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EX-10.1 - EXHIBIT 10.1 NOTE PURCHASE AGREEMENT - TELEDYNE TECHNOLOGIES INCexhibit101notepurchaseagre.htm
EX-31.2 - EXHIBIT 31.2 SECTION 302 CERTIFICATION CFO - TELEDYNE TECHNOLOGIES INCtdy-ex312_20150927xq3.htm
EX-32.1 - EXHIBIT 32.1 CERTIFICATION OF CEO PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT - TELEDYNE TECHNOLOGIES INCtdy-ex321_20150927xq3.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION OF CEO PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT - TELEDYNE TECHNOLOGIES INCtdy-ex311_20150927xq3.htm
EX-32.2 - EXHIBIT 32.2 CERTIFICATION OF CFO PURSUANT TO SECTION 906 OF SARBANES-OXELY ACT - TELEDYNE TECHNOLOGIES INCtdy-ex322_20150927xq3.htm

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-Q
_____________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 1-15295
_____________________________________
TELEDYNE TECHNOLOGIES INCORPORATED
(Exact name of registrant as specified in its charter)
_____________________________________
Delaware
 
25-1843385
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
1049 Camino Dos Rios
Thousand Oaks, California
 
91360-2362
(Address of principal executive offices)
 
(Zip Code)
(805) 373-4545
(Registrant’s telephone number, including area code)
_____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
  
Outstanding at October 28, 2015
Common Stock, $.01 par value per share
  
35,441,756 shares




TELEDYNE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS

1


PART I FINANCIAL INFORMATION
 
Item 1.    Financial Statements
TELEDYNE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 2015 AND SEPTEMBER 28, 2014
(Unaudited - Amounts in millions, except per-share amounts)
 
Third Quarter
 
Nine Months
 
2015
 
2014
 
2015
 
2014
Net sales
$
555.4

 
$
601.1

 
$
1,698.1

 
$
1,771.7

Costs and expenses
 
 
 
 
 
 
 
Cost of sales
345.8

 
375.4

 
1,049.4

 
1,095.5

Selling, general and administrative expenses
140.1

 
151.4

 
443.0

 
461.6

Total costs and expenses
485.9

 
526.8

 
1,492.4

 
1,557.1

Operating income
69.5

 
74.3

 
205.7

 
214.6

Interest expense, net
(6.0
)
 
(4.6
)
 
(17.9
)
 
(13.9
)
Other income (expense), net
(2.1
)
 
(1.8
)
 
2.1

 
7.0

Income before income taxes
61.4

 
67.9

 
189.9

 
207.7

Provision for income taxes
13.1

 
13.0

 
49.9

 
51.0

Net income
48.3

 
54.9

 
140.0

 
156.7

Noncontrolling interest

 
0.7

 
0.3

 
0.8

Net income attributable to Teledyne
$
48.3

 
$
55.6

 
$
140.3

 
$
157.5

 
 
 
 
 
 
 
 
Basic earnings per common share
$
1.37

 
$
1.49

 
$
3.96

 
$
4.21

Weighted average common shares outstanding
35.3

 
37.2

 
35.4

 
37.4

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
1.34

 
$
1.47

 
$
3.88

 
$
4.13

Weighted average diluted common shares outstanding
36.1

 
37.8

 
36.2

 
38.1

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


TELEDYNE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 2015 AND SEPTEMBER 28, 2014
(Unaudited - Amounts in millions)
 
Third Quarter
 
Nine Months
 
2015
 
2014
 
2015
 
2014
Net income
$
48.3

 
$
54.9

 
$
140.0

 
$
156.7

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign exchange translation adjustment
(33.9
)
 
(35.8
)
 
(62.3
)
 
(28.7
)
Hedge activity and interest rate swap, net of tax
(1.4
)
 
(1.9
)
 
(1.9
)
 
(0.4
)
Pension and postretirement benefit adjustments, net of tax
4.8

 
3.1

 
13.7

 
8.0

Other comprehensive loss
(30.5
)
 
(34.6
)
 
(50.5
)
 
(21.1
)
Comprehensive income
17.8

 
20.3

 
89.5

 
135.6

Noncontrolling interest

 
0.7

 
0.3

 
0.8

Comprehensive income attributable to Teledyne
$
17.8

 
$
21.0

 
$
89.8

 
$
136.4

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


TELEDYNE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - Amounts in millions, except share amounts)
 
September 27, 2015
 
December 28, 2014
Assets
 
 
 
Current Assets
 
 
 
Cash
$
71.5

 
$
141.4

Accounts receivable, net
382.0

 
400.7

Inventories, net
331.5

 
311.8

Deferred income taxes, net
47.8

 
42.8

Prepaid expenses and other current assets
33.7

 
45.0

Total current assets
866.5

 
941.7

Property, plant and equipment, at cost, net of accumulated depreciation and amortization of $448.4 at September 27, 2015 and $417.5 at December 28, 2014
321.5

 
336.5

Goodwill
1,149.5

 
1,150.6

Acquired intangibles, net
253.4

 
277.6

Prepaid pension assets
108.2

 
86.3

Other assets, net
71.9

 
69.5

Total Assets
$
2,771.0

 
$
2,862.2

Liabilities and Stockholders’ Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
151.7

 
$
162.5

Accrued liabilities
245.4

 
290.3

Current portion of long-term debt and capital leases
14.3

 
86.2

Total current liabilities
411.4

 
539.0

Long-term debt and capital leases
698.4

 
618.9

Other long-term liabilities
240.4

 
235.8

Total Liabilities
1,350.2

 
1,393.7

Commitments and contingencies

 

Stockholders’ Equity

 

Preferred stock, $0.01 par value; outstanding shares - none

 

Common stock, $0.01 par value; authorized 125 million shares; issued shares: 37,697,865 at September 27, 2015 and 37,697,865 at December 28, 2014; outstanding shares: 35,438,456 at September 27, 2015 and 36,655,584 at December 28, 2014
0.4

 
0.4

Additional paid-in capital
346.6

 
326.5

Retained earnings
1,666.0

 
1,525.7

Treasury stock, 2,259,409 at September 27, 2015 and 1,042,281 at December 28, 2014
(218.5
)
 
