earnings. Overall, year-over-year revenue growth grew by 16.3% and GAAP earnings per share increased 50%. In the remainder of my comments, I'll elaborate on the operating performance of our business segments. Dale Schnittjer will then discuss more details about our financial performance and comment on our outlook for 2004.

Turning to our business segment, second quarter sales in our electronics and communications segment increased 22.8%, compared to last year, and reported operating profit increased by approximately 87% compared to last year with operating margins up over 350 basis points compared to 2003.

As I further discuss our electronics and communication businesses, which going forward would have total annual revenue of over $600 million including annualized revenues from Isco and Reynolds, I'll break up my comments into three separate market categories. First, defense electronics; second, electronic instruments, and, third, avionics and other commercial electronics. Each of these three groupings currently contribute approximately one-third of our electronic and communication segment sales.

First, as a reminder our defense electronic products and services include traveling wave tubes, microwave assemblies for electronic warfare, satellite communications, and radar applications. We also have micro electronic modules for a variety of applications including secure communication. And now with Reynolds, high voltage connectors, and our existing ejection sequencers, rigid-flex printed circuit boards and contract manufacturing of military electronic assemblies.

After roughly 30% organic growth in the second quarter of 2003, year-over-year comparisons in our defense electronics businesses were more difficult. In the second quarter of 2004, sales of defense electronics were flat compared to the second quarter of 2003. However, if we exclude the acquisition of the electronics solid state business, sales in the second quarter decreased approximately 10%, primarily due to lower sales of our manufacturing services to defense customers. We believe this is actually a timing issue.

Turning to our electronic instrumentation business, we manufacture a range of instruments used in environmental analysis and emission monitoring, industrial process control, petrol chemical manufacturing, semiconductor manufacturing, drug discovery and energy exploration and production. In the second quarter of 2004, year-over-year total sales of electronic instruments increased approximately 80%, compared to last year, due to both organic sales growth and the acquisition of Tekmar-Dohrmann in May of 2003, Lehman Labs' at the end of February, 2004, and Isco Incorporated, in June, 2004.

Organic sales were higher by approximately 50% in the second quarter, driven primarily by significantly higher sales of geophysical sensors, as well as, sales growth in nearly every instrumentation business unit. Sales of geophysical sensors used in the highly cyclical oil exploration market were at record levels in the second quarter and we expect sales of these sensors to decline sequentially in the third and fourth quarters of 2004.

Our acquisition strategy in electronic instruments which we have identified as one of our growth platforms, is focused on our products and technologies that are first complementary with our existing businesses and, second, participate in markets which we believe will grow faster than our traditional industrial process control markets. As evidenced by the acquisition of Isco, we continue to target regulatory driven end markets, such as air and water quality monitoring, as well as to seek to expand into food and beverage quality control and higher growth drug discovery and biotechnology markets.

Going forward, our electronics instrument businesses will contribute approximately $200 million of annual revenue up from under $50 million in 2001.

Finally, I'll discuss our avionics and other commercial electronics businesses. In the avionics market, we develop and manufacturer data acquisition and communication product for domestic and international airlines, as well as for business air traffic. We also manufactured electronic components including relays and connectors for a number of applications as well as do manufacturing services for some assemblies used in medical instruments and implantable medical devices.

In the second quarter of 2004, sales from these businesses collectively increased approximately 14% from the second quarter of 2003. Avionics sales on an organic growth basis increased approximately 5% compared to the second quarter of 2003. This was our first quarter of organic growth in commercial avionics since 2001. Orders continued to be strong as well.

Year-to-date, we've received a total of $4.2 million in orders from five customers for our new Wireless GroundLink data acquisition system, which automates transfer of flight safety data to an airline's operation center. In addition, our Teledyne controls business unit was recently selected by airbus as the sole supplier of their on board information terminal, which is an electronic flight bag for the A320, A330 and A340 aircraft families.

While we won't begin shipments until early 2005, we are very excited to be selected as the sole source supplier of this new product for use on a vast majority of OEM and after market airbus, air transport aircraft. In our other commercial electronics markets, sales of broadband wireless assemblies for cellular backhaul applications continue to grow as a result of increased demand from large international customers. Sales of relays using wireless infrastructure, networking equipment and semiconductor test equipment also increased during the quarter and orders for relays were the highest, at the highest level since the first quarter of 2001.

