Teledyne Technologies Inc (TDY) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first-quarter earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. I would like to now turn over your conference to our host, Mr. Jason VanWees. Please go ahead.

Thank you, Anne. 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's first-quarter 2009 earnings release conference call. We released our earnings earlier this morning before the market opened.

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

Thank you, Jason, and good morning, everyone. Before commenting on the specific results for the quarter, I have some general observations about our market, our performance and our cost reduction initiative.

The majority of our defense and government businesses performed well in the quarter, but their growth could not offset the contraction in some of our commercial businesses impacted by the global recession. As a result, total sales decreased 2.5%. Earnings per share declined 26%. Nevertheless, first-quarter 2009 earnings were consistent with our outlook issued in January.

I want to emphasize that I believe we are ahead of the curve in appropriately sizing our commercial businesses given the current market's reality. For example, we have already decreased our North American workforce by 478 or approximately by 6%. We have delayed our annual 2009 salary increases until 2010, and we have eliminated our grant of employee stock options in 2009.

Finally, by the end of the second quarter, we expect to close or relocate five operating sites. To date we have adsorbed in our operating income as opposed to taking a nonrecurring charge approximately $5.3 million of costs, $2 million of which occurred in the fourth quarter of 2008 and $3.2 million in the first quarter of 2009. These costs were associated with severance, facility relocations and planned product line terminations. We believe that we have completed many of the necessary cost reduction actions and currently expect only about $500,000 of such expenses in the second quarter.

That being said, given the recent further deterioration in the general aviation, commercial aerospace and global infrastructure markets, we expect 2009 to continue to be a very challenging year. However, the mix of our businesses, including the strength of our defense and government programs, coupled with our aggressive cost controls, should allow Teledyne to outperform in such an environment.

I will now comment on the performance of our segments. First-quarter sales in our Electronics and Communications segment increased 2.9% compared to last year from $301.3 million to $310 million with a negative organic growth of 2.6%. Segment operating profit decreased 5% from $40.3 million to $38.3 million, and segment operating margin decreased 102 basis points. However, 45 basis points of the decline in margin is related to net pension expense, and another 100 basis points is related to the cost reduction expenses that I noted earlier. Excluding these two items, operating margin would have actually improved.

In this segment our businesses lie within three separate market categories. First, Defense Electronics, which represents slightly more than 40% of the segment; second, electronic instrumentation, which represents another 45% of the segment; and third, avionics and other commercial electronics, which represents slightly less than 15% of the segment.

In the first quarter of 2009, sales of Defense Electronics increased 5.3% compared to the first quarter of 2008. Defense Electronics sales growth primarily has resulted from the acquisition of Judson Technologies in the first quarter of 2008 and Filtronic PLC's UK-based Defense Electronics business in the third quarter of 2008.

Organic sales growth due to increased sales of government-funded research and electronic manufacturing services was less than 1%.

Turning to our electronic instrumentation businesses, year-over-year sales increased approximately 10.9% from $130.7 million to $144.9 million with organic sales growth of 3.4%. Organic growth in instrumentation was comprised of approximately [23%] in marine instrumentation, offset by 20.6% decline in sales of environmental monitoring and 15.7% decline in sales of industrial instrumentation.

The decline in global infrastructure market has seriously impacted the demand for our environmental and industrial instruments. While sales were very weak, total orders in the environmental and industrial product lines exceeded sales, and we are optimistic that these businesses may receive some benefits from the American Reinvestment and Recovery Act since our products are used in emission monitorings, analyzing carbon content in ambient air, and wastewater samplings and analysis.

Teledyne's marine instrumentation businesses currently represent about $360 million or roughly 19% of total sales. Oil and gas exploration represents roughly 5% of total sales, and oil production represents approximately 6% of total sales. The balance and the largest portion of our marine sales is derived from oceanographic research, military and hydrographic surveys and other industrial markets.

In the oil exploration market, we are forecasting a contraction in full-year sales in 2009 of about 20%, especially weighed to the second half. However, we currently expect continued growth in the balance of our Marine businesses serving the oil production, research, military and other industrial markets.

Finally, in this segment I will discuss our avionics and other commercial electronics businesses. In the first quarter of 2009, sales from these businesses collectively decreased 23.5% compared to the first quarter of 2008 due to the continued decline in sales of commercial electronic manufacturing services for medical applications since we are exiting certain product lines, as well as a decline in sales of avionics and weaker sales of other commercial electronic components such as relays for electronic test equipment.