(102.1
)
Accumulated other comprehensive loss
(373.7
)
 
(323.2
)
Total Teledyne Stockholders’ Equity
1,420.8

 
1,427.3

Noncontrolling interest

 
41.2

Total Stockholders’ Equity
1,420.8

 
1,468.5

Total Liabilities and Stockholders’ Equity
$
2,771.0

 
$
2,862.2

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


TELEDYNE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 27, 2015 AND SEPTEMBER 28, 2014
(Unaudited - Amounts in millions)
 
Nine Months
 
2015
 
2014
Operating Activities
 
 
 
Net income
$
140.0

 
$
156.7

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
67.9

 
70.1

Deferred income taxes
(2.8
)
 
(3.3
)
Stock option compensation expense
9.7

 
10.1

Excess income tax benefits from stock options exercised
(3.2
)
 
(4.2
)
Changes in operating assets and liabilities, excluding the effect of businesses acquired:
 
 
 
Accounts receivable
14.8

 
1.0

Inventories
(26.4
)
 
(17.3
)
Prepaid expenses and other assets
(1.0
)
 
(0.6
)
Accounts payable
(10.4
)
 
(0.4
)
Accrued liabilities
(38.8
)
 
(5.0
)
Income taxes payable, net
6.4

 
11.0

Long-term assets
5.2

 
(5.7
)
Other long-term liabilities
(1.8
)
 
1.0

Pension benefits
(8.5
)
 
(11.5
)
Postretirement benefits
(0.5
)
 
(0.2
)
     Other, net
(1.4
)
 
0.6

Net cash provided by operating activities
149.2

 
202.3

Investing Activities
 
 
 
Purchases of property, plant and equipment
(31.6
)
 
(29.7
)
Purchase of businesses and other investments, net of cash acquired
(63.7
)
 
(8.1
)
Proceeds from the disposal of fixed assets
3.4

 
0.2

Net cash used by investing activities
(91.9
)
 
(37.6
)
Financing Activities
 
 
 
Net proceeds on credit facility
100.0

 
26.3

Proceeds on other debt
4.7

 

Payments on other debt
(97.1
)
 

Proceeds from exercise of stock options
13.5

 
14.2

Purchase of treasury stock
(142.0
)
 
(146.6
)
Excess income tax benefits from stock options exercised
3.2

 
4.2

Other, net
(0.5
)
 
(0.3
)
Net cash used by financing activities
(118.2
)
 
(102.2
)
Effect of exchange rate changes on cash
(9.0
)
 
(2.7
)
Increase (decrease) in cash
(69.9
)
 
59.8

Cash—beginning of period
141.4

 
66.0

Cash—end of period
$
71.5

 
$
125.8

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


TELEDYNE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 27, 2015

Note 1. General
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by Teledyne Technologies Incorporated (“Teledyne” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in notes to consolidated financial statements have been condensed or omitted pursuant to such rules and regulations, but resultant disclosures are in accordance with accounting principles generally accepted in the United States as they apply to interim reporting. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto in Teledyne’s Annual Report on Form 10-K for the fiscal year ended December 28, 2014 (“2014 Form 10-K”).
In the opinion of Teledyne’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly, in all material respects, Teledyne’s consolidated financial position as of September 27, 2015 and the consolidated results of operations and consolidated comprehensive income for the three and nine months then ended and consolidated cash flows for the nine months then ended. The results of operations and cash flows for the period ended September 27, 2015 are not necessarily indicative of the results of operations or cash flows to be expected for any subsequent quarter or the full fiscal year. Certain prior year amounts have been reclassified to conform to the current period presentation.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. In July 2015, the FASB deferred the effective date by one year, but will allow early adoption as of the original adoption date. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently in the process of determining its implementation approach and assessing the impact on the consolidated financial statements and footnote disclosures.



6


Note 2. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (AOCI”) by component, net of tax, for the third quarter and nine months ended September 27, 2015 and September 28, 2014 are as follows (in millions):
 
Foreign Currency Translation
 
Cash Flow Hedges and Other
 
Pension and Postretirement Benefits
 
Total
Balance as of June 28, 2015
$
(119.0
)
 
$
(5.8
)
 
$
(218.4
)
 
$
(343.2
)
   Other comprehensive loss before reclassifications
(33.9
)
 
(3.2
)
 

 
(37.1
)
   Amounts reclassified from AOCI

 
1.8

 
4.8

 
6.6

Net other comprehensive income (loss)
(33.9
)
 
(1.4
)
 
4.8

 
(30.5
)
Balance as of September 27, 2015
$
(152.9
)
 
$
(7.2
)
 
$
(213.6
)
 
$
(373.7
)
 
 
 
 
 
 
 
 
 
Foreign Currency Translation
 
Cash Flow Hedges and Other
 
Pension and Postretirement Benefits
 
Total
Balance as of June 29, 2014
$
(25.3
)
 
$
(1.8
)
 
$
(124.9
)
 
$
(152.0
)
   Other comprehensive loss before reclassifications
(35.8
)
 
(2.4
)
 

 
(38.2
)
   Amounts reclassified from AOCI

 
0.5

 
3.1

 
3.6

Net other comprehensive income (loss)
(35.8
)
 
(1.9
)
 
3.1

 
(34.6
)
Balance as of September 28, 2014
$
(61.1
)
 
$
(3.7
)
 
$
(121.8
)
 
$
(186.6
)

7


 
Foreign Currency Translation
 
Cash Flow Hedges and Other
 
Pension and Postretirement Benefits
 
Total
Balance as of December 28, 2014
$
(90.6
)
 
$
(5.3
)
 
$
(227.3
)
 
$
(323.2
)
   Other comprehensive loss before reclassifications
(62.3
)
 
(6.1
)
 

 
(68.4
)
   Amounts reclassified from AOCI

 
4.2

 
13.7

 
17.9

Net other comprehensive income (loss)
(62.3
)
 
(1.9
)
 
13.7

 
(50.5
)
Balance as of September 27, 2015
$
(152.9
)
 
$
(7.2
)
 
$
(213.6
)
 
$
(373.7
)
 
 
 
 
 
 
 
 
 
