Teledyne Technologies Inc (TDY) 2005 Q4 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by, and welcome to the Teledyne Fourth Quarter Earnings Conference. (Operator Instructions.) I would now like to turn the conference over to our host, Jason VanWees. Please go ahead, sir.

  • Jason VanWees - Director of Corp. Dev. & IR

  • Good morning, everyone. This is Jason VanWees, Director of Corporate Development and IR at Teledyne Technologies. I’d like to welcome everyone to Teledyne Technologies’ Fourth Quarter and Full Year 2005 Earnings Release Conference Call. We released our earnings earlier this morning before the market opened.

  • Joining me today are Teledyne Technologies’ Chairman, President and CEO, Robert Mehrabian, Senior VP and CFO, Dale Schnittjer, and Executive VP, General Counsel, and Secretary, John Kuelbs, as well. 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 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.

  • Robert Mehrabian - Chairman, President & CEO

  • Thank you, Jason, and good morning, everyone. Since our fourth quarter earning release was issued earlier this morning, I won’t go through all the details. But, I’d like to make some introductory comments about the quarter and the year, followed by observations on the performance of the various segments.

  • To begin, our record revenue and net earnings capped an outstanding year for Teledyne. Fourth quarter year-over-year earnings per share increased for the 16th consecutive quarter. Sales in the quarter grew 7.7% while earnings per share increased at three times that rate, or 23.1%, compared to 2004.

  • For the full year 2005, sales were just over $1.2 billion, an increase of 18.7% over the same period in 2004. The corresponding increasing earnings per share was almost 50%. We attribute this performance first to our success with acquisition and our integration program, and second, investments made in product development, and third, operational excellence program applying lean manufacturing principals focused on margin expansion.

  • The overall operating margin in the fourth quarter increased over 100 basis points, compared to last year. And on a full year basis, operating margin increased almost 200 basis points. Reflecting on our 2005 performance and our current business portfolio, we believe that Teledyne represents a unique U.S.-based manufacturing and engineering services company. While the profitability of manufacturing operations in many companies has been strained by increased energy costs, our overall financial performance has improved in part due to the strong contribution from our instrumentation business as we served the petrochemical exploration market.

  • Furthermore, with relatively low direct labor costs as a percentage of sales, and with a substantial portion of our products and services provided to the military, we are somewhat insulated from overseas competition.

  • I will now elaborate on the operating performance of our business segments, followed by Dale Schnittjer, who will discuss in more detail our financial performance and comments on our outlook for the first quarter and full year 2006.

  • Turning to our business segments, fourth quarter sales in electronics and communications segment increased 16.7% compared to last year, from $161.8 million to $188.9 million, with organic growth up 4.5%. Operating profit increased 33.5% from $16.7 million to $22.3 million, with operating margin of approximately 150 basis points compared to 2004, up from 10.3% to 11.8%.

  • As I further discuss our electronics and communication businesses, I’ll break up my comments into three separate categories. First, defense electronics, second, electronic instruments, and third, avionics and other commercial electronics. Each of these groupings currently contributes approximately one-third to our electronics and communications segment sales.

  • In the fourth quarter of 2005, sales of defense electronics increased approximately 26%, compared to the fourth quarter of 2004. Excluding acquisitions, organic sales growth of defense electronics in the fourth quarter was approximately 10%, up as sales in several different electronics products and services categories increased compared to last year’s. Examples include traveling wave tubes for radar and satellite communication operations, high voltage connectors and cable assemblies, and manufacturing services for [indiscernible] and circuit card assemblies using infrared counter measure system, litho systems, and battlefield communication.

  • Turning to our electronic instrumentation businesses, in the fourth quarter of 2005, year-over-year total sales of electronic instruments increased approximately 34% compared to last year, from $51 million to $68.5 million due in part to the acquisition of all the instruments which contribute to this increase. Organic sales, on the other hand, also increased by 12.7%. This was due to two factors. First, significantly increased sales of our geologic--geophysical sensor product line--as I mentioned, we served the petrochemical exploration market. And second, we have increases in sales of instruments and systems used for air quality monitoring.

