Teledyne Technologies Inc (TDY) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Teledyne fourth quarter earnings conference call. [Operator Instructions]. I would like to now turn the conference over our host, Mr. Jason VanWees. Please go ahead, sir.

Good morning everyone. This is Jason VanWees, Vice Present Corporate Development and Investor Relations at Teledyne Technologies. I would like to welcome everyone to Teledyne Technologies' fourth Quarter and full year 2006 earnings release conference call. We released our earnings earlier this morning before the market opened. Joining me this morning are Teledyne Technologies Chairman, President and CEO, Robert Mehrabian. Senior Vice President and CFO, Dale Schnittjer and Executive Vice President, General Counsel and Secretary, John Kuelbs. After remarks by Robert and Dale we will 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. In addition, in order to avoid potential selective disclosures this call is simultaneously being webcast and a replay by both a webcast and dial-in will be available for at least one month. Here is Robert.

Thank you, Jason, and good morning everyone. I would like to first begin with a few introductory comments about our strategy and execution since the major restructuring and refocusing of Teledyne in 2001. Second, I will summarize the overall performance the Company during the fourth quarter of 2006 and the full year. Finally I will make some detailed observations about the various business segments.

To start, for the last five years we have been successfully executing a strategy to strengthen our core businesses, improve operational efficiency and grow both organically and by acquisition. We have primarily focused on two of our core markets, defense electronics and instrumentation, which requires specialized technology and have high barriers to entry. Today Teledyne is a much stronger competitor in each of these markets with a much greater breadth and depth of product and the ability to provide integrated solutions to our customers. As a result of this focused strategy, and our continuous emphasis on operational excellence, our sales have grown by about 85% from $773 million in 2002 to over $1.43 billion in 2006, or a compounded annual growth rate of 16.7%. Over the same five-year time frame our earnings have improved from $0.77 per share to $2.26 per share for a compounded annual growth rate of 30.9%. Our operating margins have increased 318 basis points since 2002 due to a combination of improved operational performance and the acquisition of complimentary product lines in our core markets.

Turning to 2006, we continued our strong financial performance and made five acquisitions including our largest and most strategic one to date, the Rockwell Scientific Company, which provides Teledyne a greatly expanded base of technology and highly skilled scientists and engineers. This acquisition should enable us to accelerate the pace of product development in our current market and provide the technological resources to expand and become a significant competitor in adjacent markets.

Turning now to the most recent path in the fourth quarter and full years 2006, Teledyne achieved a number of financial milestones. Fourth quarter sales increased 26.1% to record levels while full year sales were over $1.43 billion an increase of 18.8% over 2005. The corresponding organic sales growth for the quarter and the full year were 8.4 and 8.6% respectively. Year-over-year earnings per share increased by 10.4% for the fourth quarter with a corresponding increase of 22.2% for the full year. While the full year earnings include $0.09 of tax benefits received in the third quarter, this was more than offset by $0.10 of stock option expense. As I comment on our business segments, I'll elaborate with some examples and then I will turn the call over to Dale Schnittjer who will discuss our financial performance in more detail and comment on our outlook for the first quarter and the full year 2007.

Turning to our business segments, fourth quarter sales in our Electronics and Communications segment increased 34.5% compared to last year from $188.9 million to $254 million with organic growth of 7.5%. Segment operating profit increased 35.4% from $22.3 million to $30.2 million. Segment operating margin increased slightly from 11.8 to 11.9% despite a negative 20 basis points headwind resulting from stock option compensation expense. Full year sales in our Electronic and Communications segment increased 25.3% compared to last year, from $717.8 million to$899.4 million with organic growth of 9.1%. Full year segment operating profit increased 30.1% from 84 to 109.3 and segment operating margin increased 45 basis points from 11.7% to 12.2% despite a negative 26 basis point headwind resulting from stock option compensation expense. As I further discuss this segment, I will break up by comments into three separate market categories. First, defense electronics which has a run rate of about 40% of the electronics segment; second, electronic instruments, which also represents approximately 40% of this segment; and third, avionics and other commercial electronics, which represent approximately 20% of our electronics segment.