Foreign Currency Translation
 
Cash Flow Hedges and Other
 
Pension and Postretirement Benefits
 
Total
Balance as of December 29, 2013
$
(32.4
)
 
$
(3.3
)
 
$
(129.8
)
 
$
(165.5
)
   Other comprehensive loss before reclassifications
(28.7
)
 
(2.2
)
 

 
(30.9
)
   Amounts reclassified from AOCI

 
1.8

 
8.0

 
9.8

Net other comprehensive income (loss)
(28.7
)
 
(0.4
)
 
8.0

 
(21.1
)
Balance as of September 28, 2014
$
(61.1
)
 
$
(3.7
)
 
$
(121.8
)
 
$
(186.6
)
The reclassifications out of AOCI for the third quarter and nine months ended September 27, 2015 and September 28, 2014 are as follows (in millions):
 
Amount Reclassified from AOCI Three Months Ended
 
Amount Reclassified from AOCI Three Months Ended
Statement of Income
 
September 27, 2015
 
September 28, 2014
Presentation
Loss on cash flow hedges:
 
 
 
 
Loss recognized in income on derivatives
$
2.4

 
$
0.6

Other expense
Income tax benefit
(0.6
)
 
(0.1
)
Income tax benefit
Total
$
1.8

 
$
0.5

 
 
 
 
 
 
Amortization of defined benefit pension and postretirement plan items:
 
 
 
 
Amortization of prior service cost
$
(1.5
)
 
$
(1.2
)
Pension expense
Amortization of net actuarial loss
8.9

 
6.1

Pension expense
Total before tax
7.4

 
4.9

 
Income tax benefit
(2.6
)
 
(1.8
)
Income tax benefit
Total
$
4.8

 
$
3.1

 

8


 
Amount Reclassified from AOCI Nine Months Ended
 
Amount Reclassified from AOCI Nine Months Ended
Statement of Income
 
September 27, 2015
 
September 28, 2014
Presentation
Loss on cash flow hedges:
 
 
 
 
Loss recognized in income on derivatives
$
5.6

 
$
2.4

Other expense
Income tax benefit
(1.4
)
 
(0.6
)
Income tax benefit
Total
$
4.2

 
$
1.8

 
 
 
 
 
 
Amortization of defined benefit pension and postretirement plan items:
 
 
 
 
Amortization of prior service cost
$
(4.5
)
 
$
(3.6
)
Pension expense
Amortization of net actuarial loss
26.0

 
16.4

Pension expense
Total before tax
21.5

 
12.8

 
Income tax benefit
(7.8
)
 
(4.8
)
Income tax benefit
Total
$
13.7

 
$
8.0

 

Note 3. Business Combinations and Investments, Goodwill and Acquired Intangible Assets
On June 5, 2015, Teledyne DALSA BV, a Netherlands-based subsidiary, acquired Industrial Control Machines SA (“ICM”) for an initial payment of $21.4 million, net of cash acquired. An additional $2.6 million of the purchase price is subject to an indemnification holdback, all or a portion of which is payable in December 2016. Based in Liège, Belgium, ICM is a leading supplier of portable X-ray generators for non-destructive testing applications, as well as complete X-ray imaging systems for on-site security screening and is part of the Digital Imaging segment.
On April 29, 2015, Teledyne DALSA, Inc. acquired the remaining 49% noncontrolling interest in the parent company of Optech Incorporated (“Optech”) for $22.0 million in cash. As a result of the purchase, the difference between the cash paid and the balance of noncontrolling interest was recorded to additional paid in capital. The balance of the noncontrolling interest of $41.2 million at December 28, 2014 decreased by $0.3 million for the net loss and $1.3 million in translation adjustments prior to the purchase which eliminated the remaining balance.  The balance of the noncontrolling interest of $47.0 million at December 29, 2013 decreased by $0.8 million for the net loss and $1.9 million in translation adjustments, resulting in a balance of $44.3 million at September 28, 2014. Teledyne no longer has any noncontrolling interests at September 27, 2015.  Optech is part of the Digital Imaging segment.
On February 2, 2015, Teledyne acquired Bowtech Products Limited (“Bowtech”) through a U.K.-based subsidiary for $18.8 million in cash, net of cash acquired and including an estimated working capital adjustment. Based in Aberdeen, Scotland, Bowtech designs and manufactures harsh underwater environment vision systems and is part of the Instrumentation segment.
Also in 2015, Teledyne made an additional investment in Ocean Aero, Inc. (“Ocean Aero”) and now owns a 36.9% interest in Ocean Aero which is accounted for under the equity method.
During 2014, Teledyne made four acquisitions, the largest of which was Bolt Technology Corporation (“Bolt”) in November 2014. All of the 2014 acquisitions are part of the Instrumentation segment.
Teledyne funded the purchases from borrowings under its credit facility and cash on hand. The ICM, Bowtech and Optech acquisitions were funded with cash held by foreign subsidiaries. The results of the acquisitions have been included in Teledyne’s results since the dates of the respective acquisition.
For a further description of the Company’s acquisition activity for the fiscal year ended December 28, 2014, please refer to Note 3 of our 2014 Form 10-K.
Teledyne’s goodwill was $1,149.5 million at September 27, 2015 and $1,150.6 million at December 28, 2014. The decrease in the balance of goodwill in 2015 resulted from the impact of exchange rate changes, mostly offset by recent acquisitions. Goodwill resulting from the Bowtech and ICM acquisitions will not be deductible for tax purposes. Teledyne’s net acquired intangible assets were $253.4 million at September 27, 2015 and $277.6 million at December 28, 2014. The decrease in the balance of acquired intangible assets in 2015 resulted from amortization and the impact of exchange rate changes, partially offset by acquired intangibles for recent acquisitions. The Company is still in the process of specifically identifying the amount to be assigned to certain assets, including acquired intangible assets, and liabilities and the related impact on taxes and goodwill