  • As a reminder, in August 2005, we acquired Teledyne RD Instruments, a manufacturer of highly sensitive acoustic instruments used to analyze the flow of water or the movement of objects in water. In the fourth quarter, we announced the pending acquisition of Benthos, Inc. to further strengthen our capabilities in underwater acoustic instrumentation. Benthos is a leading provider of oceanographic products designed for port and harbor security services, the U.S. Navy, energy exploration, and oceanographic research. Benthos has developed a broad range of innovative products, including acoustic modems for network underwater communication, a novel three-dimensional slide scan sonar system, and in the past 20 years, Benthos has produced over 400 remotely operated underwater vehicles.

  • Teledyne RD Instruments already incorporates Benthos’ acoustic telemetry technology into their products for wave monitoring. And Benthos has also manufactured hydrophones for Teledyne’s geophysical further aid of hydrophones that are used for offshore oil and gas exploration. We look forward to full integration of our fourth water instrumentation business assuming the positive vote by the shareholders of Benthos tomorrow.

  • Finally, I will discuss our avionics and other commercial electronics businesses. In the fourth quarter of 2005, sales for these businesses collectively decreased approximately 8% from the fourth quarter of 2004. The decreasing sales was due in part to decreased deliveries of broadband wireless assemblies for commercial telecom market, and commercial contract manufacturing services, which was partially offset by an increase in sales of relays and avionics systems.

  • Turning to our government engineering segment, in the fourth quarter of 2005, revenue in this segment decreased 3.2% compared to last year, while operating profit was flat. Due in part to the timing of selective government programs, revenue in this segment peaked as anticipated in the first quarter of ’05, then declined sequentially throughout the balance of the year. However, for the full year 2005, year-over-year sales grew at a more normalized rate of 8.9%.

  • Orders in our environment of systems business were strong in the fourth quarter, and we continue to believe that weapons immobilization will be a growth area for Teledyne ground engineering. Missile defense remains an important area for our government engineering services business. The current base realignment and closure, or BRAC recommendations include relocation of a number of missile defense [indiscernible] responsibilities and personnel to Huntsville, Alabama. We believe our systems engineering businesses headquartered in Huntsville are well-positioned to benefit over the long-term from NBAs growing presence in that region.

  • Turning to our aerospace engines and components segment, sales in the overall segment declined 3.4% primarily due to the decreased sales of missile engines. In addition, operating profits declined as well. Sales of piston engines and spare parts were flat due to strong sales of OEM [indiscernible], such as [indiscernible] design, offset by weakness in the aftermarket. However, sales and profits for military turbine engines, which are primarily used in cruise missiles, declined in the quarter due to lumpy deliveries, which resulted in especially tough comparison with last year’s fourth quarter.

  • Nevertheless, the overall aerospace engine business performed well in 2005 with year-over-year sales growth of over 8%. Furthermore, margins in this segment increased considerably even excluding the additional $2.5 million payment from Honda we received in the full year 2005, compared to 2004.

  • Finally, in our energy system segment, revenue in the fourth quarter decreased by 11%, also due to self comparison to the fourth quarter of last year. Sales, again, on a full year basis, however, increased 15%.

  • To wrap up, as we move forward into 2006 and beyond, our goal for Teledyne is to continue profitable growth, both organically and through acquisitions, while we find ways to benefit from increased demand for both natural resources and instruments for environmental monitoring. Our expanded water instrumentation businesses exemplify our progress toward this goal. As always, the year ahead will bring new challenges. For example, some analysts have generated somewhat gloomy forecasts for defense spending in 2006 and beyond. In addition, while some issues as the cost to comply with the Sarbanes Oxley Act have begun to moderate, new headwinds, such as the required expense of stock options and potential changes in pension accounting have emerged.

  • Our defense businesses performed well in 2005, even though demand for our product and services was not directly generated by conflicts overseas. The strength of our defense businesses resulted from demand for unique and broad end product offerings, such as microwave products to our customers. For 2006, we remain optimistic and do not anticipate a negative outlook, especially in our defense electronics businesses.

  • To conclude, this was another sound quarter and year for Teledyne. Our strategy remains the same. First, continue to focus on operations excellence and margin expansion programs. And second, invest in organic growth initiatives and find and successfully integrate acquisitions in our strategic businesses.

  • I will now turn the call over to Dale Schnittjer.

  • Dale Schnittjer - SVP and CFO

  • Thank you, Robert, and good morning. I will first discuss some additional financials for the quarter not covered by Robert. Then, I will give an update on pension costs and discuss our 2006 outlook. In the fourth quarter, cash provided from operating activities was $32.2 million, compared with cash provided from operating activities of $28 million for the same period of 2004. The higher cash flow in the fourth quarter of 2005 was primarily due to higher net income, lower tax payments, and improved working capital management, partially offset by higher pension contributions and higher aircraft product liability payments.

