Teledyne Technologies Inc (TDY) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Teledyne Technologies Third Quarter Earnings Call. (Operator Instructions). As a reminder, today's conference is being recorded. I'd now like to turn the conference over to your host, Jason VanWees. Please go ahead.

Good morning, everyone. This is Jason VanWees, Vice President Corporate Development and Investor Relations at Teledyne Technologies. I'd like to welcome everyone to Teledyne Technologies' Third Quarter 2010 Earnings Release Conference Call. We released our earnings earlier this morning before the market opened.

Joining me today is Teledyne Technologies Chairman, President and CEO, Robert Mehrabian; Senior Vice President and CFO, Dale Schnittjer; and Executive Vice President, General Counsel and Secretary, John Kuelbs.

After remarks by Robert and Dale, we will ask for your questions. However, before we get started, our attorneys have reminded me to tell you that all forward-looking statements made this morning are subject to various assumptions, risks, and caveats as noted in the earnings release and our periodic SEC filings. And, of course, actual results may differ materially.

In addition, in order to avoid potential selective disclosures, this call is simultaneously being webcast and a replay, both by a webcast and dial-in, will be available for approximately one month. Here is Robert.

Thank you, Jason. And good morning, everyone. Before commenting on the specific results within our segments, I have some general comments about our performance in the fourth quarter and full year 2010 and the progressive repositioning of Teledyne, especially after the pending acquisition of Dalsa and the sale of our piston engine businesses.

For both the fourth quarter and full year 2010, we recorded record earnings per share of $0.99 and $3.27, respectively. The quarterly performance was driven by growth in our electronics and communications segments, operating margin improvement in all segments, and favorable R&D tax credits.

I also want to emphasize our earnings consistency. Despite the recession that started in the fourth quarter of 2008 and the gradual recovery underway now, Teledyne's full year earnings per share have grown every year for nine consecutive years. Over the same nine-year period, we've progressively repositioned Teledyne by first focusing on and investing our cash flow in businesses with proprietary, hard-to-manufacture, highly engineered products.

And, second, avoiding and exiting businesses that are subject to commoditization.

The pending sale of our piston engine businesses, and the pending acquisition of Dalsa Corporation further emphasize this strategy. The sale of the engine businesses with strong strategic buyer enhances the long-term opportunities for that business and our employees there while allowing Teledyne to focus on our core electronics businesses.

In addition, proceeds from the sale will be partially used to fund our acquisition of Dalsa, our big and more significant acquisition in the digital imaging domain. I will discuss the specifics of these transactions a bit more during my comments on the business segment.

Following this transaction, Teledyne will essentially be a pure play electronics instrumentation and engineered-focused company. Furthermore, after the transaction, we expect that approximately two-thirds of our earnings will be derived from two primary markets. One, digital imaging and instrumentation; and, two, electronics systems for commercial aerospace.

In other words, we will have less exposure to markets such as defense. And a greater contribution, especially in earnings, from markets driven by attractive global themes such as demand for oil exploration and production, energy-related infrastructure such as power plant construction, the need for clean air and water, and the worldwide growth in manufacturing using process controlled machine vision and factory automation.

I will now turn to our business segments and their fourth quarter performance.

Please note that 2009 was a 53-week [week], and because of that, we are comparing a 13-week fourth quarter for 2010 with a 14-week fourth quarter in 2009. Fourth quarter sales in our electronics and communications segment increased 4.3% compared to last year and segment operating profit increased 4.6%. On a GAAP basis, segment operating margin despite 42 basis points of prepacked costs associated with the pending acquisition of Dalsa.

For the full year, sales increased 5.1%, and operating profit increased 5.6%.

In the fourth quarter of 2010, sales of defense electronics increased 5.6% driven by the acquisition of Paradise Datacom and Labtech divisions of Intelek PLC in Q3 and Optimum Optical Systems in Q2. For the full year 2010, sales of defense electronics increased over 5% compared to last year.