Turning to our systems engineering segment, in the second quarter of 2004, revenues in this segment increased approximately 5% compared to last year. Operating margin was very strong at over 12%, but operating profit decreased from last year, due to the receipt in 2003 of 2.1 million award fee, which we did not expect to reoccur. In the second quarter, we continue to see demand for our core missile defense services.

During the quarter we obtained a new customer in missile defense, the United States Strategic Command STRATCOM. In addition, strong interest continued for our specialized systems engineering services related to hardware in the new testing of missile defense systems. Finally, as you may have seen, the Ground Missile Midcourse Defense or GMV program team and the missile defense agency completed the construction of the first GMV missile defense field in Alaska recently.

As deployment of this system continues, we believe that we are well positioned for future work for the testing and sustainment, which our core competencies of our Teledyne Brown Engineering. While profitability this quarter in our systems engineering segment is again outstanding, we do not anticipate maintaining this margin in the remainder of 2004. Given the favorable mix in timing of certain government programs in the first half of the year and anticipated increases in bid and proposal expenses, we expect that operating margins in this segment would be lower in the second half of 2004.

Turning to our aerospace engines and components segment. Sales during the second quarter of 2004 for our aircraft system engine business increased approximately 15% relative to last year and resulted from an increased sales to both OEM and after-market customers. While after-market sales were up considerably, sales of engines to OEM's with our record levels.

Operating profit, however, decreased compared to last year given the substantial negative comparisons and insurance expansion following the 75% increasing costs, which occurred on June 1st of 2003. Insurance costs for the second quarter of 2004 were approximately $2 million greater than in the same period in 2003. However, our new aircraft product liability policies, which started on June 1 of this year, are expected to reduce slightly our overall aircraft liability expense.

Based on recent favorable claims experience and changes to the claim management process, the company lowered its insurance premium and increased its annual self-insurance retention to $25 million from $15 million. While aircraft product liability insurance is expected to decline just slightly. We believe the negative comparisons that we have faced over the last several years have now stabilized. In the turbine engine business sales decrease in the second quarter primarily due to timing of engine delivery for the Joint Air-to-Surface Standoff Missile.

Finally, in our energy systems segment, revenue in the second quarter of 2004 increased by over 50% compared to the second quarter of last year and operating profit was positive. Given the substantial multiyear government programs we won last year, we continue to expect this segment will achieve greater than 50% growth in revenues in 2004 and remain profitable as well.

In conclusion, I'd like to note that excluding the one-time tax benefit in the third quarter of 2003, our second quarter 2004 earnings per share were the highest since the fourth quarter of the year 2000. Going forward, we intend to build on this momentum by continuing our focus on operation of excellence and to seek and successfully integrate acquisitions in military and regulated markets that complement our core electronics instruments and systems engineering businesses. I will now turn the call over to Dale Schnittjer.

Thank you, Robert and good morning. I will first discuss some additional financials for the quarter not covered by Robert but that some four-year highlights when warranted. Then I will give an update on pension costs and discuss our 2004 outlook. First in reviewing cash flow, in the second quarter cash provided from operating activities totaled $18.4 million compared with cash provided by operating activities of $13.5 million for the same period of 2003. The primary difference was due to an improved net income and lower aircraft product liability payments.

During the second quarter of 2004, we generated free cash flow, that's cash from operating -- cash from operations less capital expenditures of $15 million compared with free cash flow of $9.8 million for the same period of 2003. On June 15, 2004, we closed our new $280 million, five-year credit facility, which was arranged with a syndicate of banks. This facility replaced Teledyne's prior $200 million credit facility that was set to expire in November of 2004.

With the pricing grid of live war plus 62.5 to 125 basis points depending upon leverage the pricing and terms of our new credit facility are favorable to our prior credit facility. After completing the Isco acquisition, which was funded using cash on hand and debt from our new $280 million credit facility, we ended the quarter with $38.8 million of net debt. Taking into account the $41.5 million Reynolds acquisition, which closed on the first day of our third quarter, pro forma net debt would have been $80.3 million.