Turning to our Engineered Systems segment, in the first quarter of 2009, revenue increased 6.3% organically compared to last year. The sales growth primarily resulted from increased sales related to gas centrifuge service modules used to help enrich uranium for use in commercial nuclear power plants, as well as increased sales in space programs such as NASA or [Air Reach One], which will be used to return humans to the moon by 2020.

Segment operating profit was flat at $8.1 million. Operating margin decreased 58 basis points solely as a result of increased net pension expense. In the first quarter, our Engineered Systems segment was awarded a $52.6 million contract if all options are exercised from the Space and Naval Warfare Systems Command to design and build marine glider systems. Given their relative low cost, minimal power usage and longevity at sea, the Navy plans to use fleets of gliders to acquire critical oceanographical data in order to improve battleship effectiveness -- battle space effectiveness.

This contract was the result of combining the strength of multiple Teledyne business units. While our Engineering Systems segment will perform the systems engineering, Teledyne Webb Research in our Marine Electronics business will provide the gliders. Webb's glider is a torpedo-shaped autonomous underwater winged vehicle that measures about 1.5 meters and uses changes in buoyancy along with its wings and tail-end steering to move through the water.

I will now discuss our aerospace engines and components segment, which as a reminder now solely represents Teledyne Continental Motors, our aircraft piston engine businesses.

Sales in this segment decreased 44.1% in the first quarter compared to last year. Year-over-year sales of OEM engines declined approximately 50%, while aftermarket parts and services declined approximately 40%. Starting in the fourth quarter of 2008, sales of new engines to OEM aircraft customers declined 50%. As previously stated, this decline is the first material reduction in our OEM engine sales in nearly 20 years as sales of new aircraft dramatically decreased due to a difficult credit environment and reductions in consumer discretionary spending.

At the moment we do not expect a significant increase in sales of OEM engines throughout the year.

On the other hand, while the aftermarket was also very weak in the first quarter, we were encouraged to see a return of order activity late in the quarter and are taking proactive steps to capture increased market share. During the first quarter, we reported an operating loss of $4.3 million primarily as a result of the large decrease in sales.

Finally, in our Energy and Power Systems segment, sales in the first quarter of 2009 decreased 24.4% compared to last year, due primarily to lower sales of commercial hydrogen generators and military turbine engines, with the latter being primarily a timing issue. First-quarter segment operating profit was breakeven.

In conclusion, we are very 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, a balanced mix of government and commercial businesses that produced highly engineered products which are not easily commoditized; second, good visibility and a healthy backlog in many of our government businesses; third, a significantly reduced cost structure due to the focused actions in Q4 of 2008 and Q1 of 2009; and fourth, 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 not covered by Robert, and then I will discuss our 2009 outlook.

In the first quarter, cash provided from operating activities was negative $7.6 million compared with cash provided from operating activities of positive $22.6 million for the same period of 2008. Free cash flow for the first quarter was negative $20.7 million compared with $13.9 million for the same period of 2008. The lower cash flow in 2009 was solely due to the pretax loss as mentioned of $80 million that we made in the first quarter of 2009. Excluding the after-tax impact of our pension contribution, free cash flow for the first quarter -- seasonally our weakest quarter -- was $27.9 million, an increase of 84% from last year and 134% of first-quarter 2009 net income.

Capital expenditures were $13.1 million in the first quarter compared to $8.7 million for the same period of 2008. Depreciation and amortization expense was $11.7 million compared with $10.7 million last year. For the full year of 2009, we expect capital expenditures of approximately $35 million to $40 million and depreciation and amortization expense of approximately $50 million. We ended the quarter with $339.8 million of net debt. Our balance sheet remains strong with a net debt to cap ratio of 39.4%. Our credit facility has $590 million of bank commitments and does not expire until July of 2011.

Next on pension expense, in the first quarter of 2009, gross pension expense was $5.6 million compared with gross pension expense of $2.3 million in the same period of 2008. Net pension expense after recovery of allowable cost pursuant to government cost accounting standards, or CAS, was $2.5 million in the first quarter of 2009 compared with no expense or income in the first quarter of 2008.

Moving to stock option compensation expense in the first quarter of 2009, stock option compensation expense was $1.6 million compared with $1.9 million in the first quarter of 2008.

