Teledyne Technologies Inc (TDY) 2005 Q1 法說會逐字稿

Welcome to the Teledyne first-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) As a reminder today's conference is being recorded. I would now like to turn the conference over to our host, Mr. Jason VanWees. Please go ahead, sir.

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

Joining us this morning are Teledyne's 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 periodic SEC filings; and of course actual results may differ materially. Also, in order to avoid selective disclosures, this call is simultaneously being web cast and a replay, both via webcast and dial-in, will be available for about one month. Here is Robert.

Thank you, Jason, and good morning. Since our first-quarter earnings release was issued earlier this morning, I won't go through all the details, but I would like to make some introductory comments about the quarter, followed by observations on the performance of the various segments.

To begin, this was a record quarter for Teledyne Technologies booking, revenues, and net income. Furthermore earnings per share increased year-over-year for the 13th consecutive quarter. Sales grew 35.5% while earnings per share increased over 155%. An important contribution to this performance is our ability to successfully integrate acquisitions into our portfolio of businesses. In my comments later regarding the electronics and communications segment, I'll give an update on the businesses acquired in 2004.

Total organic growth during the quarter was a record 19.4%. Furthermore we enjoyed organic growth in each business segment during the quarter. Operating margins for the overall Company and our electronics segments were also near record levels. Favorable market fundamentals in the majority of our businesses, coupled with strong execution through our lean manufacturing initiatives, resulted in extraordinary performance during the quarter.

In the remainder of my comments I'll elaborate on the operating performance of our business segments. Dale Schnittjer will then discuss in more detail our financial performance and comment on our outlook for 2005.

Turning to our business segments, first-quarter sales in our electronics and communications segment increased 49%, compared to last year, from 116.4 million to 173.5 million with organic growth of 18.7%. Operating profit increased 151%, from 8 million to 20.1 million, with operating margin up approximately 470 basis points compared to 2004.

As I further discuss our electronics and communications businesses, I will 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 groupings quietly (ph) contribute approximately one-third of our electronics and communications segment sales.

In the first quarter of 2005 sales of defense electronics increased approximately 57% compared to first quarter of 2004. Excluding the acquisitions of Reynolds Industries and Celeritek's defense assets, organic sales growth in the first quarter was approximately 18% of sales; and nearly every major defense electronics product and service category grew at double-digit rates compared to last year. This included vacuum and solid-state devices for electronic warfare, and manufacturing services for microelectronics or printed circuit assemblies.

As for our 2004 acquisitions, the relocation of Celeritek's defense microwave product line into our Mountain View, California, facility was successfully completed during the first quarter of 2005. Today all of our solid-state defense and commercial microwave operations, including those from Filtronics and Celeritek, are operating within a single facility. Support function, which has marketing, materials control, quality, have been integrated resulting in improved performance and operating margins.

Another 2004 defense electronic acquisition was Reynolds Industries, which was purchased in July of 2004. We are very pleased with the performance of this business. Orders and sales of Reynolds' proprietary connector assemblies for the joint helmet-mounted queueing (ph) system used in a number of military aircraft, most notably the F-18, have remained very strong, as have orders and sales of Reynolds' traditional high-voltage connectors used across multiple defense programs in the U.S. and Europe.

Turning to our electronic instrumentation businesses, in the first quarter of 2005 year-over-year total sales of electronic instruments increased approximately 71% compared to last year, from 32.1 million to 55.1 million, primarily due to sales growth through acquisitions. Organic sales, however, were also higher by approximately 9%. While we experienced strong growth in product lines such as geophysical sensors, which serve the petrochemical market, we expect to see negative year-over-year comparisons in some of these products in the remainder of 2005.

Turning to our acquisitions, in February 2004 we acquired the assets of Leeman Labs, a producer of mercury analyzers and elemental spectrometers. Given the increasing concerns regarding the toxicity of mercury and other metals, both domestically and internationally, we see a favorable outlook for this business.