Capital expenditures for the second quarter of 2004 were $2.7 million compared to $3.7 million for the same period of 2003. For 2004, we continue to see depreciation and amortization expense slightly above capital expenditures of approximately $20 million.

Now moving to pension, as we have stated before, declines in the capital markets in prior years and adjustments in the pension assumptions have resulted in an increase in pension expense and a requirement to make pension contributions. In the second quarter of 2004, pension expense was $2.2 million or negative earnings per share impact of 4 cents, compared to pension expense of $1.7million or negative earnings per share impact of 3 cents in the same period of 2003.

Pension expense for 2004 is expected to be approximately $8.7 million or negative earnings per share impact of approximately 16 cents. As mentioned in the press release, anticipated pension expense in 2004 reflects a 50 basis-point reduction in the discount rate from 7% to 6.5%.

As of July 1, 2004, new hires are being added to an enhanced, defined contribution plan as opposed to the company's existing defined benefits plan. Furthermore, employees obtained from each of our acquisitions this year were not added to our legacy defined benefit plan. Additionally, we currently anticipate making pension cash contributions in 2004. The after-tax cash impact is currently anticipated to be approximately $3 million. Subsequent to November 29, 2004, the company will be able to begin recovering certain pension costs from the US government under various government contracts. Based on our current pension assumption, we expect pension expense, net of recoverability from the government, to begin moderating after 2004.

Finally, now let me turn to our 2004 outlook. Management currently believes that 2004 GAAP earnings per share in the third quarter of 2004 will be in the range of 26 to 28 cents. The full-year earnings per share are expected to be in the range of approximately $1 to $1.05, an increase from prior guidance of 84 to 88 cents. We expect the earnings per share in 2004 excluding pension expense of approximately 16 cents will be in the range of $1.16 to $1.21 per share as shown in the release. I will now pass the call back to Robert.

Thank you, Dave. And we would like to take the questions, now. If you'd please go ahead.

Thank you, sir. Ladies and gentlemen, at this time we will conduct a question and answer session. If you have a question, please press the "*" followed by the "1" on your touchtone phone. You may remove yourself from the queue at any time by pressing the "*" followed by the "2." And as a reminder if you're using speakerphone equipment you'll need to lift the handset before pressing the numbers. And our first question comes from John Harmon. Please go ahead.

Hi. Good morning. Congratulations on such a strong performance. I guess a couple of questions. First of all, given your large credit line, what is your borrowing capacity? How much will it increase from the latest Celeritek acquisition you announced and how far can you reasonably draw on it?

John, thank you for the positive comments. Right now, as Dale mentioned, we are somewhat close to $80 million. If the Celeritek acquisition is successful, and I say if because that is subject to shareholder approval and other closing conditions. Our total debt would increase to just over $110 million, which is still 1.2 times EBITDA. Obviously, with the acquisition our EBITDA is also going to the up and we think our capacity at $280 million is then this another job -- you can do the calculation, and only that's 70 or so available.

OK. Thank you. And secondly, in your systems business you've been guiding us down to 8% operating margins for a while but you don't seem to get there. You guided you expect them down next quarter. Do you think they'll hit 8% within the year or are you still doing better?

Well, I think it's a nice surprise to keep getting better results. I think we know that our proposal expansions are going to be higher going forward because we're bidding on a significant number of new programs and as we indicated we had that one time award fee last year, which was for prior years. We think, perhaps, 8% is a little low for the whole annual year. Maybe there is a little upside on that. But we know that the second half is going to be lower than the first half.

Thank you. And finally, you had 50% organic growth in your instrument business. What is driving that?

Primarily, John, let me start by saying that almost all of our instrument businesses grew without geophysical, which I'll talk about in a second, with out it the rest of our instrument businesses grew about 6%. It's partly because of just the economy is better and we're serving a lot of different markets and part -- and that's because of the economic recovery and partly it's because we're in markets that are reasonably -- growing at a reasonable pace, especially the environmental area.

Now going back to geophysical which is where we got most of the growth there, we hit an all-time high in that product primarily I think because of the higher oil prices that we've been experiencing in the prior six months or so leading to oil exploration activities picking up at the same time. And our product obviously is a product that serves the oil and gas exploration market and consequently we saw improvements there.