9


for the ICM, Bowtech and Bolt acquisitions. The Company made preliminary estimates as of September 27, 2015 since there was insufficient time between the acquisition dates and the end of the period to finalize the analysis.
Note 4. Derivative Instruments
Teledyne transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company’s primary foreign currency risk management objective is to protect the United States dollar value of future cash flows and minimize the volatility of reported earnings. The Company utilizes foreign currency forward contracts to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in Canadian dollars. These contracts are designated and qualify as cash flow hedges.
Cash Flow Hedging Activities
The effectiveness of the cash flow hedge contracts, excluding time value, is assessed prospectively and retrospectively on a monthly basis using regression analysis, as well as using other timing and probability criteria. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedges and must be highly effective in offsetting changes to future cash flows on hedged transactions. The effective portion of the cash flow hedge contracts’ gains or losses resulting from changes in the fair value of these hedges is initially reported, net of tax, as a component of AOCI in stockholders’ equity until the underlying hedged item is reflected in our consolidated statements of income, at which time the effective amount in AOCI is reclassified to cost of sales in our consolidated statements of income. Net deferred losses recorded in AOCI, net of tax, for contracts that will mature in the next twelve months total $4.9 million. These losses are expected to be offset by anticipated gains in the value of the forecasted underlying hedged item.
In the event that the gains or losses in AOCI are deemed to be ineffective, the ineffective portion of gains or losses resulting from changes in fair value, if any, is reclassified to other income and expense. In the event that the underlying forecasted transactions do not occur, or it becomes remote that they will occur, within the defined hedge period, the gains or losses on the related cash flow hedges will be reclassified from AOCI to other income and expense. During the current reporting period, all forecasted transactions occurred and, therefore, there were no such gains or losses reclassified to other income and expense. As of September 27, 2015, Teledyne had foreign currency forward contracts designated as cash flow hedges to buy Canadian dollars and to sell U.S. dollars totaling $99.0 million. These foreign currency forward contracts have maturities ranging from December 2015 to February 2018.
Non-Designated Hedging Activities
In addition, the Company utilizes foreign currency forward contracts to mitigate foreign exchange rate risk associated with foreign-currency-denominated monetary assets and liabilities, including intercompany receivables and payables. As of September 27, 2015, Teledyne had foreign currency contracts of this type in the following pairs (in millions):
Contracts to Buy
 
Contracts to Sell
Currency
Amount
 
Currency
Amount
Canadian Dollars
C$
50.0

 
U.S. Dollars
US$
38.0

Euros
8.1

 
U.S. Dollars
US$
9.1

Great Britain Pounds
£
0.9

 
Australian Dollars
A$
1.9

Great Britain Pounds
£
15.5

 
U.S. Dollars
US$
23.9

Singapore Dollars
S$
1.7

 
U.S. Dollars
US$
1.2

U.S. Dollars
US$
0.8

 
Japanese Yen
¥
100.0

The gains and losses on these derivatives which are not designated as hedging instruments are intended to, at a minimum, partially offset the transaction gains and losses recognized in earnings. All derivatives are recorded on the balance sheet at fair value. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting. Teledyne does not use foreign currency forward contracts for speculative or trading purposes.


10


The effect of derivative instruments designated as cash flow hedges in our condensed consolidated financial statements for the third quarter and nine months ended September 27, 2015 and September 28, 2014 was as follows (in millions):
 
Third Quarter
 
Nine Months
 
2015
 
2014
 
2015
 
2014
Net loss recognized in AOCI (a)
$
(4.2
)
 
$
(3.1
)
 
$
(8.2
)
 
$
(2.9
)
Net loss reclassified from AOCI into cost of sales (a)
$
(2.4
)
 
$
(0.6
)
 
$
(5.6
)
 
$
(2.4
)
Net foreign exchange (loss) gain recognized in other income and expense (b)
$
(0.1
)
 
$
0.2

 
$
0.2

 
$
0.5

a)    Effective portion, pre-tax
b)     Amount excluded from effectiveness testing
The effect of derivative instruments not designated as cash flow hedges recognized in other income and expense for the third quarter and nine months ended September 27, 2015 was expense of $4.6 million and $7.1 million, respectively. The effect of derivative instruments not designated as cash flow hedges in other income and expense for the third quarter and nine months ended September 28, 2014 was $3.1 million and $2.0 million of gain, respectively.
Fair Value of Derivative Financial Instruments
The fair values of the Company’s derivative financial instruments are presented below. All fair values for these derivatives were measured using Level 2 information as defined by the accounting standard hierarchy (in millions):
Asset/(Liability) Derivatives
Balance sheet location
 
September 27, 2015
 
December 28, 2014
Derivatives designated as hedging instruments:
 
 
 
 
 
Cash flow forward contracts
Accrued liabilities
 
$
(6.7
)
 
$
(3.9
)
Total derivatives designated as hedging instruments
 
 
(6.7
)
 
(3.9
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
Non-designated forward contracts
Other current assets
 

 
0.3

Non-designated forward contracts
Accrued liabilities
 
(2.5
)
 
(4.8
)
Total derivatives not designated as hedging instruments
 
 
(2.5
)
 
(4.5
)
Total asset (liability) derivatives
 
 
$
(9.2
)
 
$
(8.4
)
Note 5. Earnings Per Share
Basic and diluted earnings per share were computed based on net earnings. The weighted average number of common shares outstanding during the period was used in the calculation of basic earnings per share. This number of shares was increased by contingent shares that could be issued under various compensation plans as well as by the dilutive effect of stock options based on the treasury stock method in the calculation of diluted earnings per share.
In October 2011, the Company’s Board of Directors authorized a stock repurchase program to repurchase up to 2,500,000 shares of the Company’s common stock. In September 2014, the Company entered into a $101.6 million accelerated share repurchase (“ASR”) agreement with a financial institution (“ASR Counterparty”) in a privately negotiated transaction for 1,030,000 shares of the Company’s common stock at an initial price of $98.62 per share.  Pursuant to the ASR agreement, in September 2014, the Company advanced $101.6 million to the ASR counterparty and received 927,000 shares of common stock, which used $91.4 million of the $101.6 million advanced, representing 90% of the estimated shares to be repurchased under the ASR agreement.  In May 2015, the ASR agreement was settled and Teledyne received 78,522 shares of common stock on June 3, 2015.
On January 27, 2015, the Company’s Board of Directors authorized an additional stock repurchase program authorizing the Company to repurchase up to an additional 2,500,000 shares of its common stock. On February 2, 2015, the Company entered into a $142.0 million ASR agreement with a financial institution in a privately negotiated transaction for 1,500,000 shares of the Company's common stock at an initial price of $94.68 per share. Pursuant to the ASR agreement, in February 2015, the Company advanced $142.0 million to the ASR counterparty and received 1,425,000 shares of common stock, which used $134.9 million of the $142.0 million advanced, representing 95% of the estimated shares to be repurchased under the ASR agreement.
The up-front payments were accounted for as a reduction to stockholders’ equity in the Company’s Condensed Consolidated Balance Sheet in the period the payments were made. The total number of shares of common stock repurchased under each ASR is based on the average of the daily volume-weighted average prices of the common stock during the term of the

