Teledyne Technologies Inc (TDY) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Teledyne fourth-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, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Jason VanWees. Please go ahead.

Good morning, everyone. This is Jason VanWees, Vice President, Corporate Development and Investor Relations at Teledyne Technologies. I would like to welcome everyone to Teledyne Technologies' fourth-quarter and full-year 2007 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 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 all that 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 approximately one month.

Here's Robert.

Thank you, Jason, and good morning, everyone. Per our custom, I will start with some introductory comments about the overall performance of the Company. I will then follow up with more detailed observations about each of our business segments and markets.

Overall, I'm very pleased with both the operational performance and the strategic progress of our Company. From an operational perspective, Teledyne achieved record sales of $427.5 million in the fourth quarter, driven by overall organic growth of 7.6%. Earnings of $0.73 per share increased 37.7% from last year. For the full year 2007, sales were $1.62 billion, and earnings of $2.72 increased 20.4% from last year. This was the 24th consecutive quarterly year-over-year growth in earnings per share and the 15th consecutive quarter of double-digit growth in earnings per share.

During the fourth quarter, overall GAAP operating margin increased 129 basis points to 10%, largely as a result of our Electronics and Communications segment, in which the operating margin of 13.7% increase 176 basis points compared to last year.

Finally, full-year 2007 cash flow of $126.4 million was greater than the cumulative free cash flow achieved in 2005 and 2006.

Our operational excellence initiatives have continued to improve the quality and the financial performance of our businesses. Strategically, through targeted acquisitions, we have been able to increase our technical capabilities, our scale within our major business areas, and the size of our addressable markets.

Our recent acquisition of Teledyne Storm and Teledyne Impulse further expanded our defense microwave and marine instrumentation businesses, with additional high-reliability interconnect products. Following these acquisitions, Teledyne's annualized sales of harsh environment interconnect products are expected to be approximately $200 million.

In addition, following the pending acquisition of Judson Technologies, Teledyne Imaging Sensors will be able to provide a substantially wider range of visible and infrared detectors, integrated subsystems and camera products. Judson's experience with a variety of detector materials such as indium antimonide and indium gallium arsenide, as well as its production of dewar and cooler assemblies, complements our existing capabilities in advanced detector materials, and the production of large-format focal plane arrays and custom -- design of custom -- design of custom imaging electronics.

It's important to note that in a world of high energy prices, heightened pollution concerns and robust aerospace spending, Teledyne is strategically well-positioned. Our portfolio of highly engineered products, primarily leveraged to aerospace and defense, offshore energy exploration and production, and environmental monitoring markets is quite attractive, especially given the turbulence in the financial market and the concerns about the domestic and global economics.

Turning to our business segments, in the fourth quarter we have realigned three operating companies. Teledyne Energy Systems, our former energy systems segment, and Teledyne Turbine Engines and Teledyne Battery Products, both of which were part of our Aerospace Engines in Components segment, were combined into a new segment called Energy and Power Systems. This new segment will provide our customers with a focal point for specialized hydrogen generators, fuel cells, thermoelectric generators, batteries and small turbine engines that we manufacture. These are primarily for high-reliability aerospace and defense applications. In addition, Systems Engineering Solutions segment has been renamed Engineered Systems to better describe its programs.

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 comment on our outlook for the first quarter and the full year 2008.

Fourth-quarter sales in our Electronics and Communications segment increased 11.6% compared to last year, from $254 million to $283.5 million, with organic growth of 9%. Segment operating profit increased 28.1%, from $30.2 million to $38.7 million, and segment operating margin increased 176 basis points.

Full-year sales in our Electronics and Communications segment increased 19.1% compared to last year, from $899.4 million to approximately $1.07 billion. Full-year segment operating profit increased 31%, from $109.3 million to $143.2 million, and segment operating margin increased 121 basis points.

Our Electronics and Communications businesses now generate approximately two-thirds of Teledyne's total sales. In this segment, our businesses lie within three separate market categories -- first, defense electronics, which represents approximately 41% of the segment; second, electronic instruments, which now represents approximately another 42% of the segment; and third, avionics and other commercial electronics, which represent the remaining 17% of the segment.

In the fourth quarter of 2007, sales of defense electronics have increased approximately 7.7% compared to the fourth quarter of 2006. This sales growth was entirely organic and primarily resulted from increased sales of imaging sensors and military microwave components and soft systems. For the full year 2007, sales of defense electronics increased approximately 28% compared to last year.