  • Free cash flow for the quarter was $24.7 million. Free cash flow for the year was $72.5 million, or 113% of net income. In fact, free cash flow conversion was greater than 100% for the fourth consecutive year. We ended the quarter with $37.9 million of net debt. Our balance sheet remains strong with a net debt to capital ratio of 10.4%, which provides flexibility for future acquisitions in our strategic businesses.

  • As noted in our press release, capital expenditures for the fourth quarter of 2005 were $7.5 million, compared to $8.8 million for the same period of 2004. For the fourth quarter of 2005, depreciation and amortization expense was $7.1 million, compared to depreciation and amortization expense of $6.4 million in the fourth quarter of 2004.

  • Moving to pension, as we have stated before, declines in the capital markets in prior years and adjustments in pension assumptions have resulted in an increase in FAS87 pension expense and a 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 certain contracts pursuant to U.S. government cost accounting standards, or CAS, can generally be recovered through the pricing of products and services sold to the U.S. government.

  • In the fourth quarter of 2005, FAS87 pension expense was $3.2 million, or a negative earnings per share impact of $0.05. This compares to FAS87 pension expense of $2.1 million, or a negative earnings per share impact of $0.04 in the same period of 2004. However, in the fourth quarter of 2005, pension expense allocated to contracts pursuant to CAS was $2.3 million, or a positive earnings per share impact of $0.04, compared with a $0.5 million, or a positive earnings per share impact, of $0.01 in the fourth quarter of 2004.

  • As we have mentioned before, starting January 1, 2004, new hires have been added to and enhanced the 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 our 2006 outlook. Management currently believes the DEP earnings per share in the first quarter of 20056 will be in the range of $0.43 to $0.46. The full year 2006 earnings per share are expected to be in the range of approximately $1.85 to $1.90. It is important to note that 2006 includes two accounting-related headwinds or reductions of our--in our FAS87 pension discount rate and expensing of stock options.

  • For the full year of 2006, we currently anticipate approximately $16.4 million, or $0.28 per share in pension expense under FAS87, or $6.6 million, which is $0.11 per share in net pension expense after recovery of allowable pension costs from our CAS-covered government time checks. The full year 2005 earnings included $12.7 million, or $0.23 in pension expense under FAS87, or $3.4 million, which is $0.06, in net pension expense after recovery of allowable pension costs from our CAS-covered government contracts.

  • In addition, the additional $0.05 of net pension expense is due in part to a reduction in the assumed FAS87 discount rate to 6% in 2006, from 6.25% in 2005. The Company’s 2006 earnings outlook also reflects $5.4 million, or $0.10 per share in stock option compensation expense, based on current assumptions regarding stock option issuances during the year and estimated fair value of stock options granted. Finally, we expect $2.5 million less in Honda payments in 2006 compared to 2005.

  • In the recent past, we have been conservative in our outlook as some of our end markets have tended to be weak while others were strong. However, throughout 2005, the majority of our end markets did remain strong. While our 2006 outlook continues to reflect both risk and opportunities in our businesses, our management’s outlook reflects slightly more aggressive assumptions and implies continued strength in a number of our end markets.

  • I will now pass the call back to Robert.

  • Robert Mehrabian - Chairman, President & CEO

  • Thank you very much, Dale. We would like--now like to take your questions. Kathy, if you are ready to proceed with the questions and answers, please go ahead.

  • Operator

  • Thank you. (Operator Instructions.) And our first question is from Mark Jordan with AG Edwards. Please go ahead.

  • Mark Jordan - Analyst

  • Good morning, everyone. Could we discuss the outlook for free cash flow for ’06, specifically addressing two areas, which is the aero liability? What level of payments might you see there? I happened to see a large $20 million settlement awarded against you I think this month. And I was curious as to what is the level of claims that are launched against you and what might be the net cash requirement in ’06? Secondly, what pension plan payments do you foresee also in ’06?

  • Robert Mehrabian - Chairman, President & CEO

  • Okay. Mark, good morning. I’ll answer part of that and have Dale answer the question on pension payments. First, the $20 million award that you read about, that was not paid by us. That was paid by the insurance company. Beyond--that was beyond our SIR for that year, and frankly, was part of the older arrangement with our old insurance company, which had total control over settlements. As you know, we have a different process at the present time.

