Teledyne Technologies Inc (TDY) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter Earnings Conference Call. (Operator Instructions.) As a reminder, this conference is being recorded. I would like to now turn our conference over to our host, Mr. Jason VanWees. Please go ahead.

Great. Thank you, Operator, and good morning, everyone. This is Jason VanWees, Vice President, Corporate Development and Investor Relations at Teledyne. I'd like to welcome everyone to Teledyne Technologies' Fourth Quarter and Full Year 2009 Earnings Release Conference Call. We released our earnings earlier this morning. Joining us 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. In addition, 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. Before commenting on the specific results of our individual businesses, I have some general observations about our performance during the fourth quarter and the full year 2009, as well as our 2010 outlook.

While the economic environment of 2009 brought many challenges, we were pleased to end the year with a strong quarter. Fourth quarter earnings increased [62]% from last year. Free cash flow of $70.4 million was a record and more than twice net income. Full -- for the full year 2009, earnings per share of $3.10 were a record. And finally, full year flow of almost $190 million, excluding voluntary pension contributions net of tax, was also at a record level.

In 2009, we chose to manage the company cautiously. We lowered operating costs by over $80 million, reduced headcount by 9.8%, and maximized cash flow. We ended 2009 with the strongest balance sheet in two years, a pension that's 90% funded on a GAAP PBO basis, and with a leaner, more focused, business operation.

But 2009 was not entirely about cost cuts. We also launched a number of new products and achieved major technical successes. For example, Teledyne's infrared sensors were key elements in the successful Hubbell and WISE space astronomy missions. Teledyne Webb's robotic sub-sea glider made the first transatlantic crossing of an unmanned, underwater vehicle, a seven-month voyage over 4,500 miles. And multiple segments of Teledyne Brown Engineering and Teledyne Webb won a $53 million contract for sub-sea gliders for naval applications.

Teledyne's RDI Doppler Velocity Log and Teledyne's DGO connectors were on Woods Hole Nereus vehicle that successfully traveled to the deepest part of the ocean, approximately 36,000 feet below the surface.

We further expanded our defense microwave offerings with new products for UAV data links, counter IED applications, and military communications. We acquired the remaining minority shares of our subsidiary, Ocean Design, for $25.5 million after which we formally launched the Teledyne Oil and Gas brand. We continued to gain market share and become more relevant in the offshore oil industry as we focused on specialized products for demanding deepwater offshore energy applications.

Finally, in our Continental Motors business, we plan to introduce a new 225 to 250-horsepower diesel aerospace engine later this year. By allowing the use of a fuel with worldwide availability, the new engine will expand the small airplane market in the Far East and will also open up a market in which to date we have not participated, that is, the military UAV market.

Before turning to the more detailed financials and segment data for the fourth quarter of 2009, I want to put our 2010 outlook in context. GAAP earnings per share for this year were $3.10, and included prior period R&D tax credit in the third and fourth quarter of $0.22 and $0.17, respectively. Excluding these tax credits, earnings would have been $2.71 per share. If we'd added back the one-time expenses, it would be about $2.75. On the other hand, we estimate that pension expense of $0.17 per share in 2009 will now become $0.07 of income in 2010 due largely to the approximately $170 million we chose to contribute over the last 18 months.

To recap, compared to 2009, we will lose $0.39 per share of prior period R&D tax credit, but we'll gain $0.24 per share of pension tailwind. Arithmetically, this would adjust earnings of $3.10 in 2009 to a base of $2.95. In addition, we've mentioned on previous calls that we expect declines in some of our government businesses in 2010, specifically lower sales for nuclear manufacturing and missile defense engineering services within our engineered systems segment and reduced deliveries of JASSM missile engines within our energy and power systems segment. It's our estimate at this time that this program collectively would result in revenue decline of approximately $85 million or over -- or roughly $0.14 per share in EPS in 2010.

Now, turning to our business segments, fourth quarter sales in our electronics and communications segment decreased 2.1% compared to last year, while segment operating profit decreased 7.4% and margins decreased 83 basis points. Much of the decline -- margin decline was a result of a year-over-year increase in pension expense.