Turning to our Electronic Instrumentation businesses, in the fourth quarter of 2007, year-over-year sales of electronic instruments increased approximately 25% from last year, from $97.2 million to $121.6 million. This was due primarily to strong organic sales growth of 18.3%, as well as the acquisition of assets of D.G.O'Brien in March of 2007. Organic growth in instrumentation was comprised of 27% organic growth in marine instrumentation, 12% of organic growth in environmental monitoring instruments, and 12% growth in instruments for industrial applications.

For the full year, sales of Electronic Instrumentation increased approximately 25%.

Finally, I will discuss our radionics and other commercial electronics businesses, which in the fourth quarter of 2007 collectively had a sales decrease of approximately 7% compared to last year, as a 13% sales growth of high-margin avionics was more than offset by a decline in sales of lower-margin electronic manufacturing services.

We should note that earlier in 2007, we exited certain electronic manufacturing services, as these businesses were not consistent with our strategy of focusing on highly engineered products not likely to be commoditized. Excluding these product lines, sales of avionics and other electronics increased over 8% in the quarter compared to last year.

Turning to our Engineered Systems segment, in the fourth quarter of 2007, revenue in this segment increased 7.6% organically compared to last year. Strong growth in our space programs was partially offset by year-over-year declines in some of our defense and environmental programs. Segment operating profit increased 18.3%, from $6 million to $7.1 million, and segment operating margin increased 83 basis points to almost 9.1%.

Full-year sales in our Engineered Systems segment increased 6.6% compared to last year, from $283 million to $301.7 million, with organic growth of 3.6%. Full-year segment operating profit increased almost 7%, from $24.5 million to $26.2 million, and operating margin of 8.7% was nearly identical to last year.

Turning to our Aerospace Engines and Components segment, which now solely represents Teledyne Continental Motors, our aircraft piston engine business, sales in this segment were flat compared to last year, but operating profit improved slightly due to lower product liability expense.

During the fourth quarter, as previously noted, deliveries of aircraft engines for OEM aircraft were impacted by bankruptcy of Columbia Aircraft, one of our customers. However, Cessna recently acquired assets of Columbia, and we expect they will continue to produce the Columbia models using our engines.

Full-year sales in this segment were also flat compared to last year. Orders, on the other hand, increased in each sequential quarter throughout the year, and full-year book-to-bill in this segment was 1.06.

Full-year segment operating profit increased almost 24%, from $15.5 million to $19.2 million, as operating margins increased 209 basis points. Furthermore, if we exclude a nonrecurring payment from Honda of $2.5 million in 2006, operating margin in 2007 increased 347 basis points from 2006.

Finally, in our Energy and Power Systems segment, revenue in the fourth quarter of 2007 increased 5.4% compared to last year due to higher sales of commercial hydrogen generators, partially offset by lower cruise missile turbine engine sales. Profit declined slightly in the fourth quarter, from $3.2 million to $3 million.

Full-year sales in this segment decreased slightly, about 1%, compared to last year, as double-digit revenue growth in hydrogen generators and aviation batteries was more than offset by reduced deliveries of turbine engines. In addition, full-year segment operating profit also declined slightly.

To wrap up, in conclusion, Teledyne achieved another record quarter in revenue and strong year-over-year growth in earnings. While our revenue run rate has grown to over $1.6 billion, we have continued to build a more focused and stronger-performing company. We have 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.

For example, as you know, we have completed a number of acquisitions to expand our product offerings in defense microwave and marine instrumentation markets. While we have individually expanded each of these businesses, we have also collectively developed a number of cross-platform technologies related to harsh environment electrical microwave and fiber-optic interconnects.

Going forward, we intend to first emphasize improved profitability through operational excellence and improve margins, and second, invest in our existing businesses and make acquisitions of businesses that are related to Teledyne's core competencies, businesses that preferably operate in regulated markets, businesses that are not likely to be commoditized, and finally, businesses that have favorable market trends.

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 and full year not covered by Robert. Then I will give an update on pension costs and discuss our 2008 outlook.

In the fourth quarter, cash provided from operating activities was $43.3 million compared with cash provided from operating activities of $15.9 million for the same period of 2006. The higher operating cash flow was primarily due to higher net income, increased cash from acquisitions, lower pension payments and lower tax payments.

