Teledyne Technologies Inc (TDY) 2008 Q4 法說會逐字稿

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.

Thank you, operator. Good morning, everyone; this is Jason VanWees, Vice President of Corporate Development and Investor Relations at Teledyne Technologies. I would like to welcome everyone to Teledyne Technologies' fourth-quarter and full-year 2008 earnings release conference call. We released our earnings earlier this morning before the market open.

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 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 order to avoid potential selective disclosures this call is simultaneously being webcast and a replay, both via webcast and dial in, will be available for about one month. Here's Robert.

Thank you, Jason, and good morning, everyone. Before commenting on the specific results of the quarter I'd like to make some introductory comments. We were very pleased to end 2008 with a strong quarter. Our positive results for the quarter were achieved despite the global economic turn down which has begun to impact some of our commercial businesses.

In a few moments I'll discuss some of the actions we're taking to mitigate the effects of the current economy. However, I'd first like to comment on our achievements in the fourth quarter and the full year 2008.

In the fourth quarter sales increased 9.3% and earnings per share increased 15.1%. We also achieved record operating margin of 15.1% in our Electronics and Communications segment and record margin of 11% overall for the Company. For the full year sales increased 16.8% and earnings per share increased 23.2, and operating margin expense at 91 basis point to 10.9.

Given our strong cash flow during the year we were able to close nine bolt-on acquisitions for $250 million and make a voluntary pension contribution of $50 million and yet conclude 2008 with a net debt to cap level of 37%.

As mentioned in the earnings release, orders and sales in some of our commercial markets, but primarily in general aviation, declined substantially in the fourth quarter. We absorbed costs of about $1.2 million in the fourth quarter in our operating segment for a total reduction in force of approximately 210 people. We had already taken some action in the third quarter, which brings the total number of employees that were reduced to 235.

Going forward we will continue to monitor our cost structure and take appropriate action as needed. In addition, as prospective cost -- as a prospective cost saving measure we're delineating our 2009 stock option award until at least mid year.

Regarding our pension, while none of our pension in 2008 was invested in private equity, as speculative hedge funds or residential mortgage-backed securities, we nonetheless suffered a significant year-over-year decline in assets despite the $50 million voluntary pension contribution mentioned earlier. Primarily due to this decline in assets we expect approximately $0.31 of FAS 87 pension expense in 2009 versus less than $0.01 per share of pension income in 2008. Furthermore, we expect $0.03 less in tax benefits in 2009 for a total of $0.34 of earnings headwind independent of our operations.

I am not pleased to forecast for 2009 our first contraction in earnings since the year 2001. However, I firmly believe that our balanced mix of government and commercial businesses, which have strong positions in [defensible] niche markets will allow us to successfully navigate the current worldwide economic recession.

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 2009.

Fourth-quarter sales in our Electronics and Communications segment increased 15.9% compared to last year with organic growth of 1.8%. Segment operating profit increased 28.4% and segment operating margin increased 147 basis points to a record level of 15.1%.

Full-year sales in our Electronics and Communications segment increased 19.1% compared to last year from approximately $1.07 billion to roughly $1.28 billion. Full year segment operating profit increased 27.8% from about $143 million to $183 million. That segment operating margin increased almost 100 basis points to 14.3%.

Our Electronics and Communications business generated approximately 70% of Teledyne's total sales. In this segment our business sales lie within three separate market categories -- first, Defense Electronics which represents approximately 40% of the segment; second, electronic instrumentation which now represents approximately 45% of the segment; and third, avionics and other commercial electronics which represent the remaining 15% of the segment.

In the fourth quarter of 2008 sales of Defense Electronics increased 14.6% compared to fourth quarter of 2007. Defense Electronics sales grew primarily from acquisitions of Storm Products and Judson Technologies in the first quarter and Filtronic PLC's UK-based Defense Electronics businesses in the third quarter of 2008. Organic sales growth in Defense Electronics was about 1.4%. For the full year sales of Defense Electronics increased 15% compared to last year with organic growth of approximately 5%.

Turning to our electronic instrumentation businesses, in the fourth quarter of 2008 year-over-year sales increased approximately 25% from $121.6 million to $152.3 million. This was partially due to organic sales of 4.9% and acquisitions of Impulse Enterprise, Storm Products and TSS International early in the year as well as Web research, Cormon later in the year.