In the fourth quarter of 2009, sales of defense electronics, which comprised 43% of this segment, increased slightly compared to the fourth quarter of 2008. Approximately half of our revenue in this market comes from sales of microwave devices and advanced interconnect products. Sales of these products increased year-over-year, but were partially offset by reduced sales of imaging sensors as 2008 benefited from some large imaging shipments related to certain DoD space programs.

As I mentioned earlier, we've developed a number of new products for the military communication market. For example, we recently developed and have received orders for an antennae subsystem for the Warfighter Information Network-Tactical radios program and we've designed a new UAV data link which is qualified on the Shadow platform. For the full year 2009, sales of defense electronics increased approximately 2.2% compared to last year.

Turning to our electronic instrumentation businesses, which now comprise approximately 47% of the revenue of this segment, fourth quarter sales increased modestly as a result of slight increase in sales of marine instrumentation, flat sales of environmental monitoring devices, and a 2% decline in sales of industrial instrumentation. For the full year, sales of electronic instrumentation decreased about 3%.

Teledyne's marine instrumentation businesses currently represent about $350 million or roughly 20% of our company's total sales. On a full year basis, sales of marine instruments increased about 2.4% and we currently expect growth to continue in 2010.

Finally, the remaining 10% of revenue in this segment comes from our avionics and other commercial electronics businesses. In the fourth quarter of 2009, sales from these businesses collectively decreased 19%, primarily due to a decline of sales in commercial electronic manufacturing services since we have exited this business.

Turning to our engineered systems segment, in the fourth quarter of 2009, revenue increased 2.9% compared to last year. The increase in sales primarily reflected higher sales from manufacturing and environmental programs, partially offset by reduced missile defense engineering services. Despite an increase in pension expense, operating profit increased slightly given healthy awards and incentive fees in the quarter. Full year sales in our engineered system segment decreased by 3.9% from $361.2 million to $347.0 million. Year -- full year segment operating profit decreased as a result of greater pension expense.

As I stated previously, we expect reduced sales in this segment in 2010 given the lack of a loan guarantee from our ultimate customer -- for our ultimate customer of nuclear gas centrifuge service modules, reduced government funding of some of our defense -- missile defense engineering services, as well as changes in the government's policy regarding conflict of interest.

In our aerospace engines and components segment, which represent Teledyne --which represents Teledyne Continental Motors, our aircraft piston engine business, sales decreased 11% in the fourth quarter compared to last year. Year-over-year sales in the quarter of OEM engines declined approximately 47%, while total aftermarket sales declined approximately 3%.

During the fourth quarter, we reported an operating loss of $3 million, which included the net impact of $1.3 million from product recall and replacement costs. On a full year basis, sales of engines for aircraft OEMs declined approximately 65%. While sales to the aftermarket may have stabilized, we don't really foresee the OEM markets recovering much in 2010 given continued pressure on the U.S. consumer, especially for high ticket items such as personal aircraft. However, we do see long term growth opportunities in military UAV and commercial international markets, particularly in Asia. As I previously noted, we plan to introduce a new 225 to 250-horsepower turbo diesel engine later this year.

Finally, in our energy and power systems segment, sales in the fourth quarter decreased 12% as a result of lower sales of commercial hydrogen generators and reduced revenue in the military turbine engine business, partially offset by increased sales of power systems for government applications. Fourth quarter segment operating profit decreased largely as a result of lower sales and a lower margin product mix.

In conclusion, we ended 2009 with lower operating costs and leaner operations with -- and with a strong balance sheet and a well funded pension. While some of our commercial businesses are beginning to improve, we're not overly optimistic about prospects for the U.S. and other global economies and will therefore continue to manage the company appropriately.

On the other hand, Teledyne is fortunate to have a set of exceptional high tech businesses, which -- with products that are difficult to produce and not easily -- and are not easily commoditized. As in previous years, we intend to improve our operations in 2010 as well as pursue acquisitions more aggressively.

I will now turn to -- 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, then I will discuss the 2010 outlook.