Free cash flow for the fourth quarter was $33.7 million, bringing free cash flow for the full year to $126.4 million.

Capital expenditures were $9.6 million in the fourth quarter compared to $10.1 million for the same period of 2006. We ended the quarter with $129.8 million of net debt. Our balance sheet remains strong, with a net debt to cap ratio of 19.7%. As noted in the earnings release, we completed two acquisitions and have one acquisition pending following the end of the quarter. Adjusting for these acquisitions, net debt to cap would be approximately 32%.

Depreciation and amortization expense for the fourth quarter of 2007 was $9.1 million compared to depreciation and amortization expense of $11.1 million in the fourth quarter of 2006.

Moving to pension, in the fourth quarter of 2007, FAS 87 and 158 pension expense was $3 million or a negative earnings per share impact of $0.05. This compares to FAS 87 pension expense of $3.2 million or a negative earnings per share impact of $0.06 in the same period of 2006. Pension expense allocated to contracts pursuant to cost accounting standards, or CAS, was $2.6 million or a positive earnings per share impact of $0.04 in the fourth quarter of 2007 compared to $2.6 million or a positive earnings per share impact of $0.05 in the fourth quarter of 2006.

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.

Now moving to stock option compensation expense, in the fourth quarter of 2007, per requirements of SFAS No. 123(R), stock option compensation expense was $1.7 million or a negative earnings per share impact of $0.03 compared with $1.5 million or a negative earnings per share impact of approximately $0.03 in the fourth quarter of 2006.

Now let me turn to the 2008 outlook. Management currently believes that GAAP earnings per share in the first quarter of 2008 will be in the range of $0.63 to $0.66. The full-year 2008 earnings per share are expected to be in a range of approximately $2.86 to $2.94. In addition, our full-year 2008 earnings per share outlook reflects the anticipated receipt of tax credits of $1.3 million or about $0.04 per share in the first quarter of 2008.

Our first-quarter and full-year 2008 earnings outlook reflects some additional operating income margin pressure, which is expected to result in part from the increase in depreciation of intangible assets, as well as the intangible asset amortization and the interest expense resulting from the acquisitions completed in 2007 and following the close of the fourth quarter.

We expect full-year 2008 capital expenditures of approximately $45 million and depreciation and amortization expense of approximately $45 million. The depreciation and amortization expense in 2008 is approximately $10 million greater than 2007, with approximately $6 million of this increase being related to increased intangibles and purchase accounting adjustments.

For the full year of 2008, we currently anticipate approximately $10 million or $0.17 per share in pension expense under FAS 87 and 158, or about $600,000, which is $0.01 per share in net pension expense after recovery of allowable pension costs from our CAS-covered government contracts.

Full-year 2007 earnings included $11.9 million or $0.21 per share in pension expense under FAS 87 and 158, or $1.7 million, which is $0.04 per share, in net pension expense after recovery of allowable pension costs from our CAS-covered government contracts.

The decrease in full-year 2008 net pension expense reflects pension contributions made in 2007. The Company's 2008 earnings outlook also reflects $7.8 million or $0.13 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.

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

(OPERATOR INSTRUCTIONS). Michael Lewis, BB&T Capital Markets.

Robert, just a quick question on the CapEx. Your guidance next year came out a little bit higher than what I was looking for. It looks like you're having a step-up in CapEx investment if we were to compare it to, say, '05 and '06, what we saw back then. Where exactly are you investing these resources? Is it any specific segment or have you identified higher-growth businesses that you want to deploy more resources to? Can you tell me what is going on there?

Yes, Michael, primarily there is a little bit of carryover from this year to next year. The rest of it really is investments that we intend to make in our newer acquisitions like Impulse and Storm.

Okay, that's helpful. And then just not to really put you too much on the spot here, but if I look at the guidance that you put out and the potential growth outlook of the Company, if I take into account the last three acquisitions, including Judson, Impulse and Storm, I think that -- now, my numbers might be off a little bit. Maybe you can correct them if that's indeed the case, but they should add about $80 million in forward revenue, according to my model. And if we take a really conservative net margin here, say 5%, what does that yield, about $4 million in net income? That takes into account amortization as well. So that's about $0.10 accretion that I'm getting just off the back of the envelope here. And then if I take your guidance of $2.86 to $2.94, you back out the $0.10, at the end of the date it's implying flat to about 4% EPS growth.