Now let me turn to the 2009 outlook. Management currently believes that GAAP earnings-per-share in the second quarter of 2009 will be in the range of $0.64 to $0.68. Consistent with our January 2008 outlook, we expect full-year 2009 earnings-per-share of approximately $2.70 to $2.80. However, for the full year of 2009, we now anticipate approximately $22.5 million of gross pension expense. Net pension expense after recovery of allowable pension costs from our cash-covered government contracts is now expected to be $10.1 million or $0.17 per share in 2009 compared with $200 of pension income in full-year 2008. Primarily as a result of the $80 million voluntary pension contribution made in February, net pension expense for 2009 was reduced to $0.17 per share from $0.31 per share in our prior outlook in January.

I will now pass the call back to Robert.

Thank you, Dale. We would now like 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.

Two questions. The first question here is that I noticed this morning that SeaCom put out an award intention notice that is going to award you guys another $7.5 million for more R&D on the Phase III of the Adaptive Focal Plane Array program that you have been working on. Now this has been an ongoing program. I think you're doing at the Teledyne Rockwell pickup acquisition. This has been ongoing for some time. I would like to just get an update on your progression of this product, and also what do you think the total potential value will be on this program if you were to enter into an full array production on FPAs within, say, the next 24 to 36 months?

Thank you, Michael. We have been awarded a Phase III option on the Adaptive Focal Plane Array program. As you know, AFPAs combine arrays of MEMs -- these are micro-electromechanical systems -- and tunable optical filters with our infrared focal planes for detecting targets by sensing their special signatures.

Right now we design and fabricate and deliver some prototype cameras to the Army. A full fortune technology probably will go to -- from our DARPA, it will go to [MVSD] in the Army, of course, full array production, still I think it's a little in the future. We need to do a little more work, but I think we are optimistic. So I cannot directly answer your question in terms of what this would mean to us in the long term. But we are very optimistic about the progress we are making.

Okay. That is fair. But all-in-all it is a significant program if it were to enter full rate production, is that correct?

Yes, and really it is at the forefront of the technology in that domain.

Okay. And then I was shift gears here real fast. With regard to margins, Engineered Systems did come in about 100 basis points above what I was looking for. Now this was offset by the zero margin that we saw in Energy and Power Systems. Can you walk us through the moving parts in a little more detail on those two segments? And also, what is your expectation for the full year in each one of those areas? That would be very helpful.

First, the Q1 2008 operating margin total was about 10.5%. If you look at this year, Q1, we have done negative about 200% basis points in TCM. Our charges are at about 75 basis points, and the remainder about 55 to 60 basis points is declining because of our pension. We have some upside from our cost controls, so we ended up with margins on the level of 8%.

Now if I take your question vis-a-vis Engineered Systems, our margins are about 9.1% in Q1. That was lower than the first quarter of 2008, which was about 9.7%. I think we are going to see some decline in our margins as we go through the year. I think we will end the year somewhere at about 8.5% in margins in that domain.

Moving to aerospace engines, as you know, we lost money there because of the significant decline in our revenues. What we are aiming for is to see if we can move through the year and achieve breakeven profitability in the later quarters of this year because of our cost reduction efforts and because of our efforts to capture more of that market share.

And finally, I think in our Power Energy and Power Systems, we should become profitable, especially since we will have increased revenues from our turbine engine businesses. And, of course, in Electronics and Communications, we are trying to maintain our margins with respect to last year with the exception of the fact that we do have higher pension expense, and we have to pay for that. But in the Q1, of course, we had our charges, most of which was in that segment. I don't know if that answered your question properly, Michael.

No, that was very helpful, and I will get out of the way now. Thank you very much.

Mark Jordan, Noble Financial.

On February 13 you put out a press release saying that you were going to be taking a charge for piston issues of $18 million that would be reflected in the first quarter. I have not heard nor seen any commentary on it in the release. What is the status of that charge?

As you know, what happened because that charge came after our earnings release but before we filed our K, we were obligated to take that charge in the Q4 of 2008. So that decreased our earnings for 2008 from $3.30 to $3.05. So $13.35 to $3.05.

So putting that aside, what the status of that is, we have identified about 10,000 cylinders that we intend to replace. We have at the current time relocated over 50% of those cylinders. At the same time, we have had to restart production both through our supplier and in our shop of cylinders that did not have the problem. So we had to go back and start the whole production line after scrapping about 3000 to 4000 cylinders that we had in storage. And we are making good progress.

Right now we have produced about 4000 of the new cylinders, and we are allocating them as quickly as we can to our customers that need the replacements. We are optimistic that we will get ahead of that curve. At the same time, we also have to produce cylinders for our existing revenues in our own engines and aftermarket. So I think in the next six months we should get a pretty good handle on this issue.