Organic growth in instrumentation was comprised approximately 16% in Marine instrumentation combined with a 6.5% decline in sales of environmental monitoring and industrial instrumentation. For the full year electronic instrumentation sales grew 33% with organic growth of 10.6%. Teledyne Marine instrumentation businesses currently represent approximately 350 million of sales or roughly 18% of total sales for Teledyne.

Currently each of oil and gas production and oil and gas exploration represents approximately 30% of our Marine sales or about $100 million in each market. Over the next few quarters we believe that our revenues related to subsea production will not be significantly impacted by the recent decline in the oil price. For example, our subsea equipment customers continue to have months of backlog and it is our understanding that many current large subsea projects coming online were justified over the last several years at oil prices at around $40 per barrel.

While current forecasts for [oil] production continue to be positive for 2010 and 2011, we do have some concerns that certain prior risk deep water infrastructure projects could be impacted in the long term if commodity prices remain low.

Regarding the approximately $100 million of revenue related to oil exploration, we are forecasting a contraction in sales in 2009 of about 15% to 20% as some of our customers are projecting lower capital expenditures as a result of lower commodity prices as well as greater cost in obtaining credit for the purchase of new exploration vessels.

The remaining 40%, or $150 million, of our Marine sales are from oceanographic research, military hydrographic surveys and other industrial markets and we do not expect the reduction in oil prices to directly affect these end markets.

Over the long term we continue to believe that our Marine businesses are attractive because of three factors. First, following the current recession greater demand for oil and gas especially the offshore projects will reduce dependence on Middle Eastern oil. Second, continued spending for strategically important subsea defense programs will continue. And third, heightened environmental concerns will increase investment in oceanographic research and climatology.

It's also worth noting that of the five businesses we acquired in 2008 that participate in the marine market, more than two thirds of the sales of these businesses are from non-oil and gas related markets.

Finally, for this segment I'll discuss our avionics and commercial electronics businesses. In the fourth quarter sales of these businesses collectively decreased 6% primarily due to decline in sales of commercial electronic manufacturing services or medical applications. We have previously noted that this is an area that we are slowly exiting.

For the full year 2008 sales of avionics and other electronics decreased only 2% also as a result of these electronic manufacturing services. This decrease was partially offset by 5.6% growth in our avionics businesses.

Turning to our engineered systems segment, and the fourth-quarter revenue in the segment increased 9.3% organically compared to last year. The sales growth primarily resulted from increased sales related to gas centrifuge service modules used to help reach uranium for use in commercial nuclear power plants. As well as increased sales of systems engineering and technical assistance or [civil] services for government customers. Segment operating profit increased 7% while operating margin decreased slightly from 9.1% to 8.9%.

Full-year sales in our engineering systems segment increased a healthy 20.2% compared to last year from $301.7 million to $362.7 million and full-year segment operating profit increased 33.6% from $26.2 million to $35 million with operating margin of 9.6%, an increase of 97 basis points from last year.

As we've mentioned previously, we are aware of only 16 other US-based companies that have the same nuclear manufacturing specification, or stamp, as Teledyne. Combining sales of nuclear hardware in our engineered systems segment with sales of broadband interconnect, [safety] related valve testing services and other products within our electronics segment, Teledyne currently has approximately $65 million worth of annual sales to the commercial and government nuclear industry. Given our unique capabilities and an estimated addressable market of approximately $2 billion, we're pursuing a number of initiatives to expand our nuclear business over time.

I'll now discuss our aerospace engines and components segment which, as a reminder, solely represents our aircraft system engine business. Sales in this segment decreased approximately 26%. Year-over-year sales of axle market parts and services declined about 15% in the fourth quarter. The decline was consistent with a decline in other economic cycles.

For example, during the 2001 and 2002 recession aftermarket sales declined about 20% from peak to trough. However, during the previous recession sales of our engines to the OEM customers reported positive comps in each sequential year. During the fourth quarter of 2008 sales of new engines to OEM aircraft customers declined approximately 50%. This decline was the first material reduction in our OEM engine sales in nearly 20 years as sales of new aircraft dramatically decreased due to availability of credit and reduced consumer discretionary spending.