I know that's a lot of numbers to throw at you without you seeing it, but I'm just wondering, what is going on in the core business? Are we seeing a slowdown in the core business growth, or we're just not seeing this correctly with regard to the acquisition accretion that we are expecting on these properties?

Michael, let me come at this another way, if I may, and then I will answer the specific question more from the business side.

If you look at the table we have in our earnings that talks about the outlook table, you'll note that, if you look at 2006, we have about $0.10 headwind, a combination of pension, stock option and tax benefit. In 2007, those three items combined netted out to zero. In 2008, at the present time, we again expect a headwind of about $0.10 from those three items.

So, going into the year, we are already starting with a headwind of $0.10 that we didn't have this year between those three. So that's part of it. The other part is that when we make acquisitions like the ones we have mentioned, we have assumptions on intangibles and amortization of intangibles, and we usually don't know where we are going to end up with those because we have an outside firm come in and do that for us, an independent entity. So right now, we think our intangibles are going to be a little higher than we have had experience with. So that also plays into it.

I think, underlying businesses, I don't expect any deteriorations, coming back to the last part of your question. I think we're going to work very hard to make sure that they perform well. There is some uncertainty, obviously, vis-a-vis the instrument part of our business because that's a book-and-burn part of our business, so we can't really predict how those are going to play out throughout the year. Right now, we are optimistic since they're very much dependent on environment and oil and gas production and exploration. That's the best I can do with that complex question.

That's very helpful, Robert, thank you. So at the end of the day, the core business looks like we still can maintain an internal growth target north of 5% mid-single? That's the goal?

I think 5% is a very good number.

John Harmon, Needham & Co.

A couple of questions. First of all, I would just like to talk about the rationale about how you recombined your businesses. It seems like on those four segments, you put most of your energy-related businesses, but also turbine engines. Is that, as they say, a catchall category for noncore businesses, or why did those businesses come together, please?

John, you know, because our turbine is so specialized and there's a lot of R&D that goes into it, and also we're looking at potential standby energy applications for it, the fit with batteries, which are a very high growth-rate business for us as well as probably one of our highest-margin businesses, and the fact that we also have hydrogen generators, we have other kinds of power generators, radioisotope generators, intellectually and from a market and applications and end customers' perspective, these are more military and they also have technological fit with one another.

Actually, we think that this segment has been an area that we intend to grow, and that is frankly why we put them together. We have had some really good luck with our hydrogen generators this past quarter, and as I said, our battery product margins are some of the highest in the Company. So, no, we think this is a core segment for us.

Just out of curiosity, at one point you thought you might want to bundle your turbine engine business with your piston engine business to find a buyer to make the combination more attractive. My question is last year, when private equity seemed to be buying everything in sight, did you have any nibbles on this business? And was it then because you didn't get much interest that led to the changes you announced today?

First, let me separate turbine from piston, because turbine is primarily military. It's all military. And piston is all commercial. So they're very different markets. Piston, these businesses are not for sale. And that was many years ago, I think that was right after 2001, where there were all kinds of flight restrictions and the small general aviation market for small aircraft was suffering terribly that we considered that. But now it's a nice margin business. I think if you look at the margins for our piston engine business in our earnings release, you'll note that it's about -- over 10%, 10.5% GAAP operating margin. So we are going to keep it. It's better in our portfolio than any value we could realize trying to sell it.

Okay, thank you. Just one quick one for Dale -- what tax rate should we expect in '08, please?

You should assume probably 39%.

Chris Quilty, Raymond James.

Dale, just real quick on that tax question, last couple of years you have recorded the tax benefit in Q3 versus Q1. Is there a particular reason for the timing shift? And second of all, is it fair to assume that your '08 guidance does not include the R&D tax credit which Congress has failed to pass up to this point?

The timing on the tax credit is associated with the year it is involved with. That particular tax credit of $1.3 million in the first quarter is related to a filing for 2007 once we have defined and determined what the number will be. And the tax rate in the total is at 39%, but that does not include the tax credit that was in the first quarter, the $1.3 million.

Okay, but specifically, a lot of companies out there are not including -- I mean, you got the retroactive tax benefit last year for R&D that Congress was late in passing, and of course it was a one-year fix. There hasn't yet been one approved for '08. And so did you take that into consideration in the guidance? It doesn't look like it was a 39% tax rate.