In the fourth quarter, sales for our electronic instrumentation businesses increased approximately 1.6% to $155 million, mainly due to a 14% increase in sales of industrial instruments resulting from particularly strong sales of flash chromatography systems and consumables somewhat offset by some difficult quarterly comparisons in sales of environmental instruments. Nevertheless, fourth quarter instrumentations were at the highest levels of 2010. For the full year, sales of electronic instrumentations increased almost 7% with roughly 10% growth in industrial instruments and approximately 6% growth in sales of marine and environmental instruments.

Finally, fourth quarter sales for our avionics and other commercial electronics businesses increased 11% over last year primarily led by growth in our avionics business.

Before discussing our other segments, I want to add some further color on the Dalsa acquisition. Dalsa is an international leader in high performance digital imaging and microelectromechanical systems, or MEMS. Of Dalsa's roughly $210 million in sales, approximately $165 million is comprised of high-performance imaging centers, digital cameras, and imagine processing software primarily used in industrial process control and machine vision applications along with some sales of specialty sensors and subsystems for advanced imaging applications such as digital sensors for extra imaging and very high pixel count sensors using high resolution area and satellite imagery. For example, Google Earth images.

The balance of sales are approximately $45 million, is related to manufacturing, cost of MEMS devices and especially integrated circuits.

It should be noted that the product lines of Dalsa and Teledyne imaging are almost entirely complementary. For example, Dalsa produces, among the world's most advanced visible light imaging sensors and cameras for commercial applications, while Teledyne produces extreme resolution, infrared sensors and top systems primarily for government applications.

Furthermore, Dalsa's custom MEMS capability will be augmented by having access to Teledyne's extensive MEMS research activities and advanced process technologies.

Regarding the transaction timing, a circular dated January 5, 2011, was distributed to Dalsa shareholders. On January 18th, we received early termination of the HSR antitrust review, and a Dalsa shareholder meeting has been scheduled for February 10th, and we expect to close shortly thereafter.

Turning to our engineered system segment -- in the fourth quarter of 2010, the expected revenues increased about 22% reflected lower sales from NASA programs as well as nuclear manufacturing and missile defense engineering. While operating profits decreased about 20%, operating margin increased about 23 basis points.

Full year sales in our engineered systems decreased by about 19% compared to last year from $347 million to about $280 million. Full year operating profit decreased 9.5% while operating margin increased 110 basis points.

As I mentioned, this year's revenue decline was expected. However, we believe that the revenue in this segment has now largely stabilized. While we do expect some more headwinds in the NASA and missile defense area, we expect manufacturing programs in the nuclear and aerospace market to offset such declines.

In our aerospace engines and components segment, which is our piston engines business, sales increased 14.5% for the quarter compared to last year. We reported an operating loss of $800,000 versus an operating loss of $3 million in the fourth quarter of 2009.

However, fourth quarter 2010 included about $1.5 million in professional fee expenses related to potential segment of this segment.

Full year sales in our aerospace engines and components segment increased 18% compared to last year from about $113 million to $134 million. As a result, about 47% increase in sales of engines for OEM aircraft and 12% growth of after-market parts and services.

As I mentioned earlier, on December 14th we announced the sale of the business to a subsidiary of AVIC International for $186 million in cash. Regarding closing, on January 5, 2011, we received early termination of the HSR antitrust review. Pending other necessary approvals, we expect the transaction to close before the end of the first quarter.

Finally, in our energy and power system segment, sales decreased 2.6% compared to last year as a result of reduced revenue from government power systems offset by high battery product sales. Full year sales in our energy and power segment decreased approximately 5%.

To conclude, I am optimistic about 2011. Although we will have some earning headwinds related to lower United States R&D tax credit and some additional pension and interest expense, I'd like to highlight some of the following -- first, we ended 2010 with $885 million in funded backlog compared to $831 million at year-end 2009. Second, we believe that revenue declines in our government businesses have largely stabilized. Third, our earnings will be even more leveraged towards growing commercial market. And, finally, our balance sheet is healthy, and our pension is over 90% funded.

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 thoughts related to 2011.

In the fourth quarter, cash provided from operating activities was $68 million compared with $79.8 million for the same period of 2009. The lower operating cash flow reflected the impact of an $8 million contribution to a foreign pension plan.