Since the acquisition of Isco in June of 2004 we have divested two of its non-core product lines. In late 2004 we divested Isco's interest in a partnership that produced electromagnetic flow meters, thus exiting the extremely competitive mag meter business. On March 31 of 2005 we sold the assets of Isco's German subsidiary to Endress&Hauser.

With the completion of these two small divestitures, Isco is now focused on three markets in which it has leadership positions. First, wastewater samplers and open channel flow measurement of environmental water quality monitoring. Second, flash chromatography instrumentation for drug discovery. And third, high-pressure syringe pumps for a variety of industrial applications.

Finally, I'll discuss our avionics and other commercial electronics businesses. In the first quarter of 2005 sales from these businesses collectively increased approximately 26% from the first quarter of 2004. This growth was all organic and resulted from increased sales in several product lines, most notably commercial avionics, electronic relays, and commercial contract manufacturing services.

Despite some weakness in the semiconductor test market, traditionally a large market for our electronic relays, sales of relays were at the highest level since early 2001. Sales growth resulted in part from multiple design wins in 2004 coupled with increased sales of RF relays used in wireless infrastructure and networking equipment, and increasing demand for general-purpose relays used in test and measurement instrumentation and aerospace applications.

Also in the aerospace market, sales of our Teledyne controls business unit, which produces data acquisition systems primarily for commercial aircraft, increased substantially during the quarter. Continued increases in market share on Airbus aircraft, as well as some regulatory changes being adopted by Europe and some Asian countries, helped generate good performance in this business.

Turning to our government and systems engineering segment, in the first quarter of 2005 revenues in this segment increased 29% compared to last year, while operating profit increased 23% due to a slight decline in the operating margin of this segment. Nonetheless, the operating margin of 10.6% is quite attractive for this cost-based government services business. We believe that this record quarterly revenue will probably be the peak for 2005.

In the first quarter sales were strong in both our traditional defense and space programs, as well as our newer environmental programs. As we forecasted in our outlook statement released in March, we saw particularly strong revenue growth in the first quarter due in part to favorable timing in certain environmental programs related to chemical weapons demilitarization, and the Company's systems engineering and technical assistance contract with the U.S. Army.

As a reminder, through these systems engineering and technical assistance contracts, we assist government agencies with highly technical evaluation of strategy, program management, and operational performance.

Turning to our Aerospace Engines and Components segment, sales during the first quarter of 2005 for our aircraft systems engine business increased approximately 14% relative to the first quarter of last year and resulted from increased sales to OEMs as well as continued improvement in the general aviation aftermarket.

In the turbine engine business, sales decreased compared to last year, primarily due to timing of certain programs. For example, shipments of Improved Tactical Air-Launched Decoy, or ITALD, engines which occurred in the first quarter of 2004 are expected to occur in the second quarter of 2005. In addition, we expect shipments of Joint Air-to-Surface Standoff Missile, or JASSM, engines to be stronger in the second quarter of 2005. However, overall we anticipate weaker sales of turbine engines in the second half of this year compared to 2004.

Operating profit and other segment income increased in part due to a $2.5 million payment pursuant to our agreement with Honda Motors Company. While the terms of this agreement are confidential, we anticipate receiving another 2.5 million in 2005, with 2.5 additional million in 2006. As a reminder we have been working with Honda for over two and half years on development of a new piston engine for the general aviation market.

Finally, in our Energy Systems segment, revenue in the first quarter of 2005 increased 25% compared to the first quarter of last year; and operating profit increased as well. Given the substantial multiyear government programs we have won, we continue to expect this segment to remain profitable despite R&D investments in hydrogen generation and fuel cell technologies. However, as we mentioned in our previous and current outlook segment, we expect sales in the second half of 2005 to be lower than the second half of 2004.