In the fourth quarter of 2006 overall sales of defense electronics increased approximately 58% with organic growth of 12% compared to the fourth quarter of 2005. Sales of proprietary products, including microwave products and connector assemblies as well as defense electronics manufacturing services, each increased considerably during the quarter. For the full year 2006, sales of defense electronics increased approximately 31% compared to last year, again with organic growth of approximately 12%. Our defense electronics revenues have grown from approximately $110 million in 2001 to a run rate of over $400 million today. During this period we have acquired seven defense electronics companies.

In the third quarter of 2006, we acquired Rockwell Scientific Company, now named Teledyne Scientific and Imagining. Roughly half of the acquired operation, like the vast majority of our other defense electronics businesses, provides specialized components and subsistence as opposed to system level electronics or defense platforms. By combining Teledyne's manufacturing capabilities with the very unique sensor technologies that we acquired, we believe that we may be able to further penetrate the large and growing military space base imaging as well as tactical infrared market.

Turning to our electronic instrumentation businesses, in the fourth quarter 2006 year-over-year sales of electronic instruments increased approximately 38% compared to last year, from $68.5 million to $94.9 million due in part to the acquisition of [Bentalls] and a majority stake in Ocean Design Incorporated, both part of our marine and instrumentation growth strategy. Organic sales of instruments increased approximately 9%, primarily due to strong sales growth of instruments using water quality monitoring as well as significantly increased year-over-year sales of geophysical sensors, which serve the petrol-chemical exploration market. Nevertheless, as we forecast in our previous outlook statement, sales of geophysical sensors declined over 3 million sequentially from the third quarter of 2006. We believe that this quarterly shipment of geophysical sensors may fall sequentially for one more quarter before sales begin to increase. As a result, we expect this business to show negative year-over-year revenue comparisons in the full year 2007 relative to 2006, especially in the first half the year.

Turning to the full year, sales of electronic instruments increased approximately 47% in 2006 with organic growth of approximately 19%. Our instrumentation revenues have also grown significantly from about $45 million in 2001 to a run rate of about $375 million today. Starting with a base of industrial gas analysis we acquired five companies that added closely related products, first in the environmental gas analysis then in laboratory organic and inorganic pollution analysis and subsequently in instrumentation for waste water collection and water flow measurement using acoustic Doppler technology. Our three most recent instrumentation acquisitions leveraged both our water flow instruments and long standing position as a leading manufacturer of acoustical rigs for offshore oil and gas exploration to give Teledyne an extensive product line of marine instruments used for both offshore petroleum exploration and production as well as oceanography.

I will comment now on our avionics and other commercial electronics businesses. In the fourth quarter of 2006 sales of these businesses collectively were flat compared to last year. Double-digit increases in sales of avionics and electronic relay were offset by lower sales of commercial microwave assemblies using cellular infrastructure applications as well as commercial contract manufacturing services as we are continuing to position this business to focus on the defense electronics market. For the full year 2006 sales from these businesses collectively decreased approximately 3%, primarily due to the reduction I mentioned in commercial manufacturing services.

Turning to our government Systems Engineering segment, in the fourth quarter of 2006 revenue in this segment increased 16.1% compared to last year with organic growth of 10%. However, segment operating margin of 8.2% was down 165 bases points. As noted in the earnings release, margins were affected by sales mix including greater sub-contract work, which carries lower overall margin. In addition, while the acquisition Collaborex increased revenue a bit, it contributed no operating profit, primarily due to the front-end loaded nature of the acquisition related intangible asset amortization. Full year sales in our System Engineering segment increased 7.3% compared to last year from $263.7 million to $283 million with organic growth of 5.1%. Full year segment operating profit decreased 10.9% from $27.5 to $24.5 million as operating margins returned to what we have previously indicated to the more normalized levels of between 8 and 9% as virtually all of the revenue within this segment is derived from cost-based government contracts.