On cash flow, in the fourth quarter, cash provided from operating activities was $79.8 million, compared with cash provided from operating activities of $7.5 million for the same period of 2008. The higher operating cash flow in 2009 was due to the impact of higher net income, improved working capital management, and lower aircraft product defense and settlement payments. In addition, we made no pension contributions in the fourth quarter of 2009, compared to a $30 million contribution in the fourth quarter of 2008.

Over the last 18 months, we have contributed approximately $170 million to our pension trust, and as Robert mentioned, our qualified pension plan is now approximately 90% funded on a PBO basis.

Free cash flow for the fourth quarter of 2009 was $70.4 million, compared to a cash usage of $6 million for 2008. For the full year 2009, free cash flow was $118.7 million. Excluding $71.1 million of after-tax pension contributions in 2009, free cash flow would have been $189.8 million.

Capital expenditures were $9.4 million in the fourth quarter, compared to $13.5 million for the same period of 2008. Depreciation and amortization expense was $11.5 million in the quarter, compared with $10.9 million last year.

For the full year 2009, capital expenditures were $36.2 million and depreciation and amortization expense was $44.7 million. We ended the quarter with $226 million of net debt, the lowest level since December 2007. Our balance sheet remains strong with a net debt to capital ratio of 26.1%.

Moving to pension, in the fourth quarter of 2009, gross pension expense was $5.6 million, compared with gross pension expense of $2.4 million in the same period of 2008. Net pension expense after recovery of allowable costs pursuant to government cost accounting standards, or CAS, was $2.5 million in the fourth quarter of 2009, compared with $300,000 of net pension income in the fourth quarter of 2008.

For the full year 2009, net pension expense was $10.1 million, compared to $200,000 of net pension income in 2008. The increase in pension expense in 2009 was largely due to the amortization of market losses experienced in 2008.

Next, on stock option compensation expense, in the fourth quarter of 2009, stock option compensation expense was $1.3 million, compared to $1.9 million in the fourth quarter of 2008. The lower 2009 amount reflects the decision to eliminate the annual grant of employee stock options in 2009.

Now, let me turn to the 2010 outlook. Management currently believes that GAAP earnings per share in the first quarter of 2010 will be in the range of $0.57 to $0.61. We expect full year 2010 earnings per share of approximately $2.80 to $2.90. As a reminder, 2009 earnings per share of $3.10 included $0.39 of prior period R&D tax credits that will not reoccur in 2010.

Regarding our pension for full year 2010, we currently anticipate approximately $5.2 million of gross pension expense under FAS-87 and FAS-158. However, given recovery of allowable pension costs from our CAS covered government contracts, we expect net pension income of $4.4 million or $0.07 per share in 2010, compared to $0.17 per share of net pension expense in 2009. The decrease in full year 2010 pension expense reflects higher investment returns and the impact of contributions made in 2009, as well as 2008. For full year 2010, we expect capital expenditures of approximately $40 million and depreciation and amortization expense of $48 million.

I will now pass the call back to Robert.

Thank you, Dan. We would now like to take your questions. Operator, if you are ready to proceed with the questions and answers, please go ahead.

I am. Thank you. (Operator Instructions.) We do have a question -- a number of questions. The first one is from Michael Lewis. Please state your company.

Hi. Good morning. It's from BB&T Capital Markets. Good morning, everyone.

Good morning, Michael.

Robert, with regard to engineered systems -- and you very quickly discussed the OCI issues that are occurring throughout government -- what percent of the segment's revenue falls under OCI and how are you addressing this with the government at this time?

Okay. The segment revenue is about $350 million. The portion of the work that is reflected in OCI is about $75 million. So it's about 25%. And -- but there's a difference between other OCI issues and ours. What this basically does is we expect next year to go from this $75 million to about $43 million to $45 million, primarily because -- I mean, this year, not next year, in 2010 -- primarily because we will probably not be able to be prime in some of the contracts. But we can be sub-prime. On the other hand, our margins will not decrease as much as that, again, because we don't make as good a margin when we subcontract work as opposed to when we do the work ourselves. I hope that's helpful, Michael.