We did not. The only tax credit that's in '08 is for the 2007 tax year.

Robert, if you could, in years past at the start of the year you've given us a sort of directional heading on a business-by-business rundown, sort of general growth rates for the defense electronics area or E&T in general and margin, things that should be pushing it up and down. Could you do that for us again?

Sure, I will try. I think defense electronics, the organic growth this year was over 7%. We expect that would continue, maybe improve a little bit. In terms of instrumentation, our organic growth this year was very strong, and we expect next year to be in the high single digits. In other electronics, I think we expect to have flat growth because we are basically, again, as we have said before, we have exited our medical EMS businesses.

Will the negative compares in the commercial EMS be gone, or is it still a little bit of a drag?

There would be a little bit of a drag in the first quarters, because we really didn't exit this business until the middle of the year. We slowly exited in the first half of the year. And the business is down about, I would say about $17 million year over year, from '06 to '07. So the other electronics I expect to be flat because of that. Defense electronics will be up. We think Energy and Power Systems, our new segment, will be up. We expect our Engineered Systems to be up some. And we think general aviation, if nothing terrible happens, should keep up with inflation.

Any significant margin trends or changes in any of those businesses? Or which one do you think you might have the possibility for the most margin expansion?

Right now, we're always looking to increase our margins. We start by aiming to increase them about 25 basis points across the Company. We obviously would think we will have maybe a little margin improvement in our piston engine business if we can keep our insurance premiums and our first dollar coverage in check. We think in our government businesses, Engineered Systems business, margins are going to be flat, maybe even go down a little, because we had a good fourth quarter. So, overall, we're always aiming for 25 basis points, but obviously, as we go through the year, we would push very hard to do better, as you know.

Okay. In your press release, you mentioned that a lot of the strength in defense electronics was in imaging sensors. What specific product lines were they, and were they related to the Rockwell Scientific business?

Yes, primarily, when we talk about our imaging business, we're talking about the former Rockwell Scientific imaging business that we acquired. And we have seen some strength there, both in our space sensors, which are for both NASA and DoD. We have also had some very nice progress that we have made in launching our aircrew laser eye protection spectacles for the U.S. Air Force. That has been a good program for us.

So all in all, I think sales in our what was former Rockwell Scientific improved about $5 million year over year, quarter over quarter. But we also had some improvement in our microwave business as well, because we're making better, higher integrated microwave subsystems because of the combination of acquisitions that we have had.

More generally, on the former Rockwell Scientific, where or how are you progressing in terms of some of the next-generation imaging technologies?

That's coming along pretty good. We, for example, the third-gen dual-band infrared cameras that we're developing, we expect to have enough progress in our technical performance and environmental ruggedness of those products to be able to deliver some third-gen cameras for field testing to the Army in the next few months.

Also, you may recall that we won a HIGH STARE program in midyear for the next generation of space infrared sensors. And lastly, this Judson acquisition, Chris, is very strategically important to us in that area, because as you know, most of our imaging work is focused on mercad telluride and large focal plane arrays.

What Judson brings -- and we make, you know, not too many products. Hundreds of parts a year would be on average what we make. On the other hand, Judson makes 80,000 to 90,000 products a year, and they bring to us -- expand our capabilities in detector materials from mercad telluride to include other detector materials like indium antimonide and indium gallium arsenide. They also bring some packaging capabilities, and just as importantly, they bring some dewar and cooler capabilities, which would help us move higher up in the value chain in our imaging products. So those combinations make us feel very good about that aquisition.

Final question for you regarding acquisitions -- the pipeline, how does it look this year? How do you think both within the defense arena, what the M&A activity is looking like and how the credit market condition helps or hurts you?

By and large, I think the fact that some of the equity guys have gone to the sideline, that could not hurt, because we didn't really -- the competition was very stiff when money was so readily available. From our perspective, our pipeline is -- we're always looking at things, but it has to strategically fit. So we don't decide we've got to make two or three acquisitions or five at any given year. Whatever becomes available, we will hope to get things that strategically fit us and fit at the platforms that we have established for growth, which are instrumentation electronics, imaging and so on.

And then from a credit perspective, we have a line of credit which we have -- even with the acquisitions that Dale added up, we would have sufficient [through there] to do what we need to do, and if we need to expand it we will do that.

Great. Thanks, and congratulations again on a good year.