Turning to our aerospace engines and components segment, sales in the Aerospace Engine segment increased 11.1%, primarily due to strong sales of after market aircraft piston engines and parts. In addition, operating profit increased 59.5% due to higher sales as well as improved profitability in both the aircraft piston engine and military engine business units. Full year sales in this segment increased 13.9% compared to last year. Full year segment operating profit increased 51.9% as operating margins increased 229 basis points. If we exclude the non-recurring payments from Honda, which was $2.5 million in 2006 and $5 million in 2005, operating margin this year increased 372 basis points over 2005.

Finally, in our Energy Systems segment, revenues in the fourth quarter of 2006 was flat compared to last year and operating profit declined marginally. In addition, full year sales and operating profit also declined slightly due to reduced work in our government program.

In conclusion, the fourth quarter marked an outstanding end to a very significant year for Teledyne. While our revenue run rate has grown to approximately $1.5 billion, we have continued to build a more focused and stronger performing company. We have also maintained an intentional balance between government and commercial businesses not only as a buffer against market cycles but also because we are often able to apply technology developed for one market to another. While we have become a superior player in our niche markets, we are now more aggressively seeking ways to expand the size of our addressable markets but without reaching beyond our core competencies or losing management focus.

Before I turn the call over to Dale Schnittjer I would like to add a personal comment. This week our Board of Directors asked me to remain in my present position for at least another three years and I accepted with pleasure. I look forward to building on the record Teledyne has compiled over the past five years and I appreciate our shareholders' support and look forward to being accountable to them in the years ahead. Now here is Dale.

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 2007 outlook.

In the fourth quarter cash provided from operating activities was $15.9 million compared with cash provided from operating activities of $32.2 million for the same period of 2005. The lower cash flow in the fourth quarter of 2006 compared to 2005 was primarily due to higher income tax payments, greater working capital requirements and pension contributions partially offset by operating cash flow from acquisitions. Additionally in the fourth quarter of 2006 in accordance with SFAS 123R, excess tax benefits for stock based compensation of $800,000 were classified as a financing cash flow instead of an operating cash flow. Free cash flow for the fourth quarter was $5.8 million. We made five acquisitions in 2006 for $252 million and we ended the quarter with $222.8 million of net debt.

Our balance sheet remains strong with net debt to capital ratio of 34%. As noted in our Press Release, capital expenditures for the fourth quarter of 2006 were $10.1 million compared to $7.5 million for the same period of 2005. For the fourth quarter of 2006 depreciation and amortization expense was $11.1 million compared to depreciation amortization expense of $7.1 million in the third quarter and fourth quarter of 2005. We anticipate that free cash flow in 2007 will modestly exceed net income, primarily as a result of reductions in working capital and lower pension contributions.

Turning to pension matters, as we have stated before, declines in the capital markets in the prior years and adjustments in pension assumptions have resulted in an increase in FAS 87 pension expense and a requirement to make pension contributions. However, pension expense allocated to various 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 2006 and 2005 FAS 87 pension expense was $3.2 million or a negative earnings per share impact of $0.05 for each quarter. However, in the fourth quarter of 2006 pension expense allocated to contracts pursuant to CAS was $2.6 million or a positive earnings per share impact of $0.04 compared with $2.3 million or a positive earnings per share impact of $0.04 in the fourth quarter of 2005. As we have mentioned before, starting January 1st, 2004, new hires have been added to an enhanced defined contribution plan as opposed to the Company's existing defined benefit plan.

Now moving to stock option compensation expense, in the fourth quarter of 2006 for the requirements of SFAS 123R stock option compensation expense was $1.5 million or a negative earnings per share impact of $0.02. No stock option compensation expense was recorded prior to 2006.