I will remind you that just finally that the cracking that we have observed is not an issue that occurs immediately. It happens after we have had a significant number of hours on the engines. So what we have been trying to do is give an early preference to some of our fleet customers that run their engines many more hours than others. But we don't think this is going to be a safety issue for us yet. We are ahead of the curve so far. I don't know if that answers your question.

That is -- just a brief follow-up on that. And your perception here, since you are kind of ahead of the curve, you don't see any -- there have not been any accidents or incidents that would cause a product liability type of -- anything beyond just the replacement needs?

No, not that we can foresee at this time.

Can we talk a little bit about interest expense? It was just $1.1 million in the quarter, which on your debt position of $361 million would imply about a 1.2% annualized rate. Was there something in there that lowered the cost, or should we extrapolate out that cost given the low interest rate environment?

I will let Dale answer that.

We are currently at about 1% borrowing costs at LIBOR plus 50 basis points, and then there's a little facility fee in that expense also. We would be at the 1% area as long as we stay at the current ratios that we are maintaining.

I'm sure everybody wishes they could borrow at that rate. And then on the corporate expense line, that has taken a step down, 6.8 in the quarter. Is that just a function of the bonus or the stock moves that you have made in other efficiencies, and is that a consistent run-rate we should assume for the balance of the year?

I think it will be a little above that. We are a little favorable in the first quarter. We might be closer to $30 million for the year.

Okay. Thank you very much.

John Harmon, Needham & Co.

I would like to get some more detail on one of the comments you made. You talked about being ahead of the curve in terms of expense reduction. Does that mean that you anticipated further difficulties because of the economic slowdown on your businesses in Q2? You cut costs ahead of that, and on the cost cuts that you did make in Q2, if I can follow up, did you make them at the beginning of the quarter, the end of the quarter? How much additional cost reductions could we see in the June quarter?

Right now I know you meant Q1. But we started cost reduction efforts in Q4 of '08 because early on we knew that our piston engine business was having problems with orders, and we took about somewhere in the neighborhood of $2 million in cost reduction costs, our own expenses in Q4 of '08.

In Q1 '09 throughout the quarter, we spent about $3.2 million for our cost reduction efforts. And then, of course, we have a little bit left for Q2 of '09. We have about $500,000 left because of facility closures.

Right now the way we look at it, John, is that with what we have done here and the salary freeze that we have put in place at least until April of 2010, we should be able to maintain our margin assuming the global economy does not deteriorate further. Of course, I don't know how that is going to go. But assuming it does not get worse, that is why we were able to maintain our earnings outlook for the year. But if things were to get worse, obviously we would go back and take more costs out.

Thank you, and just one more question please. I believe I asked this last quarter, but at what point do you think you will finish exiting your medical contract manufacturing business or get it down to a steady state level?

I think that we have a number of areas where we work in medical manufacturing. First, we have some programs in microelectronics that relate to essentially implantable devices. Then we have some programs that we are in at our medical manufacturing in Lewisburg. I think if you look at our Lewisburg medical manufacturing, that primarily has been toward providing power supplies and power controller systems for things like positron emission tomography systems et al. We should be out of that business by the end of this year.

On the Microelectronics side, we will probably have some running business there for a while longer. But our primary effort was to get out of the Lewisburg medical manufacturing EMS business primarily because we started shipping that business towards our military efforts which have been very good. The first quarter we had an uptick of almost 15% in that business.

Greg, thank you very much.

Steve Levenson, Stifel Nicolaus.

I'm curious. Do you think Teledyne Continental Motors will be back to breakeven by the end of the year, not for the full year but possibly in the back end?

That is our plan at this time. That is where we have taken a lot of costs out. The largest workforce reduction in terms of percentage has been in that business. I think approximately 14%. As I mentioned earlier, we are seeing a little more activity in our aftermarket. And if you looked at our aftermarket, we have -- just in the continental United States, we have about a little over 100,000 of installed engines. The average -- and I would say of the average hours that those are flown are between 100 hours a month and let's say 50 hours a month, and those have to be go through an overhaul every 1200 hours to 2000 hours. Even if we get a reasonable fraction of that, one would say that about 5% to 10% of those engines need overhaul or rebuilt engines or new engines. So our focus is shifting to the asset market, and we have got to capture some of that market and hope to do more of that during the year. The last few years we have focused on OEM engines. So if we can do that, we should be able to breakeven by the end of the year.

Do you think that exchange program, not the warranty, but the engine exchange program will have an impact, too, or are you seeing one yet?