During the fourth quarter we reduced the workforce in this segment by approximately 14% and we will continue to monitor this market very closely. During the quarter we reported an operating loss of $2.8 million primarily as a result of the large decrease in sales. Full-year sales in this segment decreased approximately 5% compared to last year solely as a result of very weak sales in the fourth quarter. Operating profit for the year declined 50 -- almost [57]%.

Finally, in our energy and power systems segment, sales in the fourth quarter of 2008 decreased 8% compared to last year primarily due to lower sales of commercial hydrogen generators partially offset by sales of military turbine engines. Fourth-quarter operating profits remain flat at trading in dollars.

Full-year sales in this segment increased a healthy 23% compared to last year due to increased deliveries of turbine engines and government power systems. Full-year operating profit increased 62% approximately as a result of higher sales and operating margin in (inaudible) 289 basis points.

In conclusion, we are very pleased with the results of this quarter as well as the full year. However, we're also cognizant of the rapid deterioration in the global economy that affects some of our end markets.

Nevertheless, as I mentioned earlier, risks to Teledyne are somewhat mitigated by a number of factors including -- first, our balanced mix of government and commercial businesses that produce highly engineered products which are not easily commoditized; second, good visibility and a healthy backlog in many of our government businesses; and third, ample liquidity and a proven track record of continuously improving our operations and successfully integrating acquisitions. 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 2009 outlook.

In the fourth quarter cash provided from operating activities was $7.5 million compared with cash provided from operating activities of $43.3 million for the same period of 2007. The lower operating cash flow was primarily due to voluntary pension contributions of $30 million in the quarter, higher aircraft product defense and settlement payments of $18.2 million, and increased working capital requirements partially offset by higher net income., the contribution from recent acquisitions and lower income tax payments of $12.4 million.

Free cash flow for the fourth quarter was a negative $6 million compared with $33.7 million of free cash flow for the same period of 2007. Capital expenditures were $13.5 million in the fourth quarter compared to $9.6 million for the same period of 2007. We ended the year with $312.8 million of net debt. Our balance sheet remains strong with a net debt to capital ratio of 36.7%. Our credit facility has $590 million of bank commitments and does not expire until July of 2011.

As noted in our press release, depreciation and amortization expense for the fourth quarter of 2008 was $10.9 million compared with $9.1 million in the fourth quarter of 2007. For the full year of 2008 free cash flow was $78.5 million. Excluding the $50 million of voluntary pension contribution in 2008, free cash flow for 2008 would have been similar to 2007. Full-year 2008 capital expenditures were $41.9 million and total depreciation and amortization expense was $47.3 million. For reference, intangible asset amortization was $15.7 million in 2008, an increase of $9.3 million or $0.16 per share from the full year 2007.

Moving to pension -- in the fourth quarter of 2008 FAS 87 and FAS 158 pension expense was $2.4 million; this compares to FAS 87 and FAS 158 pension expense of $3 million in the same period of 2007. Pension expense allocated to contracts pursuant to Cost Accounting Standards, or CAS, was $2.7 million in the fourth quarter of 2008 compared with $2.6 million in the fourth quarter of 2007.

As Robert mentioned earlier, the value of our pension assets declined significantly in 2008. Primarily due to this decline in assets we expect pension expense net of recovery of allowable pension cost under CAS of $18.3 million or $0.31 per share in 2009 versus $200,000 of income in 2008. For reference, 2009 expense is based upon an assumed rate of return of 8.25% and an assumed discount rate of 6.25%.

On stock option compensation expense in the fourth quarter of 2008 per the requirements of SFAS 123R, stock option compensation expense was $1.9 million compared with $1.7 million in the fourth quarter of 2007.

Turning to the 2009 outlook -- management currently believes that GAAP earnings per share in the first quarter of 2009 will be in the range of $0.50 to $0.55. The full-year 2009 earnings per-share are expected to be in the range of approximately $2.70 to $2.80. Our outlook for the first quarter and full year of 2009 reflects the significant recent reduction in orders and sales from our aerospace engines and components segment. In addition, as Robert has mentioned earlier, we are expecting contraction in our marine instruments businesses that serve the offshore exploration market, especially in the second half of 2009.