Yes, that's helpful. So just to repeat that, it's you're going to have the lower margin, but as a result of the sub revenue not falling through you're going to see the margin actually improve?

Yes, for that specific business. Yes.

Okay. And then, just two more quick questions. Number one, with regard to the M&A outlook. And I know that you put into the release that you want to get "more aggressive." Now, can you define what that really means? Are we going to expect to see something of a more material nature or something transformational to the company? Can you talk about that a little bit more for us?

Yes. All I can say is what I said -- we said in the earnings release. What I mean by being more aggressive is that last year we really hunkered down with our operations trying to cut costs, save money, pay up on our pension, and kind of stabilize our businesses. While we made three very small acquisitions, we really didn't do anything like we did in 2008 where we made approximately $160 million to $200 million investments in nine acquisitions.

Now, I think we will make some smaller acquisitions, Michael, like we did in 2009. I can't tell you how many. Obviously, we are always looking for larger acquisitions. But the ones that -- and we're always looking, obviously. But a lot of the stuff, just like you would expect, is difficult for us to integrate because they have such diverse businesses. So if we find something that's transformational but fits us better, then we would certainly consider it.

Okay, that's helpful. Then just a final question. Has the Board thought about authorizing a stock repurchase plan?

Well, actually, we announced -- when our stock went down in the 20s, we announced a 1 million share purchase -- repurchase program, but we exercised a very small fraction of it because our stock recovered.

Frankly, a company like Teledyne that has so much opportunities to invest, both in our businesses as well as make acquisitions, we really don't think buying back our stock is the best way to invest our cash. We like to keep our powder dry at this point, because we think there are going to be opportunities going forward in doing other things with our cash.

Yes, I must correct myself. I should've been more eloquent. I meant to say a more material buyback. But thanks so much. I appreciate your time.

Thanks, Michael.

And now, we'll go to Steve Levenson. Please state your company.

Stifel Nicolaus. Good morning, everybody.

Good morning, Steve.

In relation to Continental Motors, I guess Cessna's introducing where they'll be selling and delivering Skycatchers this year.

Yes.

That was a pretty good trick for you guys to get the engine.

Well, that was --

(multiple speakers) could that help you?

Yes, it will. But it's -- as you expect these things, they start at a lower volume. The interesting thing about the Skycatcher is the body of the aircraft is made in China. And then, the engines are, of course, ours made here. But that was a really nice competitive environment for us to be able to take that since Cessna owns our competitor, Lycoming. You're right.

So you think it won't make a big contribution?

It will make some contribution -- maybe $3 million in revenue. But it's not going to be huge, because it's just starting out.

Okay, thank you. Shifting over to the infrared sensors, your third generation. I guess you've got a fourth generation tunable sensor you're working on. Two, can you tell us where you stand in terms of the sensor products going forward?

Well, let me just say in the general infrared imaging sensors that the army intends to promote a competitive environment for the [lower rate] initial production and other future phases of third generation infrared imaging sensors. They are -- they continue to show strong support for our effort and they're providing funding to support our effort. We're also investing our own R&D in this domain. So -- and we do have some recent advances that look very interesting.

Going to the fourth gen that you mentioned, these are advanced focal plane array that we have -- we have a DARPA program. But this -- the production for these are a few years out, as you would expect. These are the tunable advanced focal plane arrays.

Okay, thank you. And last, is there going to be a replacement for the Orbiting Carbon Observatory that is not orbiting?

That's the one that I should have -- it was an unfortunate set of circumstances, but that did not make the orbit. At this time we don't really know what the plans are. We have provided pricing quotes on that, but haven't heard anything back recently, Steve.

Okay. Thank you very much.

Thank you.

Next we will have Chris Quilty. Please state your company.

Good morning out there, gentlemen. Nice results here. I have a question for you. Just a clarification. You didn't mention any organic growth rates. Am I correct in assuming that it was -- the acquisition contribution was relatively immaterial this quarter?