Now let me turn to our 2007 outlook. Management currently believes that GAAP earnings per share in the first quarter of 2007 will be in the range of $0.47 to $0.51. The full year [2000] earnings per share are expected to be in the range of approximately $2.33 to $2.38. Our full year 2007 earnings per share outlook reflects the anticipated receipt of tax credits ranging from $2.8 million to $3.8 million in the third quarter of 2007. Our first quarter and full year 2007 earnings outlook reflects some additional operating income margin pressure, which is expected to result in part from the increase in depreciation and intangible asset amortization as a result of our acquisitions completed in 2006. We expect full year 2007 capital expenditures of approximately $35 million and depreciation and amortization expense of approximately $40 million.

For the full year of 2007 we currently anticipate approximately $12.2 million or $0.22 per share in pension expense under FAS 87 and FAS 158 or $2 million, which is about $0.04 per share in net pension expense after recovery of allowable pension costs from our CAS government contracts. Full year 2006 earnings included $15.4 million or $0.27 per share in pension expense under FAS 87 and FAS 158 or $4.9 million, which is $0.09 per share in net pension expense after recovery of allowable pension costs from our CAS covered government contracts. The decrease in full year 2007 net pension expense reflects the pension contributions made in 2006, the impact of favorable market returns and the surplus pension assets of approximately $37 million assumed in the acquisition of Rockwell Scientific Company during the third quarter of 2006.

The Company's 2007 earnings outlook also reflects $6.7 million or $0.12 per share in stock option compensation expense based on current assumptions regarding stock option issuances during the year and estimated fair value of stock option grants. I will now pass the call back to Robert.

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

[Operator Instructions]. Our first question from the line of Mark Jordan with A.G. Edwards.

Robert, Congratulations on your extended tenure. We look forward to working with you over the next three years. Question on cash flow a little bit here, could you talk or give us a breakdown of the what comprises depreciation, what is acquisition related amortization in the $40 million D&A number for next year?

The acquisition amortization is about $8 million of next year's number, 8 or 9.

Okay and then the balance is depreciation?

That's right.

Yes the projected CapEx number of 35 million that's up if my numbers or memory is correct about 75% from 2005. Is this reflective of a replacement rate or how much of that incremental growth would be more related on investment related spending.

The investment related spending is related-- the biggest part of the gross is related-- growth is related to scientific and imaging, the acquisition we made in the third quarter. There's also an increase in capital expenditure associated with the movement of one division from the current location on Olympic Boulevard to a new location and there are some expenditures in the year for that move.

Okay looking at the guidance that you have out there you're looking for a 4 to 5% type EPS growth year-over-year bottom line. Looking at the sort of an EBITDA measure that seems to be going up around 15%. Is the significant difference in growth rates there just the function that Rockwell Scientific is more of a drag over the shorter term until you get growth coming out the tactical imaging area?

I'm not sure if I'd use the word drag because we're very excited with the fact that this acquisition is going to provide us the technological base to expand in our markets as well as other markets but having said that both acquisitions that we've made have intangibles associated with them and also Rockwell Scientific had a significant buildup of capital expenditures as they built their new imaging facilities, which I think you visited.

Yes.

And so the depreciation associated with that investment is partially contributing to the higher depreciation number.

Okay let me ask just one more question and then I'll turn over the call. In the aerospace area you clearly had a significant improvement in '06 versus '05. Could you talk about one, the insurance impact? What has it been in '06? What are you looking for in '07 and do you see the opportunity for longer term seeing significant improvement from the base that you showed in '06?

Let me address the insurance first. Year-over-year insurance premiums 5 and 6, '05 and '06, were flat essentially and right now we're going into our renewal cycle, which will be in May of this year and right now we're hoping that will either remain flat or hopefully go down a little but I think flat is where our assumptions are at the present time. The most important thing that's happened in that segment is that the operating performance is improved in the factory because of obviously the investments we've made and also the fact that we're putting increased emphasis in operational excellence in that factory. Right now we're assuming that next year's performance would be in line with 2006. We saw significant growth in market in 2006 and it's unclear at this point to us, Mark, as to what the market is going to be like in the coming year so we're assuming at this time that it will be relatively flat with 2006.