For the full year 2009 we currently anticipate approximately $30.7 million or $0.51 per share of gross pension expense under FAS 87 and FAS 158. As mentioned earlier, net pension expense after recovery of allowable pension costs from our CAS covered government contracts is expected to be $18.3 million or $0.31 per share in 2009. For the full year of 2009 we expect capital expenditures of approximately $45 million and depreciation and amortization expense of approximately $50 million. I will now pass the call back to Robert.

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

(Operator Instructions). John Harmon, Needham & Company.

Good morning. A couple of questions, please. First of all, regarding your avionics business, you talked about how much it was down versus how much it is in typical recessions. Do you think the business has bottomed yet or not? Or if not, when do you think it could bottom?

John, I guess that first -- I'm sure you meant our general aviation engine business because we have a separate avionic business that is a little different. In the general aviation engine business, I'm not sure what's going to happen. The set of economic conditions we're facing today are unprecedented; none of us have really faced such conditions previously that we're facing today. And our best estimate is that our OEM engines will stay around where they were in the fourth quarter and our aftermarket engines and parts will be down about 20% to 25%.

Having said that, as you know, we have also in our parts businesses -- we have primarily two Napa type competitors that produce parts for our engine. One of those competitors, Superior, declared bankruptcy only very recently. And some of the pressure on some of our parts businesses, from that source at least, should come off in due course. Do you have another question, John?

Yes, thank you. A similar type of question. When would you expect to stop exiting medical device manufacturing?

Well, we've been getting out of that business over a period of time. At one time we had almost $50 million to $60 million worth of business there. That level is now -- in the fourth quarter it was down to about I'd say several million dollars -- less than $5 million. Some of that product that's in microelectronics will keep doing that, but some of the product that's in primarily for electronic manufacturing services, we're just sustaining a little bit of that to help our customers transition to new suppliers. But that's not an area that we want to really be in.

Thank you. And just finally, one financial question, Dale. If you could please break out the components of free cash flow and just talk about what it was that drove it negative in the fourth quarter?

Sure. The big drivers in the fourth quarter were related -- was related -- the biggest driver was related to the pension contribution of $30 million and then we also had an increase in working capital requirements which was another component of that. And those are the two largest components. We also had -- aircraft product liability payments of about $18 million and then we had some tax credits associated with the additional pension payments. So those are the major components.

That helps. Thank you very much.

Steve Levenson, Stifel Nicolaus.

Thank you, good morning. And forgive me, I've been on another call at the same time, I hope I'm not asking a duplicate question. But you think recent acquisitions can offset the declines in your instrumentation sales related to oil exploration?

I think overall most of the acquisitions that we made in that domain were relatively small. If you take the whole company as a whole I think that may be true. I don't know if they will offset the oil exploration in and of themselves, but they should help.

Okay, thanks. Would you hazard a guess as to what price oil has to rise to for offshore exploration to pick up?

I can't, but I'll tell you, Steve, I didn't think the oil prices at $140 were sustainable and I also don't think they're sustainable at $40. So I think there's going to be movement sooner or later to somewhere at a higher level. But I can't -- I don't know how our customers calculate what that level should be. Part of it has to do of course with the availability of credit because oil exploration customers are building boats and equipping with our new streamers and most of that is with borrowed capital. So there's a combination.

Okay, thank you. As far as the acquisition pipeline, are things looking better, is pricing better and opportunities or do you think it will be similar to what it was in 2008?

I think in 2009 things might -- valuations of course are going to be coming down, at least the way we see it right now. In 2008 we found some very attractive deals for us. On the average we -- on the nine acquisitions that we made, on the average we paid about 8.5 times EBITDA. But as we've previously said, once we get those acquisitions and we integrate them successfully the earnings go up and an EBITDA multiple would have been paid in some future date comes down to about 6.5. So hopefully we'll find things that will be attractive.

Okay, thank you very much.

Michael Lewis, BB&T.

Good morning. Robert, I was wondering, just to help us kind of set some expectations here, if we look out for the full year 2009 and we look at what has been revised out here with regard to your expectations versus where consensus was, would you say that we should expect to see the topline revenue growth in the low single digit range right now based on what you know now in the market? And to set that at the bottom and hopefully see some upward revisions going forward, how would we triangulate on that?