To summarize, this was Teledyne's best quarter since our spinoff in late 1999, and we expect to build on this momentum of quality revenue and EPS growth by, first, continuing our focus on operational excellence and margin expansion programs; and second, to invest in organic growth initiatives, and find and successfully integrate acquisitions in defense and regulated commercial markets. 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, plus add some full-year highlights when warranted. Then I will give an update on pension costs and discuss our 2005 outlook.

In the first quarter cash provided from operating activities was $2 million, compared with cash provided from operating activities of $8.2 million in the same period of 2004. The lower cash flow in 2005 was due to increased accounts receivable resulting from higher sales; greater inventory balances due to anticipated sales in the second quarter of 2005; a $1.7 million pension contribution; and higher compensation payments made in the first quarter of 2005. This was partially offset by greater net income.

While free cash flow was slightly negative in the first quarter, net debt was slightly lower than 2004 year end, due in part to receipt of $5.2 million from the sale of the assets of STIP-Isco in the quarter. STIP-Isco was acquired as part of the Isco acquisition made last year; and in accordance with purchase accounting no gain was recorded on the sale and goodwill was adjusted accordingly. At the end of the quarter we had $58 million of net debt.

Our balance sheet remains strong, with net debt to capital ratio of 16.9%, which provides flexibility for future acquisitions in our strategic businesses. As shown in our press release, capital expenditures for the first quarter of 2005 and for the first quarter of 2004 were $3.3 million. For the first quarter of 2005 depreciation and amortization expense was $6.1 million, compared to depreciation and amortization expense of $5.6 million in the first quarter of 2004.

As we have stated before, declines in the capital markets in prior years and adjustments in pension assumptions have resulted in an increase in FAS 87 pension expense and our requirement to make pension contributions. However, subsequent to November 29, 2004, the Company is able to recover certain pension costs from the U.S. government. Pension expense allocated to various contracts pursuant to the U.S. government Cost Accounting Standards or CAS can generally be recovered through pricing of products and services to the U.S. government.

In the first quarter of 2005 FAS 87 pension expense was $3.2 million or a negative earnings per share of $0.06. This compares to FAS 87 pension expense of $2.2 million or negative earnings per share impact of $0.04 in the same period of 2004. However, in the first quarter of 2005 pension expense allocated to contracts pursuant to CAS was $2.4 million or a positive earnings per share impact of $0.04, compared to no allocation in the first quarter of '04 because we were prohibited from charging CAS pension expense to the government prior to 11/29 of '04.

As we have mentioned before starting January 1, 2004, new hires have been added to an enhanced defined contribution plan, as opposed to the Company's existing defined benefit plan. Furthermore, employees from acquisitions will participate only in our defined contribution plan.

Now let me turn to the 2005 outlook. Management currently believes that GAAP earnings per share in the second quarter of 2005 will be in the range of $0.37 to $0.40. The full-year 2005 earnings per share are expected to be in the range of approximately $1.50 to $1.55. We currently anticipate $12 million or $0.23 per share in pension expense under FAS 87, or $3.4 million which is $0.06 per share in net pension expense after recovery of allowable pension costs from our CAS-covered government contracts.

Full-year 2004 earnings included 8.7 million or $0.16 per share in pension expense under FAS 87, or 8.2 million which is $0.15 per share in net pension expense after recovery of allowable pension costs from our CAS-covered government contracts. The assumed FAS 87 discount rate is 6.25% in 2005, compared to 6.5% in 2004. I will now pass the call back to Robert.

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

(OPERATOR INSTRUCTIONS) Gary Liebowitz from Jeffries and Company.

Nice quarter. Could you talk about the margins in the system engineering business? I mean it is basically a cost-plus type business and you still are over 10%. Where there any award fees, perhaps on missile defense programs that are worth pointing out during the quarter?

No, I don't believe so, Gary. It really was 10.6% in this quarter. It was somewhat lower than the first quarter of last year. So we saw some decrease in that. In the first quarter of last year it was over 11%.