The -- if you look at the quarter as a whole across the company, I'll give you some numbers. The -- with the acquisition our revenue was down 2.2%. If you excluded acquisitions from last year that carried over, the revenue would have been down about 3.8%. So it's a difference of 1.5% from acquisitions.

Okay. And all of those were in the electronic and communications segment?

Yes.

And if I remember correctly, there were none in defense electronics within the (multiple speakers).

No, there were none in defense electronics. There were two in ocean domain and one in our avionics area -- small acquisitions.

Okay. And Robert, can you help frame for us how we should look at the operating margins by segment this year?

I can tell you they're going to increase, I hope. I think if you look at the operating margins for the past year, let's just start there because everything's relevant to where we were and where we're going. In the electronics group -- electronics and communication group, we ended the year with operating margins of about 14.3%. We started the year at 12.4%, Chris, and we ended at 14.3%, which was equal to the operating margin for the full year 2008. In engineered systems, we ended up with an operating margin of about 9% and that was lower than last year and that was partially because of pension.

In aerospace engines, we had a negative margin. And so, if we can stabilize that, that will help the overall margins. In energy and power, for the full year we had only 4.5% margins, and if can improve that -- so I think our overall company margin for Q4 this year was 9.5% and full year 2009 was about 9.4%. I think we should be able to improve that to at least what we had last year, which was about 10%. Hopefully, we can do better than that, Chris.

Okay. And when you look at the operating loss in the aerospace engines in the fourth quarter, was there anything specific and one-time in nature that contributed to the size of the loss there?

Yes. There was about $1.3 million of a recall of a component that one of our suppliers provided to us. It was a -- it's called a lifter. It goes under the valves, sits on top of cam shaft. And the casting -- it's a casting made of white and gray iron. And in the casting process -- they just lost the formula for the casting process. So we've been working very hard to solve that problem. I think we're on top of it. But we recalled about -- I would say about a little over 1,000 of these units and are replacing them.

Okay. And obviously, you're accounting for any incremental expenses in your guidance on a go-forward basis or have you reserved for that?

We've reserved for that pretty much.

Okay, great. And I don't follow it as closely, but on the centrifuge issue, obviously, that's a funding issue downstream from you. Given what's generally a much more positive outlook on nuclear power today than it was even a couple of years ago, what are the expectations there that that thing might get online sometime this year? Clearly, it's not in your forecast.

No, it's not in our forecast. We have -- this year we're going to -- we were projecting initially to have about $36 million of revenue in the manufacturing there. We ended up with just about a little over $20 million. And this year in 2010 we're projecting in the lower teens if nothing happens.

What this was, as you know, this is a loan guarantee to USEC for producing the product enrichment. USEC stands for U.S. Enrichment Corporation. DOE -- and they have the $2 billion approved by Congress. The DOE cited some concerns for technical readiness and some financial liability of the project. USEC is addressing that.

The expectations are, at least we're told, that there will be a loan adjudication sometime in mid-year. If that happens, then the project will be -- will go off and we'll have more revenue. But at this time, like anything else, we can't count on it until that happens.

Great. Thank you, Robert.

Thank you, Chris.

(Operator Instructions.) We now will go to the line of Matthew Crews. Please state your company.

Yes, thank you. Noble Financial. A question getting back to aerospace. Is there -- with the loss is there a revenue run rate on a quarterly basis that you need to hit to get that back to breakeven?

Matt, that's a good question. What we've done in that business is we've lowered our breakeven point significantly. Right now, for 2009, the total revenue in that segment was $113 million versus $171 million last year. I think if we can go to $125 million, maybe $120 million, we will break even in that business. And we hope that we can do that.

Some of our aftermarket product, Matt, that has stabilized. And early in the year our orders for rebuilt engines and factory new engines are improving. The flip side of that is that we, as I mentioned, we are going to introduce a turbo diesel this year, so we are going to invest in R&D in that area. So if we show some losses this year, it's because we are going to invest in that part of the business, because we think introduction of diesel is a game changer in this business.