Finally, on the Geo, I should note that historically we've had a product there that screamer -- that is filled with oil and with the electronic sensors. These are electric devices inside. We've developed a new product, which are gel-filled, solid products, which are also gaining some new markets. Having said all of that, we think this was an exceptional first quarter for that business. I think it was the strongest quarter since 1998. We think the second half is going to moderate, but we, overall, have a positive outlook for that. But also going forward, you know, with the Celeritek acquisition, we took instruments are going to keep at a fairly stronger pace.

OK. Thank you very much.

Thanks, John.

And our next question comes from Mark Jordan. Please go ahead.

Good morning, gentlemen. Could we talk first about the systems solution group? You had mentioned a significant bid and proposal activity. Could you quantify what your pipeline is in that area? And if you're successful in these activities, could we see this segment start, growth rate accelerate in 2005?

Mark that is a good question. The part of the bid on proposal activity is that you don't know how the outcome -- what the outcome is until the customer decides who to give the contract to. Right now, from where I see it, I think going forward, especially in 2005, we are expecting not significant increases in this area.

We are increasing our EMP activity significantly, primarily because we're also going into some newer areas, dealing with things like the biological warfare materials instruction, having on-site capabilities at the customer's facility. And we are bidding on some programs with other primes. So, it's very difficult for me at this time to say that it's going to be really significantly increasing in 2005. We're obviously hopeful.

OK. If you were to look at the electronics and communications segments with 10.5% operating margin, clearly, you know, inflated a little bit, you did have about one-time, nonrecurring benefit from licensing, which would, if you backed that out, you'd be at about 10%. I guess historically, if you looked at this line, you'd tended to be sort of a low 9% type of range. Is that more reasonable, that lower range more reasonable in the out quarters here because the -- in the second quarter the geophysical instruments area was so strong and that kind of goosed your margins a little bit also?

I think I couldn't have said it better. I'll take that as an answer, Mark.

Aerospace with the JASSM funding down, I mean, clearly in the budgets JASSM funding is rising, so is this just sort of a gap in the order patterns? And then, secondly, could you size what your normalized turbine business is relative to the overall size of your aerospace group?

OK. Let me go through the first part of the question. When you look at the budget, the request and the conference as of today, we are going to be, right now, it looks like a -- about a 6% reduction in the budget. The quantities were slated to be around 350-360. They might be lower than that. They might be closer to 300 because program managers always have some holdback. But we think it would be similar between 300 and 350 for this year.

Going forward, on the JASSM, we expect -- at least the plan's right now that we see lot five, which is next year, its slated to be at 360, and going up to 2007, 2008, it's slated to remain at about that level. I think if you look at the second part of your question, if you look at the overall contribution of the turbine business, to the overall aerospace and components, JASSM is a part of the business. We'll probably end up delivering 90 this year, and of course, as I said, next year we expect that to tick up. We also deliver other missile engines. We still deliver harpoon engines for foreign military sales.

We also have a decoy -- ITALD, their Launched Decoy that we make engines for. So when you put all that -- and we still do parts for the Air Force trainer engines, which are our old engines. If you put all of that together, I think the turbine engine contributes somewhere around $25 million to the overall aerospace and components business.

OK. A last question on the pension area. I realize this is really kind of a-- asking for a ballpark comment, but assuming a flat market and that you maintain your current assumptions, would it be reasonable to assume that, you know, you say you're expecting pension -- the pension drag to moderate in 2005. I mean, but if you were to try to throw something, would it be somewhere in the range of 4 to 5 cents lower next year given the fact that, again, we've had an improving market a little bit, and you're able to charge back some of these expenses that somewhere in the 4 to 5 cents lower might be a reasonable ballpark guess at this point in time?

I will -- that's a good question again, Mark. I'll let Dale answer that for me.

I think it's a little too early to say give a specific number. There are a number of factors that will have to be taken into consideration, what are the interest rates going to be going forward, which will certainly affect our pension assumptions, what will the market return in the remainder of this year, and then, obviously, we had some fixed price government contracts that, obviously, we couldn't add the pension costs to, which went out a number of years.

So our mix of costs plus contracts and fixed price contracts will affect the amount that will be able to be absorbed. But we do think that the 4 to 5 cents is probably a reasonable estimate.

OK. Thank you very much.

Thank you, Mark.

Our next question comes from Chris Quilty. Please go ahead.