No, did you mean the cylinder program?

No, no, I believe you are advertising an engine exchange.

I think we have seen some orders pickups there. We are going to do a whole bunch more of those things as the year goes on.

Great. Thank you. On the acquisition pipeline, given the fact that you have got good borrowing availability, are your plans to continue that program, and what do you see in the pipeline, and do you think it is current administration tax considerations that might drive it or what else?

Let me start with the the tax and not about the administration. We had a little tax uptick in Q1 of 2009 thanks to our California legislators, and that cost us about $300,000. In this environment tax increases are really contrary to any kind of an economic growth.

But having said that, going back to acquisitions, we always have acquisitions in our pipeline. We made nine small ones last year, so we are kind of digesting those and trying to integrate those. But we do have some in the pipeline. If anything comes up that is attractive and the prices are a little more moderated I should say, now we will make our acquisitions. But right now our focus is on cash generation as much as we can. Because as Dale mentioned, our line of credit will expire in mid-July of 2011 or mid-2011, and the borrowing costs are going to be horrendous. At least if the current economic environment persists, our borrowing costs may go from 25 to 50 basis points over LIBOR to up to 300 basis points over LIBOR. So we are right now a little more focused on cash generation.

The last one is, what are you going to do with your third-generation thermal imaging sensor?

We have on the third gen, as you know, that we were -- granted our proposal was very highly ranked both technically and in management. Well, we lost that on price alone. That was disappointing to us. But however, we are now hearing that we can expect to receive some additional funding in that domain to ensure that we can be competitive in the low rate initial production phase. So we're a little more encouraged about that, and we're actually investing some of our own money in that program to get ahead of the curve. And so we are optimistic that we will be able to be competitive at the next phase of that program.

Chris Quilty, Raymond James.

Gentlemen, I have got a quick question. In January when you provided the earnings guidance of 270 to 280, I think you were including about $0.31 of pension hit. Due to the cash payments, you are now only expecting $0.17. Was there something that got incrementally worse since January that would have prevented you from raising guidance by that 14% differential?

Thank you, Chris. I will take a part of it and then pass the harder part to Dale. The easier part which I will take is that if you take the $0.17 that we are discussing here, about -- we spent about $0.06 on cost reduction in the first quarters. So between $0.17 and $0.31, that is $0.14. Half of that went to our cost reduction efforts. We are going to have another $0.01 probably in Q2, and the remainder I will pass to Dale.

The remainder sort of relates to the fact that the commercial businesses, as Robert mentioned earlier, continue to be a question on the -- there is still uncertainty in where they are going, and the general aviation market, particularly TCM, continues to be fairly weak, so that would be the difference.

Okay and then a follow-up question. It sounds like during your conference call yesterday Lockheed bailed on the F-22. Can you give us your input on what if anything you had in your expectations this year and out years for contribution from that program?

Sure, Chris. If you don't mind, I would like to combine the F-22 and F-35 together because they are obviously trade there. We do have revenue on the F-22, and we do expect that we will lose some of that revenue because of the program -- what is happening to it.

On the other hand, we have our products on F-35, a lot of products on F-35, actually more than we have on F-22. We have fiber optic transceivers, ejection sequencers, microwave cables, etc. Because of the broader range of our products on F-35, including, as I said, various microwave assemblies, we think that even though the prices that we are enjoying there are lower, we think that overall with the increase in our anticipated high production of the F-35, that the future, when you look at those two platforms together, we think the future will actually be favorable to us in terms of revenue.

Okay and a final question for you. We have not spoken since Secretary Gates outlined his fiscal 2010 defense budget blueprint. We obviously have not seen the line item budget yet, but can you give us at least your quick read on (inaudible) extent or how the developing budget may or may not help you?

Let me just start with a broader comment on that. Right now reading that carefully and its various components from satellites to communication to the various platforms, the shipbuilding, etc., we don't see much adverse effect on Teledyne. We talked about the F-22 and F-35. If you look at the cancellation of the transformational satellite and increased production of advanced extreme high-frequency satellite, that should be up for us because we have more products in that. And some of our smart (inaudible) secured mobile anti-jam, reliable tactical terminals, etc., those would be all good for us.

In terms of cancellation of search and rescue and VH-71 (inaudible) helicopters, that should have no effect on us.

The only area that we are a little cognizant of is in the missile defense domain. In the missile defense domain, our anticipations are, if we are reading this correctly, that there would be some decrease in that budget. It could be 10% to 15%.