  • In terms of projecting what potential cash outlays might be in that area for 2006, we frankly don’t know because we have no idea where the various litigation processes are. And so, all we do is we have--we do reserve our first dollar coverage up to $15 million or so, $14 million or $15 million. But, we can’t predict whether we’ll spend it because some years we do and some years we don’t. So, I can’t judge that.

  • Moving to the question on contribution to pension, I’ll ask Dale to answer that question.

  • Dale Schnittjer - SVP and CFO

  • Yes. For the pension contributions in 2006, first of all, as I mentioned earlier, we do receive some recovery from the U.S. government. And after recovery from the U.S. government and after tax, it will probably be about $7 million.

  • Mark Jordan - Analyst

  • Okay. That’s what you plan to fund or--?

  • Dale Schnittjer - SVP and CFO

  • --That’s correct.

  • Mark Jordan - Analyst

  • Okay.

  • Robert Mehrabian - Chairman, President & CEO

  • Also, we fund from our own money. We get certain dollars from the government as reimbursement, which is another--.

  • Dale Schnittjer - SVP and CFO

  • --No, that’s--that was the net number. Seven is the net number [inaudible].

  • Robert Mehrabian - Chairman, President & CEO

  • After taxes. Okay. Thank you.

  • Mark Jordan - Analyst

  • The--.

  • Operator

  • --Oh, I’m sorry. Go ahead.

  • Mark Jordan - Analyst

  • In the aircraft engine area, with the Honda payments being down $2.5 million, could you talk about the impact that Honda had from an operating--absolute operating profit basis in ’05 and what the delta might be in ’06?

  • Robert Mehrabian - Chairman, President & CEO

  • In ’05, we had a $5 million payment. In ’06, we will get $2.5 million. So, it’s down $2.5.

  • Mark Jordan - Analyst

  • Excuse me. I’m saying the operating profit. I would assume you had some offsetting services that were done in relationship to that.

  • Robert Mehrabian - Chairman, President & CEO

  • Nothing else significant, because the relationship the way it’s set up now, some of it--some of the services we provide the technical services--we provide it as part of our partnership.

  • Mark Jordan - Analyst

  • And a last one, please. Benthos. What is the size of the revenue base of that acquisition?

  • Robert Mehrabian - Chairman, President & CEO

  • The revenue in that is about $25 million, Mark.

  • Mark Jordan - Analyst

  • Okay. Thank you very much.

  • Robert Mehrabian - Chairman, President & CEO

  • Thank you, Mark.

  • Operator

  • Thank you. Our next question is from John Harmon with Needham and Company. Please go ahead.

  • John Harmon - Analyst

  • Hi, good morning. Just a couple of quick question, please. In your systems engineering segment revenues, the decline on a sequential basis throughout the year. What is the outlook for ’06? Where do they bottom out at and do they potential grow from there? And does that accelerate the anticipated decrease in the margins?

  • Robert Mehrabian - Chairman, President & CEO

  • First, let me say that year-over-year, as you noted, revenues actually increased almost 10%. For next year, right now we’re looking at either flat with this year or slightly up in the low single digit range in terms of revenue.

  • John Harmon - Analyst

  • Okay.

  • Robert Mehrabian - Chairman, President & CEO

  • In terms of margins, margins for the quarters were relatively flat with last year’s quartesr. And--but, margins for the year were down somewhat from 11.2% to 10.4%. I think--and in the fourth quarter margins were about 9.9%. I think somewhere between 9.5 and 10, 10.5 is what we expect the margins to remain at.

  • John Harmon - Analyst

  • Okay. Thank you. And looking at your [inaudible] business, you talked about the year-over-year performance, but it looks like it picked up a little bit sequentially in the December quarter. Is that just seasonality or is the business firming?

  • Robert Mehrabian - Chairman, President & CEO

  • Actually, this is just a lumpy delivery issue for us, because a lot of our engines--some of them go to FMS, foreign military sale, and we produce a large number, and then, we sell them all at once. This year it just happened that we sold a lot of those engines in other quarters. But, if you look at the overall engine business in terms of year-over-year, the overall turbine engine business increased 16.5% from last year to this year. But, it’s the lumpiness of delivery.

  • John Harmon - Analyst

  • I see. Thank you very much.