Good morning gentlemen. Fabulous numbers. Question for you on the -- just the aerospace engine business in general, the general aviation part of that. Can you give us your thoughts on how you feel about the overall market trends, any positive impacts you might be seeing from a warming economy, in terms of usage and replacement parts, and then, any update you can give us on the status of negotiations with Honda?

Good morning, Chris. I think our numbers this quarter are a pretty good -- in terms of revenue are a pretty good indication of the market in that area. What's happened to that market, as you well know, is that the newer composite aircrafts are gaining market share, significant market share and we're sole source engine on those aircraft. Consequently, that is helping the sales of our product over and beyond what you would -- what would be the market improvement.

Second, we believe that we're going to be able to get some -- garner some additional customers in that domain that have historically, perhaps, not been ours, because our engines seem to be performing better. The aftermarket revenues are relatively strong again because I think people are flying aircraft, putting more hours on their aircraft. So our immediate projection is that in terms of revenues, that business will stay healthy.

What our challenge is, Chris, to be able to increase our cost reductions on the factory floor to make up for the headwind that we experienced last year from the insurance and reserve combination that was almost $1 million a month. So what we're trying to do over a one-year span is make up $12 million in increased insurance costs by improving our productivity. I think we're making headwind there, we're making headway there, but again, we have our work cut out. Going back to the second part --

I --

Yes. Please go ahead.

No. I was just going to say I expect you to do that by next year. That's a joke.

Well, I know. I hope we can. On the Honda, we are continuing our activities with Honda. We are obviously working on the engine that they've developed. I think it's important when you come up with a new engine in a new business like this, and this will be probably the first new engine in general aviation piston engine business in several decades and when you do that, that you come up with a really improved engine over the existing products that are out there. And we're still working on that and when -- and we're hopeful that that will work out to satisfactory -- we have all of our people right now at Oshkosh as you may know, talking about that subject. So we're hopeful.

Good. On the defense side of the business, you mentioned a decline in EMS services. Is there any greater trend we should read into that or is that more, you know, just a blip in terms of order flow?

I think what happened is there -- this is work that we're doing out of our facility in Lewisburg, Tennessee. We have a couple of long-running contracts that -- with the military triumphs that ended. So we think that was a temporary decline.

Following orders in existing products, however, are increasing. We've had some really good orders in (inaudible), which, you know, the enhanced position, location and reporting system and we've also orders on the Navy's Vertical Launch System and box build for US Army's Smart Key dotcom system. So these orders are for the next year or two and we think that between this and the fact that that we have to make up for the Comanche -- government Comanche program, I think this was a temporary phenomenon.

But going forward, overall, in the defense electronic market, because the comparisons, because that business grew so fast, except if we make or are successful in our current acquisition and make further acquisitions. In an organic basis we think that will stay relatively flat. And that's a pretty healthy pace for our businesses. But of course if we're successful in the acquisitions that we've announced, we expect a pickup in that business.

OK. And final question. I mean, I guess this goes in the hodgepodge, short cycle electronics, the sort of anti-semiconductor test equipment, medical products, did you characterize you know, overall sales across those product lines and as either improving or softening?

Yes. I think our organic there was up approximately 5%, but that would include several things. It will include Avionics. But if we went back to the various components of that, we make relays, as you well know, or have relays and switches. We're getting some strong orders in that area.

We are -- we -- when markets were down we did two things. We first brought our costs down so that our breakeven point was significantly lower than where it used to be and we spent tremendous amount of time in developing new products so that they would get designed into the higher frequency products that semiconductor tests they put on people who were quitting up.

So what happened is -- what has happened is, as people are now introducing new products in the semiconductor test equipment and telecom market we're getting improved orders because we've designed it already. That's one.

Second, in the broadband wireless, we make transceivers for point-to-point radio and we've been adding frequencies, different frequencies to our capabilities and for one of our largest European customers, this business has been pretty good, especially in third world countries. And so that's helped us as well. So if you look at, finally, you asked about the medical electronics, demand for printed circuit cards and subassemblies such as MRI, CAT SCAN, x-rays, et cetera, we're weaker in the second -- in Q2 especially in our Mexico and Tennessee facilities.