Michael, let me start with the topline. There's so much uncertainty out there that I -- we never really hazard guesses there. But we if I were to just be responsive to your question, it could be minus 5% to plus 5%, reasonably flat at best. But that can change depending on the -- that's my best estimate at this time. Because the uncertainty right now is so overwhelming.

In terms of the bottom-line, we've been here before, of course it's been a long time. We've had seven years of improved earnings quarter over quarter, I think it was 28 of them including this fourth quarter. It's the first time that we're predicting an earnings decline in seven years. And we've been here before. We will slowly work our way out of it as we have previously.

The $0.08 a share per quarter that we're getting from pension, the headwind, and then we got $0.03 of one-time tax benefits that we're not getting. So that's about $0.35, it's almost $0.09 a share -- the $0.03 is really in the first quarter that we're getting hit. Then if you take everything else and put them aside and you look at our piston engine business. In the fourth quarter of last year we made about $3 million. In the fourth quarter of this year we lost $2.8 million. If you add those two together that's about $0.09.

We think the first quarter is going to be a little worse maybe. We know it's going to be a little worse. So if you take $0.12 on just piston engines over the year, $0.12, $0.14, that's really the detriment we see. So you've got about $0.35 of pension, whereas nothing to do with our operating condition. As we go forward we look to see whether we should be making more pension contribution. We've got the one-time tax and we got let's say $0.14, $0.15 of engine business, maybe a little more. That's it. The rest of it, we're going to build with it.

Okay, that's actually very helpful, Robert. Thank you for that. With that said, so it sounds like if we look at and isolate in on EC&C for example in electronics, the margin in the quarter was 15% in obviously a very tough market. Now I do recall from prior quarters you said that maybe 14% is a sustainable level. Are you going to stay with that 14% in margin expectation in that segment alone since it is the largest segment, it does contribute the most to EPS?

Well, I think the margins might come down a little bit only partially because we're taking some of the pension in the segment. So you're going to get about 100 basis points that has nothing to do with the operations, it's going to be a pension hit -- the pension contribution that we take in the segment. And if exploration doesn't go down, those are very hard margin business -- if exploration doesn't go down too much, we should hold the margin at least in the first quarter minus the pension. I would say it will go down to maybe 13, maybe a little bit lower primarily because of the pension hit.

Okay, that's very helpful. And then just one final question and I'll get out of the way. Probably a question for Dale. With regard to your net debt to cap you're running in the 30 plus percent range right now. At what level do you start to get less comfortable? Because what I'm trying to do is triangulate here and say, "How much more room is there for acquisitions", "How much dry powder do you have and what are the other uses of funds that you have out there? Do you think at this level a stock buyback may make some sense here as well?

We are not currently looking toward stock buyback. We're -- as Robert mentioned earlier, we're probably looking at pension more closely and the debt is approximately -- net debt is approximately $300 million. We've got the line of $590 million. We will try to keep that open for acquisitions and pension, and we generate $100 million plus of cash a year. So we are not too worried about it at this time.

Okay, thank you.

Mark Jordan, Noble Financial.

Yes, gentlemen, this is Matthew Crews standing in for Mark. Just -- most of my questions have been answered. One question is, are you at full run rate on the centrifuge contract exiting the fourth quarter?

Yes, we are right now. The contract is contributing about $35 million a quarter, maybe have a little uptick. But about -- I'm sorry, I said quarter; I meant the year. Somewhere between $35 million and $40 million for the year.

For 2008?

No, 2009.

Okay, so that is expectation for 2009, thank you. And one second question. I think it has pretty much been answered already, but in terms of outlook for 2009 and the seasonality, I am just trying to -- sounds like the first quarter is going to take a little bit more hit with the tax issue. And then you have a little bit of a headwind in the back half.

Is that going to mean a little bit more of a seasonally flat versus previous years? I think you have had more of a trend, a positive trendline through the four quarters?

Yes, you know, Matthew, I think our visibility at least -- our visibility at least to the piston engine businesses are not that good right now. So we only are looking at the first quarter. Things may deteriorate or they may stay the same or get better. I think right now we're looking at relatively flattish quarters going forward, maybe there will be slightly Q2, Q3, Q4 relatively flat with the Q1 at the high end of Q1, as you can see from our projections.