[Carl Ohlschlager] with Banc of America Securities.

I wanted to ask just with respect to the guidance that you've given and the plan in place to reach that guidance, what areas when you look at your different business segments do you think there's upside opportunity? Where is there upside opportunity versus sort of your plan?

Actually, Carl, we've been fairly aggressive in pushing our operating units in their plans to the point that they really feel very strained in that. But having said that, I think right now we because of the acquisition of Ocean Design because we have some sequential order decreases in our geophysical, we might be able to get some upside in our overall activities in the marine instrumentation business. The other area that we've been very-- a little cautious about, is our commercial telecommunication products where we make transceivers for some international customers and that slowed down significantly in the fourth quarter and so we're kind of a little more cautious in that domain as well. And I think those are the main ones that I can speak to.

Then to maybe step back again and talk about the insurance situation, in aerospace you know you have this I guess and in May you're going to redo the negotiations for the insurance but you also reserve I believe a portion of what you think might be deductibles and it's kind of based on sort of what you think the experience will be. What have you-- what kind of experience did you see in '06 versus '05 and is there potential of kind of resetting that sort of reserve level?

Carl, that's a good point. What-- where we look at the reserve level we don't really look at year-over-year because the problem with year-over-year is you can get spikes or dips significant depending on whether you had one or two cases that went one way or another so we look at multiple years and see how that works out and it could go as far as 10 to 12 years before we make any changes. Right now we're not planning any changes in 2007 even though I'd say in the last few years our experience has been a little better primarily because we've been able to become much more actively involved in the cases as to which cases we should go forward and because we don't think there's merit in the cases. So recently we've had good experience but it hasn't been long enough for us to change our reserve levels.

Michael Lewis with BB&T Capital Markets.

Robert, I was hoping within the electronics engineer communications segment we saw almost a 12% margin in the segment. I was wondering if you believe these levels of margin are sustainable throughout 2007?

I think we had a plus up of about 20 basis points in this quarter if you count the option expense, maybe 30 basis points. We think there's a plus side of 10 to 20 basis points next year. Some of that is moderated a little bit because our scientific and imaging operational margins are not as high as our other different electronics margins so we're thinking maybe 10 to 20 basis points right now.

Okay that's helpful and I was hoping that we could get a more in depth update on the R&D developments at Rockwell and what would your expectations be for this unit moving through 2007? In other words, will we see a move in from some R&D development to some manufacturing capability there?

Well yes we first, as you know, in general we are trying to match up at the present time their applied research capabilities with our own manufacturing capabilities. And by the way, just to elaborate on something that Dale mentioned before, at this facility in which the Corporate offices are located our controls facility will be moving to El Segundo to a new place. The Corporate offices will be moving to-- are moving in the next two weeks to Thousand Oaks where Teledyne Scientific and Imaging is so that we can be closer to what's going to be to the heart of the development. In terms of working between imaging, scientific and imaging, and the various Teledyne manufacturing activities, we have teams of people working on a number of projects ranging from microwave amplifiers to high speed digital to analog converters to high frequency semiconductors, [mend] switches etcetera. We think we will have some prototypes in 2007 and probably have some manufacturing operations with those in 2008, at least that's the current thinking on that.

Okay and that is in line with your original plan when you picked up the company?

Yes, Michael, because this transition from R&D to manufacturing is not-- it takes a little time and we realize that. On the other hand we think as a merchant supplier to a large number of customers we are probably the best fit to take some of the products and move them into the marketplace much more quickly than could, for example, a large company that's platform specific and frankly this fits very well with DARPA's who is a big sponsor of our scientific and imaging operations, DARPA's plans of transitioning from development into manufacturing.

Okay and just one more quick question, has there been any increase in ownership interest with Ocean Design over the quarter or are you still at 51%?

No we are closer right now to about 60%, Michael. There hasn't been a lot of rendering of shares, primarily because when we started the price of the shares were prices such that they were at a premium to the trading earnings and it will take a little time for the share price based on the formula that we have to catch up to the initial price but we expect it will get there soon enough. That business is doing very well. It had a very good fourth quarter.