  • Robert Mehrabian - Chairman, President & CEO

  • Thank you, John.

  • Operator

  • We will now go to the line with Robert Stallard of Bank of America Securities. Go ahead, please.

  • Robert Stallard - Analyst

  • Good morning, guys.

  • Robert Mehrabian - Chairman, President & CEO

  • Good morning.

  • Robert Stallard - Analyst

  • Just a couple of questions. On the insurance front, can you fill us in on how trends are going for your short costs in aerospace and whether you see any improvement moving into 2006?

  • Robert Mehrabian - Chairman, President & CEO

  • Last year, we had--as you know, we had significant increases after 2001, and that kind of accelerated into 2003. In 2004, it flattened out. In 2005, we had just a very moderate relief in that insurance. Our insurance is coming up in May of this year and it’s a little early for us to be able to tell what it will be in the next year, but we have been hoping that it will at least remain flat with 2005, which was a good year for us.

  • Robert Stallard - Analyst

  • Okay. And you mentioned your insurance payment reserve of $50 million. If you look back over the last couple of years, how much have you been paying out versus that reserve?

  • Robert Mehrabian - Chairman, President & CEO

  • Let’s--I don’t have the exact number, but I would say on the average about--so far, about a half to two-thirds. If it’s a long term issue because you reserved this year, but you’re really paying out for things that would be many years ago.

  • Robert Stallard - Analyst

  • Right. Okay. Moving on to the missile defense world. Was there an award fee finalization for 2005 on ground-based [indiscernible]?

  • Robert Mehrabian - Chairman, President & CEO

  • Yes, a very small one--relatively small relative to prior years.

  • Robert Stallard - Analyst

  • And just finally, on the M&A front. As you mentioned, your balance sheet looking pretty strong at the moment. Could you just update us on what your latest plans are for any acquisitions, particularly which areas you’re looking at?

  • Robert Mehrabian - Chairman, President & CEO

  • Well, we are--we looked at--last year, interestingly, we looked at 40 acquisitions and we ended up with two bolt-ons and three small acquisitions that we call tuck-ins. Of course, the Benthos, as I mentioned, is coming up. We are obviously looking at a significant number at the present time. And--but, you know--as you well know, the R&D--the competition for things that go on the auction block has become pretty severe because of the amount of money that’s floating out there. And we’re not tended to give--to pay exorbitant prices.

  • But, to answer your last question, we’re looking at really three areas at the present time. We’re still looking at defense electronics, because that’s our core area. We’re looking at--generally, at the instrumentation, especially air quality. And we are--and also, because we have--if the Benthos acquisition is successful, we’ll have nearly $80 million to $100 million worth of business in underwater acoustic systems and telemetry. And we are also looking to--for some things in systems engineering. Having said all of that, it is very difficult for me to predict what our ship rates would be. But, as you said, our balance sheet is very strong and we expect to make acquisitions.

  • Robert Stallard - Analyst

  • That’s great. Thank you very much.

  • Robert Mehrabian - Chairman, President & CEO

  • Thank you.

  • Operator

  • And we’ll now go to Chris Quilty with Raymond James and Associates. Go ahead, please.

  • Chris Quilty - Analyst

  • Good morning, gentlemen.

  • Robert Mehrabian - Chairman, President & CEO

  • Good morning, Chris.

  • Chris Quilty - Analyst

  • Robert, since you gave general guidance for the systems engineering business, could you do the same for us for electronics and components and aerospace in terms of general revenue growth, margin trends?

  • Robert Mehrabian - Chairman, President & CEO

  • Yes. I think in the electronics area my expectation is that it would be mid to high single-digits in terms of growth. In the aerospace area, I expect it to be flat. At least that’s our current outlook. We may go up a little bit because we just have--because we’re introducing this new product in controls on engines, but that’s a long-term process. I think if we hold it flat or increase it a little bit with inflation, we’ll be okay.

  • Chris Quilty - Analyst

  • And margin trends on those businesses?

  • Robert Mehrabian - Chairman, President & CEO

  • I think the margin trend you--Chris, you’ve got to look at the margin with or without pension and options. If you exclude the option expense, margins should increase--improve as we do our--as we continue doing our manufacturing excellence and our lean manufacturing programs as we’ve done prior--previously. But, when you throw in the FAS123 expense and you’re trying to increase pension expense because of a reduced discount rate, then margins will be probably relatively flat. But, we have to make up for those headwinds, obviously, to keep it flat.