But you had talked about this business as being sort of a long-run 8 to 9% type margin business. Maybe that's where it's going in the second half. But no unusual onetime favorable accruals in that business, correct?

No, I think, Gary, we did get a little help from CAS. And we did have some estimates for completion that helped also. But overall I'd say there weren't any large significant items there.

Also if we turn to the aerospace engine business, are you seeing any pickup in the pricing environment because of the strong demand?

Yes, we have had a price increase which became effective earlier this year. So far it has held. I think because of our position with new OEMs, especially OEM aircraft that are gaining market share, we are well situated there.

The other help that we had in that segment is we've extended our operational excellence lean manufacturing program to the system engine. We always had a fairly good structure and a good factory. But we've put now some exceptional emphasis on taking costs out of that factory.

Great. Also one last thing, Robert. On the last call you talked about perhaps emerging opportunities for surveillance, UAVs, and upcoming competitions or possible awards. Has anything changed on that in the last three months?

The only thing, Gary, on that is we had an agreement with of Rheinmetall of Germany where we're using their -- the German military developed UAV system. We have submitted a proposal for the future combat systems UAV program. We expect to hear about that in the second, near the end of the second or early third quarter.

Thank you very much.

John Harmon from Needham and Company.

I would just like to discuss revenues, margins, and guidance a little bit. I guess first of all, if you could please talk about your gross margins. You have had very good expansion year-over-year, whether it is the acquisitions you have made that have driven that. And looking at Q2 guidance, which looks like historically has been a seasonally flattish quarter, your EPS guidance is down a bit. Just wondering what the driver is there, whether it's margins or something else?

First let me talk about the improved margins in the first quarter. There are really two primary driver's there. The first is the additional volume that we've enjoyed in our sales mix, and our sales mix. I mentioned for example that we had good volume in our relays. Our fixed costs in our relays businesses are significant; and once we break through a certain level we enjoy pretty healthy gross margins in that business.

Second, our cost-reduction efforts in electronics and communications especially are continuing. Of course, acquisitions helped. We think from the 400-some basis point improvement maybe 200 of that came from acquisitions. I've talked briefly about Reynolds and Isco doing really well.

About the second quarter, we think it is going to be relatively flat year-over-year in terms of margins. We think it's going to be flat also with respect to the first quarter, pretty much flat. We think the revenues are going to be a little lower in the second quarter at this time. So we are projecting, as Dale mentioned, we are projecting $0.37 to $0.40, which is still above last year's second quarter as you know, which was about -- I believe it was about $0.30.

Thank you. A couple other quick things. Could you please discuss what goes into other income? And talk about your timeline for repaying your debt?

The only thing that goes in the other income is, first, the Honda payment that we discussed, the 2.5 million that goes into our aerospace engines program. We do have a small amount of rent and royalty, which is not that significant. It is certainly less than $1 million a year. And the second part of the question was --?

You paid a bit of your debt off with your divestitures. Going ahead, do you anticipate paying it off with cash flow?

Yes, we think we're going to have -- our first-quarter cash flow has always been relatively weak with respect to the rest of the year, primarily because bonuses are paid in that quarter. We think the rest of the year our free cash flow should be at least equal to our net income for the year. If we do not make any acquisitions, if we do not make any acquisitions, obviously we will pay down our debt.

Thank you very much.

Karl Oehlschlaeger, Banc of America Securities.

I guess I'll start off with a question on your E&C business. You talked about geophysical sensors slowing down. I guess you had a difficult comp. Can you break out what the geophysical sensor revenue was for FY '04 and 2005?

I'm digging that out right now. I would say in 2004 it was somewhere between 25 and $30 million, approximately in that range. I think in 2005 in general it's going to be about 5-plus million more than that.

In the kind of guidance that you are giving out, what sort of organic pipeline growth rate are you factoring in?

We really never give guidance on top line. But I think we have always said that in general we are in the middle single digits in our general businesses, in the long term, I should say.