11


respective ASR, less a discount. At settlement, the ASR Counterparty may be required to deliver additional shares of the Company’s common stock to the Company or, under certain circumstances, the Company may be required to deliver shares of its common stock or make a cash payment to the ASR Counterparty.  Final settlement of the September 2014 ASR agreement occurred in May 2015 as noted above.  Final settlement of the February 2015 ASR agreement is expected to occur in December 2015, although the settlement may be accelerated at the ASR Counterparty’s option. The Company has treated the ASRs as a treasury share repurchase of common stock in the period the shares were delivered for purposes of calculating earnings per share and as a forward contract indexed to its own common stock.  The ASRs meet all of the applicable criteria for equity classification, and, therefore, is not accounted for as a derivative instrument.
The February 2015 ASR was funded by cash on hand and floating rate borrowings of $120.0 million under the $750 million credit facility. The 2011 and 2015 stock repurchase authorizations are expected to remain open continuously, and the number of shares repurchased will depend on a variety of factors, such as share price, levels of cash and borrowing capacity available, alternative investment opportunities available immediately or longer-term, and other regulatory, market or economic conditions. Future repurchases are expected to be funded with cash on hand and borrowings under the company’s credit facility. Teledyne has 2,259,409 shares of treasury stock at September 27, 2015.
For the third quarter and first nine months of 2015 and 2014, no stock options were excluded in the computation of diluted earnings per share.
The following table sets forth the computations of basic and diluted earnings per share (amounts in millions, except per share data):
 
Third Quarter
 
Nine Months
 
2015
 
2014
 
2015
 
2014
Net income attributable to Teledyne
$
48.3

 
$
55.6

 
$
140.3

 
$
157.5

Basic earnings per share:
 
 
 
 
 
 
 
Weighted average common shares outstanding
35.3

 
37.2

 
35.4

 
37.4

 
 
 
 
 
 
 
 
Basic earnings per common share
$
1.37

 
$
1.49

 
$
3.96

 
$
4.21

Diluted earnings per share:
 
 
 
 
 
 
 
Weighted average common shares outstanding
35.3

 
37.2

 
35.4

 
37.4

Effect of dilutive securities
0.8

 
0.6

 
0.8

 
0.7

Weighted average diluted common shares outstanding
36.1

 
37.8

 
36.2

 
38.1

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
1.34

 
$
1.47

 
$
3.88

 
$
4.13

Note 6. Stock-Based Compensation Plans
Teledyne has long-term incentive plans pursuant to which it has granted non-qualified stock options, restricted stock and performance shares to certain employees. The Company also has non-employee director stock compensation plans, pursuant to which non-qualified stock options and common stock, and beginning in 2015 restricted stock units, have been issued to its directors.
Stock Incentive Plan
The following disclosures are based on stock options granted to Teledyne’s employees and directors. The Company recorded a total of $2.6 million and $9.7 million in stock option compensation expense for the third quarter of 2015 and the first nine months of 2015, respectively. The Company recorded a total of $3.9 million and $10.1 million in stock option compensation expense for the third quarter and the first nine months of 2014, respectively. Employee stock option grants are charged to expense evenly over the three year vesting period. Director stock option grants are charged to expense evenly over the one-year vesting period. For 2015, the Company currently expects approximately $12.2 million in stock option compensation expense based on stock options already granted. This amount is based on stock options currently outstanding and can be impacted by employee retirements and terminations. The Company issues shares of common stock upon the exercise of stock options. No stock options are expected to be granted in 2015.


12


Stock option transactions for Teledyne’s employee stock option plans for the third quarter and nine months ended September 27, 2015 are summarized as follows:
 
2015
 
Third Quarter
 
Nine Months
 
Shares
Weighted
Average
Exercise
Price
 
Shares
Weighted
Average
Exercise
Price
Beginning balance
2,291,292

$
64.31

 
2,499,708

$
63.85

Exercised
(45,528
)
$
53.27

 
(217,458
)
$
54.06

Canceled
(10,185
)
$
87.23

 
(46,671
)
$
81.67

Ending balance
2,235,579

$
64.43

 
2,235,579

$
64.43

Options exercisable at end of period
1,732,496

$
57.50

 
1,732,496

$
57.50

Stock option transactions for Teledyne’s non-employee director stock option plans for the third quarter and nine months ended September 27, 2015 are summarized as follows:
 