  • Chris Quilty - Analyst

  • Okay. Speaking of the option expense, and maybe this is a question for Dale, when you do your first quarter earnings report, how are you going to segregate the option expense for us? I mean, are you going to give us a pro forma that shows what’s coming out of cost of goods and what’s coming out of SG&A or are you just going to give us a consolidated expense number?

  • Dale Schnittjer - SVP and CFO

  • We’ll probably just give you a consolidated number that is required to be reported in the first quarter.

  • Chris Quilty - Analyst

  • Okay. And, of course, you’ll probably give us the--at that point the comparable for what it was in the first quarter of ’05.

  • Dale Schnittjer - SVP and CFO

  • Which is zero in ’05, and we’ll have expense in ’06. Right.

  • Chris Quilty - Analyst

  • Right. But, I mean, can you give us an apples to apples of what the option expense would have been in the first quarter of ’05?

  • Dale Schnittjer - SVP and CFO

  • Well, we’ll decide that when we get there, but we’ve been pretty transparent in giving you numbers in the past, and we’ll probably continue that transparency.

  • Chris Quilty - Analyst

  • Okay, fair enough. A question for you, and I guess this is back to Robert, on major defense programs and defense spending. It looks like the ’07 budget is going to be more of the same. So much for all that QDR effort. Does that mean good things or bad things for Teledyne? I know you don’t have a lot of large program exposure with the exception perhaps of [Jassen].

  • Robert Mehrabian - Chairman, President & CEO

  • Yes. And in the Jassen, as we discussed I think last time, as the numbers go down, the price goes up. So, other than it being cancelled, which I don’t think is likely because the performance of the engines are pretty good right now--the performance of the [indiscernible] is pretty good right now, I think we should be okay there at least in the near future.

  • Coming back to the budget, it’s really--Chris, it’s very hard for me to sort out all of the programs and how it would affect us. The rate of growth of the defense budget is going to moderate, obviously. On the other hand, the cancellation of large programs, even if they were to occur, is probably not going to affect us. If anything, it may even benefit us because they’ll go to more electronic [indiscernible] of Legacy systems.

  • On the QDR that we just saw, the--there is some indication that we might benefit from some of the new initiatives, especially if you’re--I don’t know if you saw the Washington Post article the day before talking about special operation forces increases--significant increases in special operation portions. If that were to happen, I think that would have a benefit for us, because we make a lot of products now with our underwater systems on diver navigation and mapping systems and mine contour measure systems and things like that. So, especially with Benthos and the telemetry, that would benefit us in the--in that case.

  • And then, finally, two things for us that help us. First, I think that as time goes on, the clients are more inclined to outsource manufacturing and we’ll be the beneficiary of that. Second, we have now a broader range of products and services because we have made some acquisitions and can offer more integrated systems like integrated microwave systems. And in 2005, our defense electronics, as you note--as you will note, in 2005 the defense electronics organically grew the full year almost 17%, a little over 17% actually.

  • So, with--and the systems group, 9%. So, for me, things look okay. Maybe good.

  • Chris Quilty - Analyst

  • Okay. And just a specific note. Ground base missile defense--I had seen some reports that they were planning on increasing the number of intercept tests. And, if I remember in the past, back a couple of years ago, when they were heavily into that, that usually provided some good outcomes for you in terms of success, fees and other things.

  • Robert Mehrabian - Chairman, President & CEO

  • I’ll agree with that statement.

  • Chris Quilty - Analyst

  • Okay. And am I correct in that we should see increased activity in calendar ’06 year?

  • Robert Mehrabian - Chairman, President & CEO

  • Only if the program does what you said. You know, there’s always--also some pressure on that program. So, we’ll see how it works out. But, if it does what you just mentioned in terms of number of tests increasing, that would be good for us.

  • Chris Quilty - Analyst

  • Okay. And the final question. You mentioned strength in the instrument area, specifically in air quality. Is there a specific reason why it’s air quality, not water quality, that you’re seeing strength?

  • Robert Mehrabian - Chairman, President & CEO

  • Actually, we measure air quality specifically. It’s primarily because of the revenues we’re getting in overseas. If you look at our total instrument portfolio, about 40% of our revenue is overseas. And it just so happened that on that quarter basis, ambient air quality measurement and from [indiscernible] production, especially in China, and also some OEMs in--European OEMs, that increased our air quality measurement products by almost 12%.