We've enjoyed a really good organic growth the first quarter. But we think some of those are because we, as we mentioned, some of our revenues -- for example in the defense engineering services business -- peaked in this quarter. We don't think that is going to happen the rest of the year. And we also have some year-over-year negative comps in our turbine engine business.

The stock option expense, you mentioned in the press release for the second half of the year it is about $0.05 in total. Is that how we should be thinking about that expense going forward? It's I think around $0.11 for the footnotes in 2004. So it sounds about the same.

I'm going to let Dale answer that, if I may.

Yes, that would be as we presented it in the table. I would agree with what you just said.

Just finally, on the M&A environment. you mentioned that you are still looking for defense and regulated commercial market sort of assets. What are you seeing now and kind of relative to the last couple of quarters in terms of pricing. Has it changed, has it gone up? What is your take on the current M&A environment for your target market?

In the defense electronics market, pricing has gone up. In some things it's gone beyond our appetite, especially when you look at large assets. As you know some of the announcements on the large assets, there have been some international buyers with the depressed dollar that have been able to afford to pay significantly higher multiples than we are willing to pay. Even then I think on the small asset side -- assets in the 20 to 30 million, 35, $40 million range -- we see some potential acquisitions.

On the non-defense electronics domain there are still available assets. Again in the smaller sizes. That's a fairly black instrument (ph). That is a fairly bifurcated market. It's just that for us we have to make sure that what we're buying fits with our strategy of our focus strategy, whether it's continuing our instruments for processing or instruments that have to do with air and water quality.

That is it for me. Thanks, guys.

Chris Quilty from Raymond James and Associates.

Question for you on the defense electronics business. It seems to have peaked up in the last couple of quarters after being soft last year. Were there any specific programs that you can point out that may be driving the growth? Or is it just an anomaly of the build cycle on a number of programs?

I think in general we have kind of enjoyed a pickup across a variety of programs ranging from F-22 to our qualification of fiber optic transceivers in the Joint Strike Fighter. We are seeing a little more activity related to secure communications that have to do with battlefield radios.

We also are seeing some satellite communication demand, which had softened near the end of last year. We saw some pickup of that in the first quarter. And also in our contract manufacturing, we do also make some transceiver assemblies for satellite communication. So I would say across the board we've seen some pickup there in the first quarter.

Shifting gears to aerospace engines business, I think your insurance contract comes due next month. Can you remind us of what you've said your expectations are? And maybe even if you can remind me what were the rate increases you saw over the last couple of years? I know that trend has been moderating.

In looking at the outlook here for the next round, are there any changes in the carrier pool or anything else that may have made the negotiations more favorable for you?

I'm going backward and doing a little mental arithmetic here. If we go back to two years -- no, let's go back three years. If we go back three years, our premiums were about -- between premiums and what we've reserved as a first-dollar basis, those costs were around 16 to $17 million for us, annualized.

The following year that jumped about $1 million a month. So it went up to 27, $28 million or a little more. Last year we had a slight decrease in our premiums. We are still reserving a significant amount, more than the 10; we are reserving closer to 16-plus. But our premiums went down just a little bit a percent or two.

We are right in the thick of making presentations to insurance companies here and in Europe for renewal of our policy, which is due for renewal at the end of May. Our anticipation at this point is that the policy will stay flat, the premiums will stay flat, maybe decline a little.

But we're not sure because the market is kind of fickle. It tightens up. It seems it always tightens up when we're going for a renewal. But maybe that's just my impression.

What about your reserve levels? You have had a very good experience over the last couple of years. At what point might you lower your reserve levels? Can you give me an accounting course here on how that might be recognized?

I am going to let the accounting course be given by our CFO.

We look at reserves on a quarterly basis. Obviously we look at our annual and our history on losses. We accrue for what we think will be the losses in any particular year; and then if there is anything that is an outlier, we would have to take care of that in the quarter. But we can't predict and we can't tell you where this is going to go in the future.