However, we're seeing strong orders for new products. So it's kind of a mix. I think the overall sales flow of relays and broadband wireless should be up in double digits, slightly moderated by our inability to predict what the pull would be for our medical product printed circuit boards.

Fair enough. Thank you very much, gentlemen.

Thank you, Chris.

And our next question comes from Seth Tutlis. Please go ahead.

Hi. Good morning. When I look at your Systems Engineering business, you've put up the last, you know, the first half of the year about 5% revenue growth, yet you've had a ramp down in revenue presumably from the GMD program, and you know, my question is, what is -- been the offsetting work from -- in order to not only offset the ramp down from GMD but to add the growth? And then what can we look at in the second half of this year from a top line perspective in terms of a run rate?

OK. First, what has happened on to offset and actually improve our revenues is that we have been growing our business in the environmental area of systems engineering. As you may recall, we were the recipient of several contracts that dealt with chemical -- destruction of chemical weapons. That's been very helpful in terms of improving our revenues and making up for some of the other programs. We think that we will have some more top-line growth.

Overall we think in the mid single digits organically in the second half, we think this trend will continue, and as you remember, when I was answering Mark's question earlier, we are aggressively pursuing new bids, but there, of course, you know, the outcome isn't predictable. So I think mid single digits is a good number for that business in terms of growth

OK. Thanks. I hate to beat a dead horse but when we look at the margins in that business, and I just want to make sure I'm clear, when you expect a lower margin in the second half of the year, are we talking about 8% for the second half of the year or is that a year-end number for including on a go --

I think closer to eight for the second half. The year-end number may be somewhere in between -- it's, you know, we keep saying that margins are going to go down and we keep surprising ourselves but I think since we've decided to spend a significantly more dollars on the bid and proposal, we ought to be able to get -- we will get down to closer to 8%, maybe a little over 8% in the second half.

OK. OK. Thanks very much, guys.

Thanks, Seth.

Our next question comes from Robert Stellar (ph). Please go ahead.

Good morning. Just got a couple of questions for you. First of all if you look across your product line on the commercial aerospace side, I was wondering if you could quantify what the growth in the commercial after market has been this quarter and where you see that trending for the rest of the year and possibly into 2005.

Are you talking about the avionics businesses with airbus and Boeing? Or are you talking about the engines business?

If you could do both that would be great.

OK. On the Avionics side, our organic growth has been about 5%. And I think that's primarily because we keep gaining market share on the airbus platform. If you look at where we were three years ago, on the airbus platform, we had about 5% of the market. Last year we had about 35% and this year we're enjoying closer to 55%. And going forward, if the projections that we're hearing, some modest improvements and of course, we have about 50% of the Boeing market.

If the modest improvements that we're seeing and the projections we heard from Boeing yesterday, that they expect increased deliveries next year, we think this trend of 5% or so will continue for us. On the other hand, we think what will happen is as we have new products, as I mentioned our wireless ground link and now the electronic flight back as it begins delivery in the middle of next year, we think that we should see some improved revenues in that area. But we have to continue to see struggle for new markets to ensure that business remains healthy.

If you go to the engine businesses as I indicated before, we have enjoyed a 15% growth and that's a combination of improved economy as well as increasing market share in those products in the composite aircraft products, which are really gaining market from the more traditional aircraft.

So just to conclude, you're saying the aftermarket growth in Avionics is around 5% and engines about 15%?

About.

OK. If I could just follow on, you mentioned earlier on, about portfolio things going forward. What areas do you see would still be potentially acquisitions and what areas do you see potentially being for disposal?

Well, right now let me take the second part first. Right now, we don't see much tuning of our portfolio. Because we really took a hard look at our portfolio and fixed things in 2001. Having said that, we've always said that aerospace engines are not strategically critical to us going forward. So we probably will not make substantial investments in that area. Even though we will have hopefully some new programs there. So I don't think you're going to see us making a lot of dispositions.

What we have said all along is that there are three areas and we've so far we've focused on two of them -- defense and aerospace electronics. So far, most of our emphasis has been in microwave businesses and of course we bought one business that was in our Avionics area, small business. And the second area is our electronics instrument. We like both of those markets a lot.