2015
 
Third Quarter
 
Nine Months
 
Shares
Weighted
Average
Exercise
Price
 
Shares
Weighted
Average
Exercise
Price
Beginning balance
316,895

$
52.62

 
351,169

$
51.76

Exercised
(8,129
)
$
33.04

 
(42,403
)
$
41.78

Ending balance
308,766
$
53.13

 
308,766
$
53.13

Options exercisable at end of period
308,296

$
53.12

 
308,296

$
53.12

Performance Share Plan and Restricted Stock Award Program
For the first of three annual installments of the 2012 to 2014 Performance Share Plan, 1,944 shares of Teledyne common stock were issued in the first quarter of 2015. The remaining 8,309 shares are expected to be issued in approximately two equal annual installments. In the first quarter of 2015, the restriction was removed for 29,642 shares of Teledyne common stock related to the 2012 to 2014 Restricted Stock Award Program. In addition, in the first nine months of 2015, 13,502 shares were forfeited. In the first nine months of 2015, the Company granted 34,054 shares of restricted stock securities to certain employees at a weighted average fair value of $92.74 per share for the 2015 to 2017 program. Also in the first nine months of 2015, the Company issued 9,534 shares of restricted stock units to non-employee directors at a weighted average fair value of $108.95 per share. The restricted stock units issued to non-employee directors vest one year from the grant date.
Note 7. Inventories
Inventories are stated at the lower of cost or market, less progress payments. Inventories are valued under the FIFO method, LIFO method and average cost method. Inventories at cost determined on the average cost or the FIFO methods were $257.4 million at September 27, 2015 and $241.8 million at December 28, 2014. The remainder of the inventories using the LIFO method were $104.0 million at September 27, 2015 and $98.1 million at December 28, 2014. Interim LIFO calculations are based on the Company’s estimates of expected year-end inventory levels and costs since an actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Because these are subject to many factors beyond the Company’s control, interim results are subject to the final year-end LIFO inventory valuation. Inventories consist of the following (in millions):
Balance at
September 27, 2015
 
December 28, 2014
Raw materials and supplies
$
150.6

 
$
143.1

Work in process
167.9

 
153.5

Finished goods
42.9

 
43.3

 
361.4

 
339.9

Progress payments
(13.5
)
 
(11.6
)
LIFO reserve
(16.4
)
 
(16.5
)
Total inventories, net
$
331.5

 
$
311.8


13


Note 8. Supplemental Balance Sheet Information
The following table presents the balance of selected components of Teledyne’s balance sheet (in millions):
Balance sheet items
Balance sheet classification
 
September 27, 2015
 
December 28, 2014
Cash (a)
Cash
 
$
71.5

 
$
141.4

Allowance for doubtful accounts
Accounts receivable
 
$
6.9

 
$
7.8

Income tax receivable
Prepaid expenses and other current assets
 
$
2.8

 
$
13.6

Deferred compensation assets
Other assets, net
 
$
46.9

 
$
49.6

Salaries and wages
Accrued liabilities
 
$
88.5

 
$
108.7

Customer deposits and credits
Accrued liabilities
 
$
44.5

 
$
47.9

Pension obligation - foreign plans
Other long-term liabilities
 
$
13.7

 
$
14.2

Postretirement benefits
Other long-term liabilities
 
$
11.0

 
$
11.6

Deferred compensation liabilities
Other long-term liabilities
 
$
43.8

 
$
45.8

Deferred tax liabilities
Other long-term liabilities
 
$
89.4

 
$
77.3

(a) The decrease in cash primarily reflects the use of cash by foreign subsidiaries to fund the ICM, Bowtech and Optech acquisitions.
Some of the Company’s products are subject to specified warranties and the Company provides for the estimated cost of product warranties. The adequacy of the pre-existing warranty liabilities is assessed regularly and the reserve is adjusted as necessary based on a review of historic warranty experience with respect to the applicable business or products, as well as the length and actual terms of the warranties, which are typically one year. The product warranty reserve is included in current and long term accrued liabilities on the balance sheet. Changes in the Company’s product warranty reserve during the first nine months of 2015 and 2014 are as follows (in millions):
 
Nine Months
 
2015
 
2014
Balance at beginning of year
$
18.5

 
$
17.3

Accruals for product warranties charged to expense
4.6

 
2.7

Cost of product warranty claims
(5.5
)
 
(4.1
)
Acquisitions
0.2

 
0.1

Balance at end of period
$
17.8

 
$
16.0

Note 9. Income Taxes
The income tax provision is calculated using an estimated annual effective tax rate, based upon expected annual income, permanent items, statutory rates and planned tax strategies in the various jurisdictions in which the Company operates. However, losses in certain jurisdictions and discrete items, such as the resolution of uncertain tax positions, are treated separately.
The Company’s effective income tax rate for the third quarter and first nine months of 2015 was 21.4% and 26.3% respectively. The Company’s effective income tax rate for the third quarter and first nine months of 2014 was 19.2% and 24.6%, respectively. The first nine months of 2015 included $8.5 million in net discrete income tax benefits, compared with net discrete income tax benefits of $8.2 million for the first nine months of 2014. The third quarter of 2015 included net discrete income tax benefits of $7.4 million compared with net discrete income tax benefits of $6.1 million for the third quarter of 2014. The net discrete income tax benefits in 2015, included the remeasurement of uncertain tax positions due to expiration of statute of limitations, favorable resolution of tax matters, and certain deferred tax adjustments. The net discrete income tax benefits in 2014, included the remeasurement of uncertain tax positions, primarily due to an expiration of statute of limitations and a favorable resolution of a tax matter. Excluding net discrete income tax items in both periods, the effective tax rates would have been 33.5% for the third quarter of 2015 and 30.8% for the first nine months of 2015 and 28.1% for the third quarter of 2014 and 28.5% for the first nine months of 2014. During the next twelve months, it is reasonably possible that expirations of the statutes of limitations could reduce unrecognized tax benefits by $3.6 million. Of the $3.6 million, $3.1 million would affect the effective tax rate.



14





Note 10. Long-Term Debt and Capital Leases
Long-term debt consisted of the following (in millions):
Balance at
September 27, 2015
 
December 28, 2014
4.04% Senior Notes due September 2015
$

 
$
75.0

4.74% Senior Notes due September 2017
100.0

 
100.0

2.61% Senior Notes due December 2019
30.0

 
30.0

5.30% Senior Notes due September 2020
75.0

 
75.0

3.09% Senior Notes due December 2021
95.0

 
95.0

Term loans due through March 2019, weighted average rate of 1.45% at September 27, 2015 and 1.28% at December 28, 2014
195.0

 
200.0

Other debt at various rates due through 2031
3.5

 
14.7

$750.0 million revolving credit facility due March 2018, weighted average rate of 1.35% at September 27, 2015 and 1.24% at December 28, 2014
205.0

 
105.0

Total debt
703.5

 
694.7

Less: current portion of long-term debt
(13.0
)
 