Free cash flow for the fourth quarter of 2010 was $52 million compared to $70.4 million for 2009. As I mentioned earlier, we made a voluntary pretax pension contribution of $8 million in the fourth quarter of 2010, and we had higher capital spending for the quarter.

Adjusting for the pension contribution net of taxes, free cash flow was $57 million in the fourth quarter of 2010, and it was 56% greater than net income.

For the full year 2010, free cash flow was $108.4 million. Adjusting for the total pension contributions during the year, net of taxes, free cash flow was $136 million.

Capital expenditures were $16 million in the fourth quarter compared to $9.4 million in the same period of 2009.

Depreciation and amortization expense was $12.6 million in the quarter compared with $11.5 million last year.

For the full year, capital expenditures were $33.4 million and depreciation and amortization expense was $47.6 million. We ended the quarter with $192.2 million of net debt.

As a reminder, in September 2010, we funded a $250 million private placement of fixed rate notes with a weighted average interest of 4.8%.

Our balance sheet remains strong with a net debt to capital ratio of 19.6%.

Net pension income after recovery of allowable costs pursuant to government cost accounting standards was $1.1 million in the fourth quarter of 2010 compared with $2.5 million of net pension expense in the fourth quarter of 2009.

For the full year 2010, net pension income was $4.4 million compared to $10.1 million of net pension expense in 2009.

Moving to stock options, stock option compensation expense was $1.2 million in the fourth quarter of 2010 compared to $1.3 million in the fourth quarter of 2009.

Turning to 2011, we plan to provide a more detailed earnings outlook later this quarter. This is simply due to a number of items, which we are expecting to change in the next several weeks, such as the closure of the Dalsa acquisition and the valuation of its intangible assets; also the divestiture of Continental Motors and its reclassification as a discontinued operation. And, finally, the potential splitting of the electronics and communications segment into two new reporting segments.

I will now pass the call back to Robert.

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

(Operator Instructions) Mark Jordan, Noble Financial.

I understand the reluctance to be more specific on guidance, but I do have a general one for you, Robert, as you look at the year today with all the moving pieces. You know, you've taken pride in your nine years of earnings growth. We look at this year and back out the nonrecurring items, you're about 3.08. Using that as a base, do you feel comfortable that 2011 will be your 10th year of growth?

Good morning, Mark. I would have expected you to do that. Yes.

Okay, thank you. Could we talk a little bit about Dalsa and its competitive position in the marketplace? I guess the one company with relatively high profile in the machine business marketplace is Cognex. Could you say how Dalsa competes with that company?

I believe -- and I have to wait until I have Brian Doody working with us to be totally well informed on this. But I believe Dalsa cameras are used by Cognex, and they combine it with their software. Therefore, I think Cognex is a customer of Dalsa. There is another competitor in that domain, which is e2v. They compete in the space domain more and, actually, they complement some of our introvert systems for space applications.

The other part is Dalsa is not only a sensor and camera company, but it also has machine vision cameras and software of their own. And, furthermore, in their MEMS foundry, they are the largest independent MEMS foundry in the world today.

And, lastly, the area that they are growing in, which I'm not aware of their competition in this domain, is in the x-ray digital imaging used for medical and dental applications.

Okay. It looks like you have about $75 million or more in incremental financings to do with all the dust of sale and buy settles. What is your financing plans that you have to fund the completion of the Dalsa acquisition?

Yes, I think, Mark, if you put the two pieces together, if you take the cash that we are going to get from the pending sale of piston engine business after-tax cash, we expect it to be about $140 million.

Then the Dalsa acquisition with the fees -- acquisition expenses -- probably is going to be close to $350 million. So if you subtract those two from one another, net-net, we're going to need to have another $211 million. Now, we have, as you know, our bank debt right now is in a reasonably good position. Even though we have a fixed debt of $250 million, we have cash on hand. So net-net, let's say we're at $175 million debt right now. When you put the two things together, that will take us about, let's say, $375 million.

What I'll do is, after the transaction -- today our net debt to EBITDA is about $1.2 million. It will put it up to about $1.8 million, and, of course, that will go down throughout the year as we generate more cash as we did this year.

Okay. And, finally, just the cost of that incremental debt?