Now having said that, we have a variety of programs. We enjoy about $160 million worth of sales in that domain. Some of it is midcourse, ground-based midcourse defense; some of it is system engineering and technical assistance, and some of it is in the integrated testings and so on.

If, as Secretary Gates mentioned, the GMD is going to be shifting from a focus of deployment, rapid capability-based appointment, to integration and testing, that is good for us because that is what we do and we do it well. We don't have any product that relates to airborne laser or multiple kill vehicles seriously, and we think some of our [SEDAR] programs would go down proportionate to the overall missile defense budget decreases.

So having said that, I mean they might be -- a missile defense would not have much effect in our Defense Electronics sales. So if you add all that up and I could talk about destroyers and so on, right now the way we read the whole thing is it should not have much of an effect on Teledyne. Because of the merchant supplier's status that we have and the sophisticated products that we produce, they are going to be needed in different existing platforms if other platforms are canceled.

Michael Lewis, BB&T Capital Markets.

Thank you for taking a second question here, and it is actually a follow-up to Chris's question. I will start first with the Gates recommendations. What about the ISR area since that was pretty much -- the expectation was set that that would probably increase or increased about $2 billion based on his commentary. Where are you going to play with regard to capabilities there?

I think that may be favorable to us because of our large format of focal plane arrays that we make. Also, we have content on multiple UAV systems, which would be carrying our SR sensors, and we think overall that will be positive for us.

Okay. And then last quarter I think the expectation with regard to stock options was set that you were going to hold off on options until the second half. Now it looks like we have eliminated them altogether. It coincides with Chris's question on the pension. If we are taking some of that expense out, where is it being offset? How come we don't see that as upside on just the stock options alone?

Yes, the options, frankly, if you throw them all in, it is just a couple of pennies over the year because we are expensing prior-year stock options as we go. Only a third of the new options would be expensed. So it is not much. It is a couple of pennies. And what we have seen is actually since January, we have seen a much weaker domain, order domain for our engines and our avionics businesses. And right now we are cautious about what is going to happen as we go through the rest of the year.

Credit is still tight. Airlines are not doing well. There are a lot more aircraft cancellations as you look at them, order cancellations. So we are a little cautious on that. I mean we have seen a downdraft in our avionics business of almost 20%, and then combine that with an engine business of 44%, that is a little scary. So we are being cautious.

Okay. In other words, just a little bit of a cushion for you?

I would not say that.

Okay, I tried. Thank you very much.

[John Quilty], Jefferies & Co.

I was curious to know if there is an annual run-rate in savings that you can attach to the cost reduction efforts you have been implementing last quarter or this quarter into Q2 of this year?

I mean there is a timing issue. But I would say it would be -- the payback on this cost reduction should be a matter of months rather than years. We have spent over $5 million and certainly expect to have the cost reductions kind of make that up in the remainder of the year, and we are kind of counting on that. Overall I would say we have taken our costs, our (inaudible), when everything is said and done, our costs should have gone down over $25 million annualized.

Wow, that is quite impressive good. Then I had a question about the general aviation engine business. With declines of 50% OE, 40% after market, I'm sure inventories are something that are a challenge to manage in this environment. I wondered if you could talk a little bit about that and as well maybe touch upon receivables to the aircraft OEs? I would imagine in many cases Teledyne is a bit financially stronger than many of your customers in there and if there's any risks that we needed to think about.

There is always risk. Last year one of our OEs went bankrupt, and we took a charge on that. We are very cognizant of our accounts receivables, and we monitor those very carefully and don't let people get too far out on the curve on us. Some people we might put on a pay-as-you-go basis.

So things can happen, but it is not going to be devastating because we just don't let our Accounts Receivables get out of hand.

In terms of inventory, I think what we have done is we have started worrying about that late last year. I think our inventories overall are trending down rather than up since we are not producing as much product and not trying to produce only products for which we get orders.

So I think in terms of our delinquencies, our Accounts Receivable, our days sales outstanding, we are in pretty good shape. We feel okay.

We have no additional questions at this time. Please continue.

Thank you, operator. I will now ask Jason to conclude our conference call.

Thanks, Robert. Again, thanks, everyone, for joining us this morning. If you have any follow-up questions, please feel free to call me at the number on the earnings release. Good-bye.

Operator, if you could do the replay, please. Thank you.

Ladies and gentlemen, this conference will be available for replay after 10:00 am today until May 22 of 2009 at midnight. You may access the AT&T Executive Playback Service at any time by dialing 800-475-6701 and entering the access code of 983733.

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