You're right, we've had some favorable experience. And if that continues we would see some favorability associated with that. But that is sort of a long-term look, and there is no short-term or medium-term change that we're looking at.

Okay. Shifting gears while I have you, Dale. The balance sheet leverage has been around 20% in the last couple of quarters; and obviously there is some excess working capital at the close of the first quarter. Where, as a Company, would you start to think about slowing down acquisition activity? At what level of leverage do you feel like you would have to either look at other financing options, or raise capital, or just slow down until the cash flow pays down the debt?

We spend a lot of time looking at working capital and working with each of the business units to keep working capital at a minimum. We don't see any immediate near-term change in what we see in the near future or for the rest of the year on the working capital side.

We'd certainly like to be investment-grade, and when we -- if we get outside of that, we might have to look at something. But we don't see anything in the near-term that's going to put us there.

But you don't have an internal barometer that says once we get to 40 or 50% debt to cap?

We do not.

Okay. Finally, can you give us a -- on pension contribution an update? You made, obviously, a small contribution in this quarter. Are there any remaining cash contributions that you expect on a go-forward basis?

Yes, there are. We probably have another -- well, there's a range in what we could pay, but we will pay probably at least 12, $13 million this year additionally.

Okay. And actually, I lied; I had one more question on my list. On the instrument business, can we get a general update on where you think you stand in the consolidation there? It looks like the product roadmap, at least the major holes in that have been filled. Is that still an area where you look for continued acquisitions, or is it really shifting over to some other areas?

No. I think, Chris, that remains, as do defense electronics and perhaps systems, one of our platforms for growth. I think we've just begun in that area. There are a lot of assets available, attractive assets; some of them available, I should say, that like we'd like to pursue. That is a very important area for us.

Have you basically put together the selling organization so that it's fairly coherent now? In other words, a salesman from an Isco organization is now cross-selling other products? Is there a single catalogue or means by which they can pull in other experts to try to do more bundled sales?

Only in areas where we have common customer sets. Some of the customers in these businesses are different from one another. But were there are common customers, we do that. There are also some intercompany synergies. For example, we make flow controllers, meter controllers, in our Hastings instruments, which are now being embedded in our Tecmar products. And we also have in our API categories, we have capabilities in API, advanced instruments that we make there, which are used in our monitor lab systems.

The other thing is that some of the service functions are also being combined. That is the more expensive part of our business. And then we have, of course, our overseas sales. We're finding commonality there, also.

Thank you very much, gentlemen. Keep up the good work.

Jeff Lee (ph) with A.G. Edwards.

I'm pinch-hitting today for Mark Jordan who couldn't be with us. I just wanted some clarification on where you think the margins are going to settle over the next few quarters for the electronics and communications division.

Thank you, Jeff. In the electronics and communications segment we think margins might go down slightly, but fairly flat. I would say margins probably go down a little bit, because we think our revenues are going to be peaked in the first quarter of the year.

Thank you.

Stephen McBoyle from Lord Abbett.

I think you may have just answered my first question, and that was within defense electronics, just in relation to the organic growth of 18%; and you laid out some of the programs there, just questioning whether that is actually sustainable through the remainder of the year. Or is it fair to say that Q1 was, to Chris's question, somewhat exceptional?

I think in the defense electronics business, the Q1 -- while it was exceptional -- I think the programs that we have are longer-running programs. We think that there might be some deterioration in that, but not a whole lot.

Okay. You hadn't touched on relays as much. I am just curious to the extent there that you're obviously seeing some demands equal to amounts that you saw back in the '01 time period, it is almost surprising to hear that. But I am just curious as to if you could just elaborate on that and how sustainable that may be.

We were fortunate. During the down cycle in relays we spent a significant amount of time getting designed into new systems. A lot of test and instrumentation systems were being redesigned. And we got our RF relays, especially our high-frequency application relay, defined into those systems. At one point we were counting, like we had over 100 designs that we got in. I think we're enjoying some of the fruits of that labor in general.