  • Chris Quilty - Analyst

  • Okay. And I lied. One more question. Geophysical instruments you didn’t mention. I know you had weakness back in Q2 due to some hurricane activity--I’m sorry, Q3. Were you playing catch up here in the fourth quarter with fire orders and are you expecting stable growth as long as gas prices don’t change significantly?

  • Robert Mehrabian - Chairman, President & CEO

  • I think the--when we look at the revenues in Q4 in that business, it’s been solid in the last quarters. Year-over-year, it’s increased almost two-fold in the quarters. We have good orders there, Chris, and the issue for us is two-fold. First, we are building a new product with the [indiscernible] going away from a lot of our customers are asking us to produce our new product, which is not liquid-filled, it’s gel-filled. It’s got a lower signal to noise ratio. It can perform in bad weather, so it can stand out there longer. It’s good for our customers. And so, with that we have the challenge of building this whole new product line and we’re getting our factory to do that.

  • So, we have some challenges in terms of manufacturing, but others look very strong.

  • Chris Quilty - Analyst

  • Great. Thank you very much, gentlemen.

  • Robert Mehrabian - Chairman, President & CEO

  • Thank you, Chris.

  • Operator

  • Our next question is from [Howard Druble] with Jeffries and Company. Please go ahead.

  • Howard Druble - Analyst

  • Good morning.

  • Robert Mehrabian - Chairman, President & CEO

  • Good morning, Howard.

  • Howard Druble - Analyst

  • Robert. Thank you. First, could you go back and talk for a minute about book to bill for the electronics business as you sort--as you ended the year?

  • Robert Mehrabian - Chairman, President & CEO

  • I’m trying to get some numbers from our people, but they are segmented. In the instruments businesses, other than--I would say other than the oil exploration we just talked about, a lot of our orders are book and burn, very short-term book and burn orders. So, we don’t have all that much visibility, but it’s been consistently strong.

  • In terms of the overall electronics, I’d say the orders to book--orders to sale is about 10%, 1.1 [indiscernible] percent.

  • Howard Druble - Analyst

  • I understand.

  • Robert Mehrabian - Chairman, President & CEO

  • In the systems area, it’s just slightly over 100%.

  • Howard Druble - Analyst

  • And as you look forward, are you continuing to find some additional opportunities? I mean, you sort of talked about it a little bit, but could you highlight a couple of opportunities again in electronics where you had some new customer design initiatives where you’re sitting down either in the microwave area or in some outsourcing opportunities?

  • Robert Mehrabian - Chairman, President & CEO

  • Yes. Actually, we have a full range of products, especially in the micro and electronics area that--and also, in our connector area. Let me give you some specific examples. In the connector area, which is our Reynolds product line that we acquired over a year ago, one of the things that we make there is specialized cables for the joint helmet mountain [chewing] system.

  • As you’ll recall, this is a helmet that the--the pilot is able to chew the system by line of sight. He can predict his weapons by looking at the target. Therefore, he doesn’t have to maneuver the aircraft to align it with the target before a weapon is released. That business has really moved significantly, and we expect--and it’s going into a whole range of aircraft like the F15, F16, and the F18, the Typhoon aircraft, and the Eurocopter. So, that’s an example of where things are moving very well.

  • On the traveling waves to earth, microwave communication or radar sights, the movement there in TWTs is toward the KA band. We have the successful KA band product of this kind, which is used by the Army for satellite communication. We still light the war fighters at a data rate of about 10 times what is currently available. At the same time, we have a whole range of microelectronic products that we’ve developed and don’t have--haven’t recorded the sales this year, which go from transceivers, video control, light control, avionics control for the F22, F35, F16, B1B, Eurofighter, etc. And we have some new programs in power controllers and converters for the Abram [indiscernible] Bradley fighting vehicle.

  • So, there’s a whole range of stuff. And finally, we talked about geophysical instruments in terms of oil and gas exploration. One of the things that we’re focusing on, and we’ve actually added a new facility in Houston, to be able to do or increase defense oriented sonar array work that we’re doing. And all the acquisitions that we’ve made in this water instrumentation business is adding to that things, like I mentioned, the Navy sub--sea market, etc. So, we feel pretty good about all of that.