Karl Oehlschlaeger, Banc of America Securities.

I wanted to ask on -- dig a little bit more on the aerospace business, the piston engine business. In the first three quarters in 2007, looking at the [Gamma] data, it looks like the piston engine deliveries were down, and I wanted to see to what extent that sort of impacted your business -- your business did fairly well, I think, on a relative basis -- and kind of get a better idea as to what trends that you're seeing with respect to the decrease in piston engine deliveries.

In general, as you know, we are in the higher-end aircraft market, the new aircraft that are gaining share in that business. So even if the overall business would go down, we expect our part of the business to remain fairly flat, because companies like Cirrus are gaining market share.

A little bit of a setback in 2007 had to do with the bankruptcy, the Columbia bankruptcy, but that is behind us since that was bought by Cessna, and our anticipation is that they will continue with our engines, since that is the engine that's qualified, certified for that aircraft.

Also, there is a significant amount of effort, ongoing effort, which may not be as productive to us in 2008, but it will be in 2009 and beyond, and that is the emergence of light sport aircraft. Interestingly enough, Cessna has chosen Teledyne's engine for their light sport aircraft, which would probably enter the market in 2009, and they already have over 800 orders, and we unit backlog. So we expect this business, even if the market goes south, at least to remain flat, if not do better.

But you're going to start seeing some benefit in '08 on the SkyCatcher?

I think that would be probably starting early '09. We may make -- we are already producing some prototype engines for test, and we delivered a couple, but it takes a long time to certify those aircraft. So I would say early '09, Karl.

In terms of -- you had some lower insurance costs, and I was hoping that maybe you could kind of break that down into a little bit more detail in terms of the size of your insurance costs that you booked against your margin in '07, how that changed from '06, and how you expect that to trend in '08, based on the guidance you've given. I know it's been really high in the past, and I think you were booking -- accruing some of -- I guess it's your -- the deductibles at a fairly high rate. But over time, I think that has become -- you haven't had to pay the costs, and so maybe that accrual rate is coming down. Can you talk about those insurance costs and how it impacts that segment?

Yes. After 2001, we had a real -- because of the threat of -- the threats that were underway at that time and insurance prices went way up and our premiums went up and our reserves that we were accruing went up. This year, we enjoyed some modest decrease, this year being the past year, 2007, some modest decrease in premium and some decrease in our reserves. The reserves, we don't set them; they have to be set based on multiyear experience, 10-year experience, and they are set in coordination with our external auditors. So we had a little decrease in our reserves in 2007.

Going forward in 2008, if we can maintain those, what we gained in 2007, we would be very happy. We don't at this time anticipate any significant changes, maybe a couple or $300,000 or so, but nothing that would affect our earnings in an important way. Where we obviously are going to work very hard to improve is in our operations, because we do have room to improve in our operations in that factory.

Michael Lewis, BB&T Capital Markets.

Robert, if we can just circle back on Chris' question earlier, where you're providing a little bit of guidance on the specific segments, Energy Systems, I missed that -- what did you say on that, the direction?

I think on energy, we are going to have about -- the Energy and Power Systems, our new segment, I think somewhere in the high single digits' revenue growth.

Would margins be consistent or slightly improved? You talk about this goal of 25 basis points.

I think they would be slightly up, Michael.

Okay, that's fair. Dale, if I could just ask you for some forward expectations on what you think the share count is going to come out at at the end of this year?

We think on average it will probably be up about $0.5 million.

And then you guys have been very good about paying down debt with free cash. What do you think a possible goal would be on net debt to cap at the end of the year, just so we can kind of model this through?

Well, we might expect that we would have free cash flow in the area of equal to net income.

Okay, and do you know how much you'll deploy to pay down any debt?

Approximately $100 million.

And we have no more questions in queue at this time.

Okay, well, thank you, operator. I will now ask Jason to conclude our conference call.

Thanks, Robert. Again, thank you, everyone, for joining us this morning. If you have any follow-up questions, please don't hesitate to call me. My number is on the press release. And of course, all the releases are available at our website, teledyne.com. Operator, if you could conclude the call and give the replay information, we would appreciate it.

Thank you. Ladies and gentlemen, this conference will be made available for replay after 11.30AM Pacific Time today until February 25 at midnight. You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and entering the access code 892590. International participants may dial 320-365-3844. (OPERATOR INSTRUCTIONS).

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.