Right now we have a facility that $590 million. It's about LIBOR+50 basis points. But it expires in July, Mark. So -- what will happen is in the next month or so we will refinance that, and I think the cost of the debt would rise to about LIBOR+150. So we have a 250 of fixed debt at average interest rate of 4.8 maturing in five, seven, and 10 years. So put that to one side. Then you have this additional debt, which would be about LIBOR+150.

Rob Takacs, Suntrust Robinson.

My question has to do with the Dalsa acquisition as well, and I was curious as to how you see the initial impact on margins within the segment. And then how do you see, heading into 2012, the margin impact of the acquisition? And I know that, you know, you've discussed splitting segments up, and that could have an impact. But if you could at least provide some directional guidance, that would be good.

Thanks, Rob. I'll try and answer the question as precisely as I can. First, the acquisition itself in 2011 in terms of acquisition costs or fees, is going to hit us about $0.15. It could be $0.12, but in the $0.12 to $0.15 range. But that's a one-time cost. So just put that aside. It's 2011, it won't recur in 2012.

The one thing that we are not cognizant of now and can't really account for is the intangibles. Because, as you well know, we have to do intangible amortization. If you looked at Teledyne today, our intangible amortization is about $0.24. Our guess, (inaudible) is not perfect. Our guess is that's going to go up between $0.20 to $0.25. So it could be as much as $0.44 to $0.48, $0.49 next year.

So I am a little hesitant to do that because of the one-time cost and the fact that we don't know about the intangibles. There is also some reclassification of tax credit. Well, you add all of that up, I think in 2011 our margins might go down in ENC, if you put it just in there now might go down as much as 100 basis points. Of course, revenue goes up so, overall, without -- and, by the way, we are selling the piston engine business, which is a low-margin business right now. So when you throw those two together, I think next year's margins should stay relatively flat.

The following year, then we should pick up the margins because we don't have the one-time costs associated with the transaction.

And then switch gears just a little bit -- just a quick question. Do you see any impact as this continuing resolution FY11 defense budget continues on to Teledyne?

There is some (inaudible) takes on that one. If you look at the continuing resolution from the perspective of, let's say, missile defense. I think it may have a little positive impact on us. And that's just an educated guess at this point because the start of some of the new programs will be delayed.

In terms of NASA, I think there, again, will have a slightly positive effect on us. As you know, NASA right now is in a state of flux, and we expect it to be flat next year with respect to this year. On the other hand, if the continuing resolution goes on, I think some of our programs will continue, so it might have a slight positive effect. But these are all educated guesses. There is not really data that I can depend on.

Michael [Shimali], Key Bank.

Robert, I guess, can you just maybe talk about -- I know you're not giving the formal guidance for '11, but maybe the impact that you're seeing right now for pension. I know maybe you thought at one point it could have been as high as a $0.20 headwind. Where do you see pension impacts of '11 right now?

Mike, thanks. When we started with a pension headwind, two things have happened since last time we spoke. The first one is that the returns on the pension improved, especially in the fourth quarters. And so we ended the year with pension assets that were about $650 million. And, second, the discount rate improved. And as you well know, as the discount rate goes up, your liabilities go down. And with the current discount rate assumptions that we have, we think we may have essentially a flat pension income expense. It maybe could be as much as $0.06 in expense versus what we talked was $0.14 before.

And what about the CAS/FAS reimbursement? Do you still expect to -- does that flip-flop next year or is it too early to tell on that one?

It's too early to tell because -- I'm going to let Dale, also, add to this. It's too early to tell because there's additional things that we don't get pension benefits if we sell the piston engine business. Dale?

The rate of return that we're projecting for next year on pension is the 8.25%. And the discount rate that we have justified is 5.9% discount rate. We do expect somewhat greater collection under CAS in 2011 than we received in 2010, about $2 million. But the pension expense is also going to be about $6 million higher.

And then maybe just to follow up on one of your comments -- you talk about Dalsa giving you more exposure to more attractive commercial markets, and you talked about commercial aerospace exposure maybe being 50% of your two-thirds, I guess, overall revenues once these deals close. Can you just elaborate, maybe, you know, into more specifics on your aerospace exposure? Maybe talking about some particular airframes or platforms and how closely we can correlate your aerospace revenues to what's happening in the cycle with increasing production rates and new platforms?