(84.9
)
Total long-term debt
$
690.5

 
$
609.8

Available borrowing capacity under the $750.0 million credit facility, which is reduced by borrowings and certain outstanding letters of credit, was $531.1 million at September 27, 2015. The credit agreement requires the Company to comply with various financial and operating covenants and at September 27, 2015, the Company was in compliance with these covenants. In August 2015, the Company entered into a note purchase agreement providing for a private placement of $125.0 million in aggregate principal amount of senior unsecured notes expected to be issued on November 5, 2015. The notes will consist of $25.0 million of 2.81% senior unsecured notes due November 5, 2020, and $100.0 million of 3.28% senior unsecured notes due November 5, 2022.
Teledyne estimates the fair value of its long-term debt based on debt of similar type, rating and maturity and at comparable interest rates. The Company’s long-term debt is considered a level 2 fair value hierarchy and is valued based on observable market data. The estimated fair value of Teledyne’s long-term debt at September 27, 2015 and December 28, 2014, approximated the carrying value.
At September 27, 2015, the Company had $9.2 million in capital leases, of which $1.3 million is current. At December 28, 2014, the Company had $10.4 million in capital leases, of which $1.3 million was current. At September 27, 2015, Teledyne had $16.2 million in outstanding letters of credit.
Note 11. Lawsuits, Claims, Commitments, Contingencies and Related Matters
For a further description of the Company’s commitments and contingencies, reference is made to Note 15 of the Company’s financial statements as of and for the fiscal year ended December 28, 2014, included in our 2014 Form 10-K.
At September 27, 2015, the Company’s reserves for environmental remediation obligations totaled $9.1 million, of which $5.0 million is included in current accrued liabilities. The Company periodically evaluates whether it may be able to recover a portion of future costs for environmental liabilities from its insurance carriers and from third parties. The timing of expenditures depends on a number of factors that vary by site, including the nature and extent of contamination, the number of potentially responsible parties, the timing of regulatory approvals, the complexity of the investigation and remediation, and the standards for remediation. The Company expects that it will expend present accruals over many years and will complete remediation of all sites with which it has been identified in up to 30 years.
A number of other lawsuits, claims and proceedings have been or may be asserted against the Company, including those pertaining to product liability, acquisitions, patent infringement, commercial contracts, environmental, employment and employee benefits matters. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to the Company, management does not believe that the disposition of any such pending matters is likely to have a material adverse effect on the Company’s financial statements.

15


Note 12. Pension Plans and Postretirement Benefits
Teledyne’s pension expense was $1.0 million and $1.9 million for the third quarter and first nine months of 2015, compared with pension income of $0.3 million and $1.0 million for the third quarter and first nine months of 2014, respectively. In the first quarter of 2015, Teledyne froze its non-qualified pension plan for top executives which resulted in a one-time gain of $1.2 million in the first quarter of 2015. For the domestic pension plan, the discount rate decreased to 4.5 percent in 2015 compared with a 5.4 percent discount rate used in 2014. Pension expense allocated to contracts pursuant to U.S. Government Cost Accounting Standards (“CAS”) was $3.4 million and $10.3 million for both the third quarters and first nine months of 2015 and 2014, respectively. Pension expense determined under CAS can generally be recovered through the pricing of products and services sold to the U.S. Government. Teledyne did not make any cash pension contributions to its domestic pension plan in 2015 or in 2014. No cash pension contributions are planned for 2015 for the domestic pension plan.
The Company sponsors several postretirement defined benefit plans that provide health care and life insurance benefits for certain eligible retirees. The following tables set forth the components of net income/expense for Teledyne’s pension plans and postretirement benefit plans for the third quarter and first nine months of 2015 and 2014 (in millions):
 
Third Quarter
 
Nine Months
Pension Benefits
2015
 
2014
 
2015
 
2014
Service cost — benefits earned during the period
$
3.3

 
$
3.2

 
$
10.0

 
$
9.4

Interest cost on benefit obligation
9.9

 
10.6

 
29.6

 
31.9

Expected return on plan assets
(19.2
)
 
(19.1
)
 
(57.5
)
 
(57.3
)
Amortization of prior service cost
(1.5
)
 
(1.2
)
 
(4.5
)
 
(3.5
)
Amortization of net actuarial loss
8.5

 
6.2

 
25.5

 
18.5

Pension plan curtailment

 

 
(1.2
)
 

Net expense (income)
$
1.0

 
$
(0.3
)
 
$
1.9

 
$
(1.0
)
 
Third Quarter
 
Nine Months
Postretirement Benefits
2015
 
2014
 
2015
 
2014
Interest cost on benefit obligation
$
0.1

 
$
0.2

 
$
0.4

 
$
0.5

Amortization of prior service cost

 
(0.1
)
 

 
(0.2
)
Amortization of net actuarial gain

 
(0.1
)
 
(0.1
)
 
(0.4
)
Net expense (income)
$
0.1

 
$

 
$
0.3

 
$
(0.1
)
Note 13. Segment Information
Teledyne is a leading provider of sophisticated instrumentation, digital imaging products and software, aerospace and defense electronics, and engineered systems. Our customers include government agencies, aerospace prime contractors, energy exploration and production companies, major industrial companies and airlines. The Company has four reportable segments: Instrumentation; Digital Imaging; Aerospace and Defense Electronics; and Engineered Systems.
Segment results include net sales and operating income by segment but excludes noncontrolling interest, equity income or loss, unusual non-recurring legal matter settlements, interest income and expense, gains and losses on the disposition of assets, sublease rental income and non-revenue licensing and royalty income, domestic and foreign income taxes and corporate office expenses. Corporate expense includes various administrative expenses relating to the corporate office and certain non-operating expenses not allocated to our segments.

16


The following table presents Teledyne’s segment disclosures.
 