We are also -- surprising to us as well -- we have seen some pickup in the wireless communications infrastructure. Both in relays as well as in some of the transceivers we make. That's been good for us as well.

We have also done some innovative products. We have now surface mount relays for the market, whereas most of these relays were not surface mount previously; and we have new customers. So it's a combination of things rather than a big market pickup from our perspective.

On the RF wireless infrastructure side, who would be some of the main customers there, if you can comment?

We are really a secondary provider. We provide to others that use our relays in introducing products. But my guess would be all the larger users, producers of wireless infrastructures, here and in Europe especially.

Just turning to systems engineering. The program that you referenced, the weapons program for the U.S. Army. have you quantified that and how that ought to roll out through the year?

Which weapons program? Help me along here.

Within an environmental program related to the --

Chemical (multiple speakers).

Chemical. Yes. Sorry; did I say weapon?

On the chemical demo (ph) program we think the first quarter was the high water mark of the program because of just primarily timing issues. We think that will moderate in the remainder of the year. That would be my answer to that question. That may decline a few million dollars in the following quarters.

Great, thank you. Just a general question with regards to the cost improvements on your operational excellence program, that you've obviously done exceptionally well over the years. I am just curious; have you targeted an aggregate dollar amount that you are shooting for in the '05 period?

Yes, but you know it depends on revenues. Let me go at it another way if I may. When we started this program, if you looked at our factories and you said, what is the cost of scrap, rework, and warranty combined, as a percentage of sales? We were somewhere north of 5%, which is not unusual by the way. Any really good measurement in a high reliability factory would yield numbers like that.

Our target has been to reduce that 20% a year. Our target for this year is to get that down to somewhere in the 2.5% range overall. Of course what happens is that as we make acquisitions we find that the acquired companies that we have that percentage jumps up. Which is okay, because what it does is that gives us more opportunity to bring -- to improve our margins by putting our lean manufacturing processes in those factories.

So I will say in terms of percentages we're trying to get down to 2.5. When we get there, I'm sure we will set some new goals. Everybody in the room is smiling about that.

It's called constant improvement, right?

Yes.

Maybe, because you used to present a wonderful chart in terms of you had 20 million in '02 -- and this was both scrap, rework, and warranty -- 15 in '03; and I think the '04 plan was 12 million. Is that a number that you're speaking to in terms of '05?

Yes, the thing is -- the only problem I have with those numbers is that if you looked at the factories that we had in '02 and you look at the same factories this year, yes, those would be closer to that number. But our revenue has gone up significantly in electronics and communications. I think it's gone up over 60% in that time period. So what has happened is the dollar number is gone up across the factory. But if you looked at original numbers that's an accurate description; it's gone down to about 12, maybe a little less.

Okay. Just to clarify, only because I heard a portion of it, with regards to the Honda payment, the 2.5 in '05, 2.5 in '06, that is consistent with what was the terms and conditions before. Is that correct?

Yes, the 2.5 -- we got 2.5 in the first quarter. We expect another 2.5 in '05. And then 2.5 and '06. Yes, that is consistent.

Thank you very much.

We have no further questions in queue. Please continue.

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

Things, Robert, and again thank you, everyone, for joining us this morning. If you have any follow-up questions please feel free to give me a ring. My number is listed on the earnings release. (indiscernible) All news releases are available on our website, Teledyne.com. Operator, please conclude the call. Thanks.

Thank you. Ladies and gentlemen, this conference will be available for replay from 11:30 AM today until May 27 at midnight. You may access the AT&T replay service by dialing 1-800-475-6701 and using the access code 778045. International callers may dial area code 320-365-3844. (OPERATOR INSTRUCTIONS) That does conclude our conference for today. Thank you for your participation, as well as for using AT&T's executive teleconference service. You may now disconnect.