Yes, let me first start. When I was talking about two-thirds of our earnings coming from those two segments, which would be instruments and machine vision and aerospace. The aerospace portion of our business is actually relatively small. It's about 10%. What we do there is primarily we have businesses of what we call controls, which supplies beta acquisition systems to commercial systems to commercial airlines, both Boeing and Airbus. And we also supply high-end batteries to commercial airlines and some relay. So that's not -- the aerospace revenues are not that large.

On the other hand, it's a relatively profitable business, especially since we've seen a significant pickup in orders as well as production in both Airbus and Boeing.

Steve Levenson, Stifel.

With the acquisition of Dalsa, forgive me for asking it this way -- what's left? Do you feel you've got the full package when it comes to EO, thermal, hyper and multispectral imaging, motion control, or is there something else that remains on the wish list? And, if so, is that something you'd attempt this year if it came up? Or are you sort of done based on the size of the Dalsa deal?

That's a great one, Steve. No, we are not done. First, I think, as you know us, we are always looking. I think there are areas, even in the imaging domain, that we can expand in. For example, in the IR domain, most of the stuff that we do is at the very high end, as you know -- space, telescopes, (inaudible), et cetera. We don't do that much commercial IR. One area that we may want to -- with Dalsa, of course, being the key driver, we may want to explore in the uncooled IR domain, which would be basically using microbolometers in the camera market.

The other thing is that there are other imaging areas that are of interest to us including hyperspectral imaging that are imaging the areas used for the information processing, using our information processing capabilities. Some things like Light/Dark, which is essentially a different type of imaging domain. So I guess the long answer to a good question is that no, we are not done. I think there is a lot of opportunity in that area as well as in the general other instrumentation areas that we have been pursuing.

Okay. Are those things -- if you do uncooled, is that something where you would be able to use your current foundry or would that take additional investment?

I think there will be some investment, but the foundry that Dalsa has -- and I have to make sure I say the words "the pending acquisition of Dalsa," because the shareholders there have yet to approve the acquisition by Teledyne.

But, having said that, they do have a very robust foundry, and our expectations would be that if we had to make investments, it would be in that foundry.

The other thing I should mention is that also is semiconductor, which is -- the foundry is within that entity, is a founding member of a center in Canada called the Micro Innovation Center, which is backed by over (inaudible) $80 million of support from the Canadian federal government and the province of Quebec. And that foundry and its facilities, which are under construction right now, are going to be available to Dalsa Semiconductors, or what their MEMS processing as well as some of the work that they do for the camera product. So there's a lot of muscle out there for us to be able to use.

Chris Quilty, Raymond James Associates.

Good morning, gentlemen. I was slow with my pen. Can you give me the breakdown again on the ENC sub segments?

Let's see, do you want it for the quarter or do you want it for the year?

The quarter should be good.

Okay. For the quarter, the ENC segment basically are about, I would say, 30% in defense electronics; about 34% in electronic instruments. I'm talking about of the total of Teledyne, if you would bear with me -- and about 8% of other avionics and electronics. So if you add those together, electronics and communications would be about 74% of Teledyne for the Q4. For the year it would be a little different but for Q4 it would be 74%, or about three-quarters, and of which within that three quarters, 31% of Teledyne is defense electronics, about 34% is instruments, and about 8% is avionics and other commercial electronics. Does that help?

Yes. I thought you gave a number, at least for the instrument business, of $155 million?

Yes.

Okay, then I can just calculate out the percentages.

You got it.

Also, can you give us your general thoughts, as you sit here today, excluding -- I don't need guidance on the piston engine business -- but what you might expect for the ENC and systems engineering for 2011 and excluding Dalsa? I mean, you know, ballpark. Which segments are going to grow, which ones are going to shrink. What order of magnitude and margin direction?

I would say, if we exclude those and sat back and looked at it, earning-wise, we're going to, right now, because we don't have a lot of tax credits for next year, earning-wise, we'll be sitting at $3.00 or a little north of $3.00.