  • Howard Druble - Analyst

  • Two more questions and then I’ll be done. One, the same on engineer services, or systems engineering rather. Are you able, other than what you talked about with chemical [indiscernible], are you finding that your--are you finding some additional opportunities to sort of broaden that business?

  • Robert Mehrabian - Chairman, President & CEO

  • Yes, Howard. The one thing of significance I would note there, I mentioned it before, is the--our reentry, if I may say so, in the UAV market. As you may recall, we had a joint initiative with [Ryan Mattel] from Germany. They have a UAV that has been developed, which we call the prospectors, for the German army where hundreds of millions of dollars have been spent to develop that system. The system is now being deployed in Europe. And we have a phase one award for the future combat--army’s future combat system for the [Clout] CUAV that we’re doing that study on. So, that’s one.

  • We have another one. We have developed a--well, it’s--at this time it’s a small revenue. We have developed--I think we talked about that at the last meeting--at last conference. There are multi-choke transport carrier systems, which is basically a very highly engineered [indiscernible]. These are on top of a 2.5 and higher size choke to transport troops and protect them, especially from small arm fires.

  • And, of course, as you mentioned, we think our environmental programs are going to grow.

  • Howard Druble - Analyst

  • The final thing is just talk--I mean, what is CapEx--what do you think CapEx is likely to be for the year?

  • Robert Mehrabian - Chairman, President & CEO

  • For next year, I’ll let Dale answer that.

  • Howard Druble - Analyst

  • Thank you very much, Dale.

  • Dale Schnittjer - SVP and CFO

  • We are looking at something in the range of $28 million.

  • Howard Druble - Analyst

  • Is it--it looks like it’s just a range of projects.

  • Dale Schnittjer - SVP and CFO

  • Yes. It’s just general--some of the capital will be to flip machines in place to support the programs Robert talked about. And then, some of it will be replacement. But there--it’s no big single investment.

  • Howard Druble - Analyst

  • Thank you.

  • Robert Mehrabian - Chairman, President & CEO

  • Thank you, Howard.

  • Operator

  • We also have a follow-up from Mark Jordan with AG Edwards. Please go ahead.

  • Mark Jordan - Analyst

  • Thank you. Two quick questions. Number one, your--Robert, your comments on the growth rate for electronics and communications, you said it was mid to high single digits. Was that an organic or an all-in number, and does that number include Benthos, which would add by itself about 3%?

  • Robert Mehrabian - Chairman, President & CEO

  • It’s primarily organic. You add Benthos, you’ll go to the high single digits, maybe you’ll hit double digits. But, that’s about--we were not--we don’t have anything other than that in there.

  • Mark Jordan - Analyst

  • Okay. So, that’s an [indiscernible] number, so the very high single digits.

  • Robert Mehrabian - Chairman, President & CEO

  • Yes.

  • Mark Jordan - Analyst

  • Secondly, is there any lumpiness to your quarterly expectations? It looks like Q1 is 23, 24% of the potential guidance for the year. Is this kind of a flattish year or is there any seasonality issues?

  • Robert Mehrabian - Chairman, President & CEO

  • Well, I think there is a little seasonality in terms of we’re going to get--some of these acquisitions we’re still integrating. So, we might have improvements as the year goes on. And frankly, as you know, Mark, we don’t like to guide too far out because we don’t know what’s going to happen. So, we have to get our--we’ve got to get our feet on the ground this year and see how things go. It’s--but, the first quarter, if you look at it year-over-year, you look at the high end of it, and then, you put the option and pension expense increases that Dale talked about, we’re driving it higher than it was last year, which was a pretty healthy first quarter.

  • Mark Jordan - Analyst

  • Right. Thank you very much.

  • Robert Mehrabian - Chairman, President & CEO

  • Thank you, Mark.

  • Operator

  • Thank you. And gentlemen, we have no further questions. Please go ahead with your closing remarks.

  • Robert Mehrabian - Chairman, President & CEO

  • Thank you very much, Operator. I will now ask Jason to conclude our conference call.

  • Jason VanWees - Director of Corp. Dev. & IR

  • Thanks, Robert. Again, thanks everyone for joining us. If you have any follow-up questions, please feel free to call me at the number on the release. And again, a replay of this call will be available both via webcast and via dial-in. Thank you, again.

  • Operator

  • Thank you. And this conference will be available for replay after 11:30 a.m. today through midnight, Sunday, February 26. You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and entering the access code 814996. International callers, dial 320-365-3844, using the same access code, 814996. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.