But we're going to try very hard to improve as we go along, we'll take whatever action we have to. I've got to say, even our earnings, if you add in the $0.35 that we are getting from pension and tax, or $0.34 I should say, we're projecting $3.04 to $3.14 in earnings next year which is only marginally down from this year considering all the problems in worldwide economies. So right now the answer is what we're projecting is a relatively flat year, but that might change.

Great, thank you very much.

Robert Kirkpatrick, Cardinal Capital.

Good morning. Staying with the pension for a moment. Could you walk us through what the -- quickly what the math on the contributions would be if you were to contribute another $50 million, what would be the incremental impact going forward on your pension expense?

The incremental impact is basically the 8.25% return on the $50 million partially offset by the interest expense, and that's five plus cents -- a little more.

Okay. And would you ever consider contributing shares to the pension plan, which I believe your former parent chose to do in the fourth quarter in their pension plan?

We have had some discussions, but we have not made a decision at this point in time.

And the attraction of funding it with shares would be what?

Well, we think that our stock price currently is at a position where we would get some improvement in the coming quarters as we get through this current announcement of having a drop in our year-over-year earnings per share. So we think that we would see some improvement in the stock price and it would probably outperform the rest of the equity market.

Okay. And your guidance that you have for the year implies what for a free cash flow number for 2009?

It's a little north of $100 million.

Okay. And then finally, if Robert could maybe talk in a little more detail to the merger and acquisition environment in terms of deals that were able to be completed in Q4, those that weren't, how sellers are adjusting to lower valuations and whether or not, as a result of the difficult economic times, there are more opportunities arising? Thank you.

Yes, Rob, there is -- and interestingly, there is a value disconnect between sellers' expectations and market realities. I think there's a (inaudible) look there that it's kind of a delayed reaction. Frankly, last year we made nine acquisitions, as I mentioned, which meant about $250 million.

There were a couple of acquisitions that we competed for and the prices just got totally out of range, our range. And somebody else was willing to pay a higher price, they got it. And there were a couple that the expectations were so high compared to the market realities that the sellers pulled properties off the market. So until the disconnect of reality sets in I expect there will be opportunities but not wholesale buying opportunities. We're obviously always looking.

In the interim does that cause you to hold more cash on the balance sheet or do you tend to pay down your debt and then have the ability to re-borrow it?

Yes, we do either or both actually. Last year, as Dale mentioned, we contributed to our pension. We'll probably do some more this year. We already have to as part of our expected contribution. We have to contribute $37 million next year in 2009. We may opt out on putting more money in there. As again Dale said, we expect to increase over $100 million in free cash. We will do opportunistic deals and contribute to the pension and generate cash and we're not very concerned about that.

Okay, and then just a final question, back to Dale on the $100 million in free cash flow. That assumes no voluntary pension contributions, correct?

That is correct, that's just the 37 (multiple speakers).

Just the 37, great.

(multiple speakers) that Robert already mentioned.

Super. Thank you so much, gentlemen.

(Operator Instructions). Chris Quilty, Raymond James & Associates.

Good morning, gentlemen. A question for you. The Defense Electronics business, it looks like you grew about 5% organically in 2008. What's your expectations for the organic growth outlook in 2009? And what, if any, are the programs or budgetary decisions that might impact that either positively or negatively?

Chris, I think 2009 our organic growth will probably be around 3%, maybe a little higher, maybe a little lower, relatively flat. In terms of budgetary considerations, we're not expecting any big surprises in the short or intermediate term that will affect us. The 2009 budget is fairly well set right now and part of 2010 is also set.

If there are changes, for example, if you look at future combat system, if there is some de-emphasis in, for example, building more armored vehicles or in favor of communication networks, robot sensors, that will be favorable to us because, as you know, we don't build trucks and hardware, we build more communications stuff.

Our microwave components we expect to grow. Our electronic manufacturing services we expect to grow; we've some very good orders this year and those are very healthy. We expect some growth in our imaging business that we have, Teledyne Imaging, these are our infrared imaging business.

So all in all I don't see a big issue for us with the budget. If they [cut out] something like -- if they reduce (inaudible) 22, yes, that might affect us, but they still have to upgrade other aircraft. So all in all I see a relatively flat -- maybe a little uptick in defense electronics organically.