We think the electronics and communication will grow in single digit domain -- in the mid single digits. We think that the engineered systems would be essentially flat. We've kind of taken all the hits we're going to take in that area, I hope, in 2010. So that would be my guess. Excluding piston engines, excluding Dalsa, that would be my best guess.

And anything to say about the margin trends?

You know, our margins are always improving a little bit. I think we may have some flat margins in engineered systems. Probably ENC will remain flat. Now, if we do get Dalsa, as I said, our margins will go down.

Okay. And a question for you -- you indicated that you would restructure the ENC segment post-Dalsa. How would you break up those sub-segments there? Would you add more or fold them in?

We're right in the middle of that, Chris. But if I had to take an educated guess -- and this is subject to going to the SEC and getting the appropriate concurrences -- if I were to take a shot at it today, I'd say our reporting segments would probably be instruments, which would include Dalsa, which is part of our instruments business, anyway, in the imaging domain. And then we would take the rest of the ENCx segment, which would be defense electronics and aerospace and other electronics. Really, it will become defense and aerospace electronics.

Got you -- two instead of three segments.

Yes.

Okay.

We currently, ENC is just one segment.

Oh, I know, but you've got to give us details on three sub-segments.

Yes.

Okay.

Is there -- hold on a second. I am giving you market breakdowns not breakdowns of the segments. Because the way we run the segment, it's just one segment right now.

ENC.

Okay, okay.

How you'll give color on a go-forward basis is what I'm trying to get at. Which brings up the bigger question of -- I, at least, haven't yet taken a swag at folding in Dalsa and taking out the piston engine for '11 or '12. And it sounds like you're going to give -- is the intent to give complete guidance when those two transactions are done before the end of the first quarter, hopefully. Sort of an all-in picture for 2011 and -- well, at least 2011?

We, as you said, assuming they are done, and the timing is going to be very important. If the shareholders of Dalsa approve the transaction, that will happen on February 10th. So we'd have ample time to work the numbers there, especially our intangibles. We certainly would know our one-time cost -- and be able to fold that numbers in.

The piston engine divestitures is again slated to happen in Q1. We are hoping it will happen in Q1. It depends on the timing. We hope that we'll be able to then give guidance before the quarter ends. But certainly if the transaction one -- or, certainly, piston engine doesn't happen, then we'll have to worry about how to give guidance. But we'll give guidance either before the quarter ends or right after it begins.

Okay. And, I guess, maybe a question for Dale. Have you thought about maybe shifting over to using EBITDA as a primary metric instead of EPS, and we wouldn't have to worry about all these amortization questions and tax issues and tax rebates in terms of targeting a metric?

We have not gone down that direction. We do give you information on capital and depreciation and amortization. So if it's important to the model, you can usually calculate it. But we have not gone in that direction.

Okay. Speaking of taxes, is it fair to assume there are probably some opportunities to lower your go-forward tax basis with the contribution of Dalsa and some of the R&D tax credits that are more available in Canada?

We might -- well, first of all, the tax rate for 2011 may be a little less than what we had anticipated. We were running about 38.8 in 2010. With the 2011 R&D tax credit being approved by the government, the rate might be closer to 37. And then, certainly, there is some opportunity for lower taxes associated with Canadian income if we were to acquire Dalsa. But we're still working on that.

Okay, got it. And while I've got you, Dale, you talk about post-acquisition. You're probably at around 1.8 debt-to-EBITDA. Where do you start to get uncomfortable in terms of a leverage ratio?

We've been under 2 since we have been Teledyne. And we are comfortable under 2. I think Robert has told most of you before, with the right acquisition we might go above that occasionally. But we're comfortable in the 1.5, 1.8 area.

Okay. And, Robert, you didn't talk a bunch about the marine instrument business and what you expect there given the activities or lack of activities in the Gulf region?

Yes. I think, first, in the Gulf region, as you well know, things are kind of -- activity is virtually halted there, in terms of new activity. On the other hand, they significantly increased activity that we see in West Africa, in Southeast Asia and, of course, Brazil. And so we think those activities would compensate for what's happening in the Gulf.