And that was in line with the previous valuation on the initial purchase with regard to the up?

Yes.

Okay and then just one follow-up question and then I'll get off the call. Dale, I was just hoping if you could just remind me what was the insurance premium in dollars in '06?

It was approximately between 11 and 12 million.

John Harmon with Needham & Co.

I'm going to try to tie this together into one question. Looking at the fourth quarter SG&A expense was up about 10 million sequentially. My question is how much of that is attributable to the Rockwell acquisition? And you gave your guidance but what's the rough operating model for 2007? Clearly you've seen some margin expansion, probably from your instrumentation and other businesses as well.

Let me see if I can answer that first part and then maybe ask you to repeat the second part, John. I'm sorry.

Sure it was a big question.

The expenses, and I may ask Dale to help me in this. Some of the expenses have to do with compensation expenses that increased because of the performance of the Company that we had to accrue more compensation expenses. Some of it had to do with expenses that we had with outside consultants, especially those that are working on our R&T for tax credits and, Dale, can you add to those?

Those are the basic drivers. It was between the stock option expensing, which is higher year-over-year, the compensation expense difference and the fact that we had some outside professional services expenses that were higher in the quarter.

So you're saying there was some one-time expenses in the fourth quarter. It's not necessarily indicative of the run rate of SG&A in '07.

Well, we think we'll be down a little bit in '07 certainly in corporate expense maybe in the vicinity of $1 million but that would be about the amount of the difference.

Yes we have some ongoing expenses, John, outside expenses on this tax credit and we also are moving, as I mentioned. We're moving our Corporate headquarters from here to Thousand Oaks as well as moving our controls operations, which is significant operation, from here to El Segundo. So there's some one-time-- there's some expenses associated with this year also with these movements but I think overall we are expecting our margins overall to go up somewhat, can say 10, 20 basis points per segment next year, in 2007.

Okay I think you mentioned the capital expense. Have you mentioned what the OpEx savings would be from moving your headquarters and moving your controls business?

Well, I think there won't be OpEx savings in moving either one of those. For example, in moving controls because we will be moving them in mid year, we almost have a double hit from the rent at both places. One place we have a rent. The other place we have some landlord monies that are forwarded to us but we have to capitalize those over so many years so we get hit twice. In our move from here to Thousand Oaks we're not going to save a lot because we're going to contribute rent to our Thousand Oaks facilities. That in turn hopefully will help with their overhead rate but I don't think it would help so much with the bottom line.

And just finally, is Rockwell completely integrated as of now and what does the acquisition pipeline look like for 2007?

I think Rockwell you can say is integrated. We, of course, have some more-- quite a bit of work left there. We once we move there then we have to work on our SOX compliance for next year, SO 404 compliance for next year. The pipeline, acquisition pipeline, is reasonable. There are a number of-- as always, we have a funnel with a large number coming at one end and a few trickling out from the other end so we're working on things and hope to do some more bolt on acquisitions as we go forward.

[Operator Instructions]. Chris Quilty with Raymond James & Associates.

Congratulations. I just want a clarification for Dale. Did you say that for 2007 you're projecting about 8 million of incremental intangible amortization relative to '06?

No. I said that we were anticipating $8 to $9 million of total amortization of intangible assets.

Okay and what was it in 2006?

About 6 to 7.

Okay. Didn't you pick up some accelerated amortization related to the Rockwell acquisition? And I guess some of that was reflected in last year's numbers or in '06's?

Well, certainly there was amortization in the-- you know from September 15th on since the acquisition was made but the amortization at that location will be higher in 2007. But you always do with an acquisition end up with higher amortization related to the backlog in the first part into the period after the acquisition.

Okay so just to make sure the incremental increase you're expecting with both Rockwell and Collaborex is about incremental 2 million?

That's right.