Okay, and just specifically on the F-22. They're finishing up the last lot of production. I'm assuming your estimates don't include any additional lots, although it looks like Congress is lobbying pretty hard to add some additional aircraft here in the last week.

Yes, we don't really. That's uncertain to us, at least in our estimates. I think lot 10, which is the one we're talking about here, that might cost us -- if that goes away it might cause us to lose maybe $2.5 million in orders in 2009. If they were not to extend it.

Okay. Is that the one that they only provided half the funding?

Yes.

Okay. And on the -- you mentioned with the exploration business that it's high-margin business and consequently a bigger impact on the bottom line. Is that higher-margin business than the core defense business?

No, the high-margin exploration business is in marine exploration for oil and gas, deep ocean exploration. And that's about 200 basis points higher than our general electronics and communication businesses.

Okay. And a question on the fourth-quarter loss in the aerospace engines business. Does that include severance costs or other one-time items?

Yes. As I mentioned, just to summarize, we had about 235 of our associates leave the Company between the third and fourth quarter, 210 of those in the fourth quarter. The total cost associated with the severance, Chris, was $1.3 million, $1.1 million of which was in the fourth quarter.

Now I have to note that not all of that was in piston engines, there was a significant number that also we reduced in some of our commercial communication business, in electronics and other areas. But the more significant part of that reduction was in piston engines. And so that charge, a lot of it was taken there. And there were some other one-time charges that we took there.

But I think when you lose that 26% of your business from $41 million to about $30 million in one quarter it's very hard to bring your costs in line. And you don't want to cut so deeply that when the market comes back you don't have the capability to produce product.

And do you think you'll be in a full-year profit position in that business in 2009?

I'm hoping. I think first quarter we'll be lucky if we break even; we might lose some money.

Okay. And then improvement throughout the year?

Yes -- I don't know, Chris. I wish I knew. There's just so much uncertainty in the world right now I just don't know.

Okay. And you also mentioned that the environmental and instrumentation business, I think sales were down -- can check my notes here -- 1% or 2% this year. What do you attribute that to and what are your thoughts on the outlook for the year ahead given all of the emphasis on environmental issues with the new administration?

Yes, let me just give you the numbers first. In the environment we couple environment and process instrumentation together, industrial instrumentation together. In the Q4 they were down about 6.5%. For the full year they were relatively flat, maybe a little up. Now, they address a whole bunch of different markets. Some of it has to do with air quality, monitoring; some of it has to do with water; and a significant portion of that business is also international.

What -- some of the declines that we've seen are because some of the infrastructure projects in the states and some even overseas -- in the states (inaudible) because of the declining tax receipts, they're not spending as much money in water cleanliness and other infrastructure projects.

On the other hand, if the current attitude and promises prevail, especially in the stimulus plan that's being discussed, all the green initiatives, energy initiatives, water and infrastructure and environmental and cleanup initiatives, science and technology, all of those would have positive effects to these businesses.

But we'll have to wait and see whether those actual investments are realized or not. So the way we're looking at it right now is we're looking at it as business as we see it and not adding in any additional revenue from new sources.

So is it fair to assume your implied guidance here is for relatively flat in '09?

Yes, essentially flat.

Okay. And because I can't add up the numbers quickly here. If you were to rename the company Tele Green and pitch yourself as an environmental company, if you add up this and the nuclear centrifuge and -- what would be the total exposure that you would have towards clean energy, alternative energy, throwing in the energy systems business also, I guess?

Yes, first let me say I'm not going to do that. Teledyne is not one of the companies we call a name du jour. But having said that, if you add the environmental stuff that we're doing, which may be 125 to 150, throw in the nuclear, you're in a little north of $200 million. You throw in hydrogen generators another $20 million. You put in some of our imaging businesses that are space-based for climate and monitoring, etc. -- I could make a case going up to north of $200 million to $250 million.

But you know, let me just say this -- in today's environment I will take our mix of businesses over a lot of other companies that are solely dependent on one sect or another. We have a healthy mix of 45% to 50% government and 50% commercial businesses. As one of our businesses like piston engines goes down we can put the emphasis on the other stuff, make acquisitions, fix them, focus on our operational excellence and come out of this hole healthier than we went in.