The other thing, Chris, that we've noted is that the major oil companies have now committed record levels of capital expenditures for 2011, especially in the subsea -- deep sea, I should say -- projects. And we think that this bodes well for us in terms of subsea trees, manifolds product, and it should be better than 2010.

On the flip side, which is the exploration side, there is a little over capacity in terms of what's available in terms of boats in the seismic survey activity. So we think that while the vessels are increasing the number of arrays and the density of arrays that we provide, that's going to remain fairly flat or soften a little bit. But having said all of that, we think our marine businesses are going to be relatively healthy, going forward. And, as you know, we recently made an acquisition, an underwater -- autonomous underwater vehicle acquisition, and we are looking to see if we can expand in that domain with more sensors or more capabilities. So that's a growth area for us, both organically as well as through acquisitions.

Last question, I promise -- I think you mentioned your environmental instruments business being down in the quarter. Are you telling me your customers still haven't gotten their stimulus checks?

(laughs) I think you're throwing out the teasers there. I'm not going to answer this that way. (laughs) I'll tell you, for the year, for the year our environmental business was up about 7%. But it really wasn't because of the stimulus. It had to do with our customers in the Far East, which are buying a lot more.

The quarterly comparison was only heightened by the fact that we had one week less in the quarter this year than we did last year. But for the year, our environmental business was up 7%. But, as you said, not because of the stimulus checks.

Michael Shimali, Key Bank.

Just back to Dalsa and maybe the margins -- it looks like, you know, Dalsa has been running 13% operating margins or so. Is there room for you guys -- whether it's synergies, removing costs out of that business -- can you push that margin higher? And I'm assuming, once everything closes, ex all costs if we want to look at it in '11 or even out to '12, your corporate operating margins should trend probably north of 12%. Is that fair?

Well, there are two issues there. One, by the way, I believe Dalsa, we've put out an earnings release either after the close of business on the East Coast or Toronto Stock Exchange today. So feel free to look at that. That would be their fourth quarter earnings release.

There is some -- we will only have them for nine months. I think you are correct on the margins, except we will get some margin compression because of the reclassification of R&D tax credits. So we are still working our way through. We do see increased business because of the complementary nature of what we do in IR and what they do in the visible domain to increase our business in the future. But I'm not sure how much cost reduction there is, because that's a well-run operation as far as we know -- as well as we've seen.

Okay. And just on the defense electronics. You know, obviously, there's a dark cloud over the entire defense industry, but you guys are largely playing in a lot of the sweet spot markets. Are you still seeing elevated demand out there? Is pricing becoming an issue? Are some of the larger primes pushing back on you guys at all?

Yes, we always have that. But, in general, in the areas of defense electronics that we are in, we don't expect to be hurt much. First, we've developed more products in unmanned aircraft, especially datalinks to unmanned aircraft. Second, we've exploited the fact that we have this large marine business, and we've garnered some new programs in subsea gliders with the Navy. And, finally, what's happening is that some of the large primes, even though they are under cost pressure, then also one way of reducing their cost is to outsource some of the manufacturing to people that are maybe less expensive.

So, overall, I believe that our defense electronics business should remain relatively flat year-over-year. The book-to-bill is about 1 right now. So I don't think that's going to hurt us too much, what's happening in that domain. We've been very careful on making sure we got out of businesses that were susceptible to declines in the defense budget.

(Operator Instructions)

Thank you, Operator. That's fine. I'll now ask Jason to conclude the conference call please.

Thanks, Operator. And, again, thanks, everyone for joining us today. Certainly, feel free to call me after the call. My number is on the earnings release. And, of course, a replay of this call will be available as well. Thanks, everyone. Operator, if you could just conclude the call and give the replay information, we will sign off.

Ladies and gentlemen, this conference will be made available for replay after 10 a.m. today until February 27th at midnight. You may access the AT&T Executive Playback service at any time by dialing 1-800-475-6701 and entering the code 177284. International participants, you may dial 1-320-365-3844. And, again, those numbers are 1-800-476-6701. International number is 1-320-365-3844 using the access code 177284. That does conclude our fourth quarter earnings conference call for today. Thank you for your participation, and for using the AT&T Executive Teleconference Service. You may now disconnect.