Because they are in either you have to have Mil-Spec to be able to play in that field or the markets like water quality, air quality, etc., that we participate in are, and now drug discovery, are highly regulated markets. So barriers to entry is pretty high. And, finally, we're starting to take a look at the systems engineering businesses because the valuations seem to be moderating. For a while there, the valuations in that business went through the stratosphere and we thought they were just too rich for our blood. But as the valuations there moderate, we would look at that market as well. I hope I answered your question.

That's right. Thank you very much.

Thank you.

Our next question comes from Ben Naha (ph). Please go ahead.

Hi, gentlemen. I appreciate the good work and the terrific earnings. A couple of questions. If I were to look at the insurance expense, some anecdotal information that we're getting is that insurance markets are softening a bit. Is there any chance that going forward into '05 that insurance expense can somehow accrue to our benefit? And, Robert, another question would be if you can aggregate for me all of the acquisition activity and just put in one lump sum, i.e. we bought $300 million of revenue, we paid $200 million for it and the current EBIT for the aggregate businesses are the following. So that's my questions?

Hi, Ben. Nice to talk to you. It's been a while. Let me go back to your first question first. Which is that, first, on the insurance, our insurance won't come up for renewal again until June 1 of 2005. So we know what we're going to have in front of us for at least the next 10 or 11 months -- 10 months. And what as I said before and as you know is that's moderated while, you take what we have to take for our reserves, which is pretty experienced based. And what we pay for premium, we're slightly down, just a couple of percent down from where we used to be last year.

The markets are improving and part of that, how well we fare there is going to very much depend on our claims experience going forward. The way the insurance companies set the premiums and the costs that you have to incur or how much you reserve depends on how much they put in reserve on their books based on your claims experience.

Fortunately for us, we have now been able to moderate that to the extent that as we have litigation the decision on how to deal with it has become more of a partnership than a singular decision making process by the insurance company. And as a consequence of that, we are optimistic that the claim experience would be OK. Going forward. Having said all of that, I think to expect that our insurance costs will go down significantly, a year from now, would be a little too optimistic. I think to be able to hold the line, where we are and be able to improve our operations, is a more realistic way of looking at it. That's my best guess at this time and of course you know if something terrible were to happen then of course anything can happen.

Let me go through the acquisitions, if I may. First, let me exclude Celeritek, because we are in a very sensitive domain area there, timing wise, because of the shareholders approval and I don't want to jump the gun on that. So if you exclude that, we have acquired about 220, maybe a little less, $215 million worth of products -- businesses among our eight acquisitions to date. And so -- and we paid about one time revenue approximately.

OK.

And those vary.

Sure.

In terms of EBITDA multiple, which is what I would use for those, that also varies business to business where we can really move the manufacturing facility to one of our facilities like we did with the ARS acquisition that we made and we moved the manufacturing from Wichita to Los Angeles or the solid state acquisition that we made that we moved into our demanding new facility there we gained a lot more synergies of everything -- accretion is better. But if you roll it all together, and we also have of course have to think about post merger integration expenses in the short time.

I think it would be safe to say that this thing all together we should enjoy an EBITDA multiple close to what we're enjoying at the present time which is about eight. We think with synergies kicking in with time, and the hard part of acquisition is not acquiring businesses. The hard part is if you really decide to integrate them, you do have some temporary costs. I think going forward those will improve.

We're very positive about the way we're integrating acquired businesses because we took our time to do a few before we started accelerating it and we're pretty focused on taking only things that are within the areas that we understand and within the markets we're playing. I hope that I answers the question fully.

Let me recap what I wrote and tell me whether I got it right. You paid about $215 million for about $215 million of sales. And you bought about $25 million or $26 million of EBIT and that EBIT can improve with synergies.

Within a percent or 2, a few here and there I think you got it. I haven't gone and done all of that but I think you're around right close.

OK. Thanks again. Again, terrific work. We really appreciate it as long-term shareholders. Thanks.

Thank you, Ben.

And, gentlemen, there are no further questions. Please continue with any closing remarks.

Thank you, operator. And thank you, everyone, for your questions. I'd like to ask Jason now to conclude the conference call.

Thanks, Robert. And again thanks everyone for joining us this morning. If any one has any follow up questions, please feel free to call me at the number listed on the earnings release and again, all releases are available on our Web site. Operator go ahead and please conclude the call.

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