So maybe I've answered your question about being green, but that's not going to be our ticket out of here. It's going to be really hard work and emphasis on improving operations.

Well, if the valuations are there please sell those businesses.

Okay.

Thank you, gentlemen.

Howard Rubel, Jefferies & Co.

Thank you. Robert, first of all I think it's green like money and that's what you've done for the most part in running the business.

Thank you.

Just a couple follow-ups. Could you just talk a little bit more about the order rates? And as you look at January or as you talk to customers do you see any change, excluding the piston market for the moment, that tells you that we're better off than just flat?

Actually, Howard, I think if you look at the book to bill ratios, we're at about 95 -- we're at 95%. We were in the fourth quarter, but the fourth quarter was an usual quarter, people were very cautious. In engines we were significantly below that. In the next four days, as we always do, we will be going through every single business here, all our business leaders, we'll go through every single business, every market, every operation and probably come out at the other end knowing a lot more than we do.

We just obviously went through our business plan in the last four or five months. But things have been changing so rapidly that some of the projections keep shifting on us. In some of our government businesses obviously we know what's going to happen in the intermediate term. But some of our short cycle businesses where we book and burn two or three weeks, four weeks, it's hard to predict. Right now I would say we're a little behind book to bill, but that can change.

I mean, there's -- I'm very sympathetic with that. I think we've all tried to get a handle on it. And as you've looked at -- aside from piston, which again I'm going to leave, where obviously the demand is far below what the traditional run rate has, can you point to any markets where it's just so far below what normal would be where there should be some bounce if this destocking works its way through the system?

I'm trying, I really can't, Howard, because nothing has dramatically come down in our other businesses -- other than engines. There's been some downtick in some of our environmental businesses, a little in our avionics business which serve the aerospace market that you cover so extensively. There's been some pushouts, but since we don't have a huge exposure to domestic airlines, they're only 10% or so, we're not seeing really big declines there either. We're seeing some. But we haven't seen any dramatic changes in our other businesses.

Just two final things. One, Dale, with respect to the way you account for pension, do you use three-year smoothing or is this direct recognition for the plan?

We do use smoothing, Howard.

Is it three years or --?

The smoothing is three years on the return, but it's more on the loss. It's like nine and a half years on the losses.

I understand what you're saying, I appreciate that. And then, Robert, to return to turbines for a minute. There's been a lot of opportunity in the military market for some of the small gas turbines that you've built. Have you been able to capture any opportunity there or are we still waiting?

We have had a significant number of research and development programs all across all of those opportunities. There hasn't been a lot of production. The closest promising thing that we have in that domain is the Japanese have a new decoy and actually they're going to use it for surveillance too, where we've qualified one of our engines on and it's called [UVRS]. And that's the nearest opportunity we have. But we have a large number of research and development programs ongoing. I have high expectations in the coming year in that business.

On the other side of the ledger, Howard, is that we are seriously looking at small piston diesel engines because, as you know, in a lot of the small UAVs they're using diesel engines and those engines do not perform well at all. The life cycle to tear them down and fix them is measured in hours, less than 10 hours, 12 hours and I think that's an opportunity for us. So we're looking hard at that, whether we should be investing and getting in that market since we have such strong capabilities in the piston engine domain.

Thank you very much, I agree.

Thank you, Howard.

Michael Lewis, BB&T.

Dale, just to follow up on one of Rob's questions earlier. When we were talking about free cash flow expectations you said around or slightly above $100 million. Now did that or did that not include the $37 million that you're expecting for pension contributions next year?

That did include the $37 million for pension contributions next year.

Okay, thank you very much.

Thank you, Michael.

And that is all the questions we have at this time. Please continue.

Thank you, Operator, I appreciate that. I'll now ask Jason to conclude our conference call.

Thanks, Robert, and again -- thanks, everyone, for joining me this morning. If you have follow-up questions please call me at the number listed on the earnings release. And as always, all news releases are available on our website, Teledyne.com. Operator, if you could conclude the call and give the replay information we'd appreciate it.

Certainly. Ladies and gentlemen, this conference will be available for replay after 10 a.m. today through February 22nd at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 967227; international participants 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. You may now disconnect.