Okay. Robert, you-- last year at this time you were projecting flat sales growth in the aerospace engines and controls business just as you are today. You ended up 14%. Can you help us understand where things were better than you had originally projected, either in growth of the end market or market share gains?

I think both helped us. The data shows that in 2006 general aviation in terms of sales of new engines as well as flying hours were up in double digits. I saw somewhere it's a little over 12% and so we kind of track that. The more people fly the more they rebuild their engines, buy parts as well as people obviously are buying the newer airplanes like Cirrus Lancair and others and so we think that that's what helped us this year. I think there was sufficient consumer discretionary spending in 2006 for that but we really can't-- I at least personally but maybe you're economist can help us. I can't right now see how 2007 is going to play out in terms of the economy and everybody has some concerns about that and we just don't have enough an outlook to be able to say if it will go up or down so we're assuming it will stay relatively flat.

Okay and next steps we might hear about with regard to your Honda relationship?

That's kind of gone into a slow development mode because they are trying to design a second generation engine with our help so I don't see anything new happening there this year that would be of significance. The most significant thing in that business for us is we've certified a significant number of electronic control systems on our new engines for the new aircraft and we hope that those would be introduced this year.

And going back to the E&C business unit you didn't provide guidance with respect to defense instruments in the commercial avionics. I guess in defense it was about 12% organic. Would you expect growth in '07 to be consistent?

Right now our plans for '07 in defense electronics are that we will actually be relatively flat early in the year and then pick up a little bit later in the year and we'll be-- we'll have low single-digit growth in the defense electronics business. On the flip side in our instrument businesses we think we will do a little better early in the year and maybe have some double-digit growth early in the year and kind of go flat near the end of the year so we're looking at low single-digits growth in defense electronics for next year absent any acquisitions and we're looking at about overall a 10% growth in instruments, primarily also because of geophysical. Geophysical had a great year this year. They sold over $50 million worth of product, the best year they've ever had and it's a little bit of a lumpy business. That's no excuse for us, never has been, but we expect it to be down about 15% next year. We're introducing a new product with a gel filled streamers and we have a new facility in Singapore for repair and those things should come on line later in the year.

And the slowdown is just due to the fact that there were such strong results or is there actual a cycle to the oil field activity or I guess the deep well offshore activity that would cause a slowdown?

No I don't think it's because of the offshore activity. Actually we have two businesses. Actually we have multiple there. Some of them that which are directly related to the oil field themselves, those businesses are picking up. Like I mentioned though DI, which makes wet matable connectors, both electrical as well as optical connectors for the ocean floor, that business has picked up. On the oil discovery side there has been a little slowdown but I think that's more concerns with our primary customer and when they refurbish a boat with our streamers and when they take the orders and when they put them out to sea so I think that's the thing. But you mentioned something earlier that's also very important. We've had this tremendous growth this year in both instruments as well as in our defense electronics that it-- the comparisons become tougher for us. For example, if you look at full year, defense electronics with acquisitions that we made grew over 46-- about 31% with acquisitions and about 12% organic so the comparisons are getting tougher. Instruments grew 46% year-over-year with 19% organic so we're a little cautious because the comparisons are tough.

Got it. Well, thank you very much and good luck in the year ahead.

Mr. VanWees, we have no further questions. I'll turn it back to you.

I'll ask Jason to conclude the conference call.

Thanks, Robert, and again thank you everyone for joining us this morning and if you have any follow-up questions please call me at the number listed on the Earnings Release and as always all the news releases are available on our website, teledyne.com. Operator, if you could conclude the call and give the replay information? Thank you.

Yes. Ladies and gentlemen, this conference call will be made available for replay. The replay of the conference starts today, January 25th at 11:30 AM Pacific time. The replay will run for one month until the date of February 25th at midnight Pacific. You may access the AT&T teleconference replay system by dialing 1-800-475-6701. Please enter the replay access code 857974. International participants may dial 320 365 3844. Those numbers again are 1-800-475-6701 and international participants dial 320 365 3844. The access code is 857974. Well, that concludes our conference call for today. I'd like to thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.