Okay, great. Thank you for that. Just -- and then, just stepping back, just trying to balance the comments that you made earlier regarding that you're managing the business I'm assuming here in 2010 to the muted global economic outlook, which is -- versus the willingness to take on acquisitions as more of an upfront and center strategy. How do you balance those two issues?

Well, I think we -- in our market, the only thing we can do is gain market share in our existing markets. Half of our business in 2009 was government. About 45% of that was defense, the rest other government. And right now, we don't really foresee any increases in defense spending. I mean, if there are, they are moderate.

And we -- in the rest of our businesses we -- the commercial businesses, there are some that we see some upside, especially in our marine businesses. We don't know what's going to happen to our environmental businesses. We're just projecting to stay flat. On the other hand, if you look at our businesses in general, they're much healthier in this constrained environment than they have been in a long time, because we've lowered our operating costs. And we're not going to add to our operating costs.

Having said that, we don't see great improvements in our commercial market. We don't see great growth in defense. So we're looking at acquisitions from two perspectives. First, because I think there is -- there are opportunities in this economic environment, and second, we're looking for acquisitions that will enable us to offer a suite of products to a given customer.

For example, in oil and gas or in the whole marine domain, we're probably the first company that rolled up about nine or so companies. And because of that, we're now able to offer a given customer a whole suite of products. They can come to Teledyne for their needs. And if we can find complementary acquisitions that enables us to do that in other areas, that would make it very attractive, because we'd grow out of just giving components or subsystems.

Great. I appreciate all the detail there. Thank you very much for your time.

Thank you.

And John Croke has a question.

Good morning. I'm with Jefferies & Company. Thanks for taking my questions. Robert, you mentioned that marine instrumentation might be one part of the portfolio that could potentially provide some upside in 2010. Could you maybe talk about some of the recent order trends and E&P activity you've been seeing in that part of the business to kind of give us a sense of what growth might look like in 2010?

Yes. If you -- we do two parts. There's two parts to that. There's exploration and production. Combined I would say we will probably see mid-single-digits, maybe a little better growth -- organic growth. And that's primarily because in oil exploration we've introduced -- with our customers we've introduced really new technologies that have much better performance in term of the oil discovery -- oil and gas discovery.

On the production side, 2009 capital expenditures were essentially flat, maybe dropped a little bit in the whole -- oil and gas production, and offshore I'm focused on here. We think in 2010 there's some information that we have that's going to grow about 10%. More importantly, the focus of that, as you know, is going to be to go to deeper and deeper waters. As you go to deeper and deeper waters, our products become exceptionally attractive.

The deepwater reservoirs tend to be hotter and at higher pressure. And we have a whole bunch of products that enables us to address that market. And they're also -- when you go to deeper ocean, people try to do some of the sub-sea separation processing down there rather than bring the oil up to the surface. Again, we have products that address that. In the connector business, for example, in the electrical connectors, we're probably the major player in the optical connectors. We're probably the sole player in that domain. If anybody has a market share of that, it's very small. I hope that answers the question.

No, no. That's very helpful. And you mentioned here you've got some new technologies and you also spoke about the new engine and some things you're doing in the UAV world. In terms of R&D as a percentage of revenues, should we expect any kind of movement in 2010 versus 2009 as you're investing in some new products, or does that stay pretty flat?

I think it will go up some. As you well know, our R&D is comprised of two components. One, internally generated R&D, internally funded R&D. We are also fortunate to be recipients of a tremendous amount of government R&D dollars. Our own R&D I think is about 4% of sales in specialty electronics and communications, maybe a little higher.

On the other hand, just to take our Teledyne Scientific & Imaging, I would say we get something on the order of $60 million to 80 million every year from the government in various R&D projects, including a lot of programs from DARPA. We have some Phase III programs there. We even are applying for a Phase IV program.

So there are two kinds of R&D -- our own, as well as external. And we think we'll probably increase that somewhat this year, because one of the things we are trying to do is get new technologies from our Scientific & Imaging laboratories into our businesses and we've had some good success in that domain.

Okay, so internally funded R&D as a percent of revenues might be a little bit up in 2010 versus 2009?

Yes.

Okay, great. And then, lastly, real quickly, you've been very good about funding the pension plan the last 18 months. As far as 2010, I would imagine that there's not a whole lot that you need to put away in the plan going forward. Is that correct?

Yes. We are not required to put any in. But, John, what we've decided to do is the following. We draw a certain amount every year from the pension plan to pay our pensioners. Last year, that was approximately $30 million, $35 million.

We've decided to fund that going forward, that is put back in what we take out. The market does what the market does. But what we want to do is we don't want to siphon off money from the pension plan, because I think in the long term you get a much healthier pension plan, between that and recovery from the government, if you kind of keep it stable.

And lastly, as you well know, we stopped new participants in our defined pension plan in January of 2004. So the number of participants is not increasing. So we will put some money in, probably in the order of $30 million to $35 million, but nothing like we put in in the last 18 months, which was over $170 million.

Yes, no, that definitely makes sense and sounds like a real sensible strategy going forward. So thank you for answering my questions.

Thank you.

And now, we'll go to Margot Murtaugh. Your line is open. And please state your company.

Thank you very much. Snyder Capital. I just have a couple of short questions. I wondered about capital spending for 2010. I wondered about stock option expense -- are you revving that back up in 2010? And then, the tax rate. And also, on acquisitions, do you have any thoughts on the size of acquisitions, what level of debt to EBITDA you're willing to take on for acquisitions? And (multiple speakers)

Margot.

Thanks.

Let me click those off as fast as I can. CapEx, as Dale mentioned, is -- we are anticipating about $40 million in 2010. It's a little higher than we had in 2009.

We have stock option awards. We are going to make stock option awards this year. We didn't last year. We think our stock option expense is going to be flat though year-over-year.

In terms of acquisitions, the size can be small, it can be on average maybe $30 million, $40 million, but it can be larger than that. We have a covenant on our EBITDA ratio -- debt to EBITDA of three to one. We'd like to stay investment grade, so we will not broach that -- we'll not get very close to that. The flipside is that we generate cash internally, a healthy cash flow. And so, between those two we should be okay.

Okay. And you said you had an $80 million headwind in engineering systems, right?

Right.

And so, is there any offset to that in that division?

I think there may be. We have some increases in that segment especially in some of our modeling work that we do. We have some integrated testing programs that we have some upside on. And then, the other thing is if there is this loan guarantee problem, if that is resolved, then that's an upside there as well.

So there's a combination of things that can happen between now and mid-year that might change that picture. But right now, we're saying we're looking at about $75 million down there and then about $10 million in turbine engine, which is separate segment.

Oh, okay.

Because of the JASSM. But the JASSM delay, it's only a delay. The program was successful in the testing and the program is going to resume near the end of this year.

Tax rate, you asked about tax rate. This year with the prior year tax credits -- R&D tax credits that we got, our tax rate is just under 30% for the full year 2009, I should say. In 2010, we anticipate that to be about 39%.

Okay, thank you very much.

Thank you, Margot.

And now, we have a follow-up question from Chris Quilty. Please go ahead and state your company.

Robert, I forgot to ask the question about the economic stimulus and if you're seeing any second derivative benefits in the environmental instrument business.

Not really, Chris. We -- there was supposed to be $6 billion in fast track - 400 wastewater projects, as an example. We didn't see anything. We hope to see something in 2010, but I'm not counting on it. I don't know where the money is going, but it's not going there.

Great mystery. Okay, thanks.

Thanks, Chris.

And there are no additional questions at this time, so please continue.

Thank you, Operator. I'll now turn the call back to Jason.

Thanks, Operator. And 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. And of course, all our earnings releases are available on our website, Teledyne.com. Operator, if you could conclude the call and give the replay information, please.

Thank you, ladies and gentlemen. This conference will be available for replay after 10:00 today until February 28 at midnight. You may access the AT&T Executive Playback Service at anytime by dialing 800-475-6701 and entering the access code of 120991. International participants may dial 320-365-3844. And again, one more time, the number is 800-475-6701 and the access code is 120991, or international 320-365-3844.

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