Third Quarter
 
%
 
Nine Months
 
%
(Dollars in millions)
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Net sales(a):
 
 
 
 
 
 
 
 
 
 
 
Instrumentation
$
243.2

 
$
280.4

 
(13.3
)%
 
$
784.8

 
$
815.9

 
(3.8
)%
Digital Imaging
95.7

 
95.6

 
0.1
 %
 
276.9

 
301.2

 
(8.1
)%
Aerospace and Defense Electronics
151.3

 
151.8

 
(0.3
)%
 
439.5

 
457.3

 
(3.9
)%
Engineered Systems
65.2

 
73.3

 
(11.1
)%
 
196.9

 
197.3

 
(0.2
)%
Total net sales
$
555.4

 
$
601.1

 
(7.6
)%
 
$
1,698.1

 
$
1,771.7

 
(4.2
)%
Operating income:
 
 
 
 
 
 
 
 
 
 
 
Instrumentation
$
38.6

 
$
46.9

 
(17.7
)%
 
$
126.4

 
$
128.2

 
(1.4
)%
Digital Imaging
10.4

 
7.9

 
31.6
 %
 
28.5

 
29.3

 
(2.7
)%
Aerospace and Defense Electronics
23.5

 
21.6

 
8.8
 %
 
63.5

 
68.3

 
(7.0
)%
Engineered Systems
5.9

 
8.5

 
(30.6
)%
 
17.4

 
21.4

 
(18.7
)%
Corporate expense
(8.9
)
 
(10.6
)
 
(16.0
)%
 
(30.1
)
 
(32.6
)
 
(7.7
)%
Operating income
$
69.5

 
$
74.3

 
(6.5
)%
 
$
205.7

 
$
214.6

 
(4.1
)%
(a)
Net sales excludes inter-segment sales of $4.8 million and $14.7 million for the third quarter and nine months ended September 27, 2015, respectively, and $4.9 million and $14.8 million for the third quarter and nine months ended September 28, 2014, respectively.
Product Lines
The Instrumentation segment includes three product lines: Environmental Instrumentation, Marine Instrumentation and Test and Measurement Instrumentation. The Digital Imaging segment contains one product line as does the Aerospace and Defense Electronics segment. The Engineered Systems segment includes three product lines: Engineered Products and Services, Turbine Engines and Energy Systems.
The following tables provide a summary of the net sales by product line for the Instrumentation segment and the Engineered Systems segment (in millions):
 
Third Quarter
 
Nine Months
Instrumentation
2015
 
2014
 
2015
 
2014
Marine Instrumentation
$
136.5

 
$
167.4

 
$
457.8

 
$
478.1

Environmental Instrumentation
67.4

 
66.1

 
202.8

 
196.8

Test and Measurement Instrumentation
39.3

 
46.9

 
124.2

 
141.0

Total
$
243.2

 
$
280.4

 
$
784.8

 
$
815.9

 
 
 
 
 
 
 
 
 
Third Quarter
 
Nine Months
Engineered Systems
2015
 
2014
 
2015
 
2014
Engineered Products and Services
$
53.1

 
$
57.1

 
$
155.7

 
$
155.0

Turbine Engines
4.1

 
6.2

 
13.7

 
19.0

Energy Systems
8.0

 
10.0

 
27.5

 
23.3

Total
$
65.2

 
$
73.3

 
$
196.9

 
$
197.3






17


Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations
Teledyne Technologies Incorporated provides enabling technologies for industrial growth markets. We have evolved from a company that was primarily focused on aerospace and defense to one that serves multiple markets that require advanced technology and high reliability. These markets include deepwater oil and gas exploration and production, oceanographic research, air and water quality environmental monitoring, factory automation and medical imaging. Our products include monitoring instrumentation for marine and environmental applications, harsh environment interconnects, electronic test and measurement equipment, digital imaging sensors and cameras, aircraft information management systems, and defense electronic and satellite communication subsystems. We also supply engineered systems for defense, space, environmental and energy applications. We differentiate ourselves from many of our direct competitors by having a customer and company sponsored applied research center that augments our product development expertise.
Strategy/Overview
Our strategy continues to emphasize growth in our core markets of instrumentation, digital imaging, aerospace and defense electronics and engineered systems. Our core markets are characterized by high barriers to entry and include specialized products and services not likely to be commoditized. We intend to strengthen and expand our core businesses with targeted acquisitions and through product development. We aggressively pursue operational excellence to continually improve our margins and earnings. Operational excellence includes the rapid integration of the businesses we acquire. Using complementary technology across our businesses and internal research and development, we seek to create new products to grow our company and expand our addressable markets. We continue to evaluate our businesses to ensure that they are aligned with our strategy.
Our Recent Acquisitions
On June 5, 2015, Teledyne DALSA BV, a Netherlands-based subsidiary, acquired Industrial Control Machines SA (“ICM”) for an initial payment of $21.4 million, net of cash acquired. An additional $2.6 million of the purchase price is subject to an indemnification holdback, all or a portion of which is payable in December 2016. Based in Liège, Belgium, ICM is a leading supplier of portable X-ray generators for non-destructive testing applications, as well as complete X-ray imaging systems for on-site security screening and is part of the Digital Imaging segment.
On April 29, 2015, Teledyne DALSA, Inc. acquired the remaining 49% minority interest in the parent company of Optech Incorporated (“Optech”) for $22.0 million in cash. As a result of the purchase, the difference between the cash paid and the balance of noncontrolling interest was recorded to additional paid in capital. Optech is part of the Digital Imaging segment.
On February 2, 2015, Teledyne acquired Bowtech Products Limited (“Bowtech”) through a U.K.-based subsidiary for $18.8 million in cash, net of cash acquired and including an estimated working capital adjustment. Based in Aberdeen, Scotland, Bowtech designs and manufactures harsh underwater environment vision systems and is part of the Instrumentation segment.
Also in 2015, Teledyne made an additional investment in Ocean Aero, Inc. (“Ocean Aero”) and now owns a 36.9% interest in Ocean Aero which is accounted for under the equity method.
During 2014, Teledyne made four acquisitions, the largest of which was Bolt Technology Corporation (“Bolt”) in November 2014. All of the 2014 acquisitions are part of the Instrumentation segment.
Teledyne funded the purchases from borrowings under its credit facility and cash on hand. The ICM, Bowtech and Optech acquisitions were funded with cash held by foreign subsidiaries. The results of the acquisitions have been included in Teledyne’s results since the dates of the respective acquisition.
For a further description of the Company’s acquisition activity for the fiscal year ended December 28, 2014, please refer to Note 3 of our 2014 Annual Report on Form 10-K (“2014 Form 10-K”).

18


Results of Operations
  
Third Quarter
 
Nine Months
(in millions)
2015
 
2014
 
2015
 
2014
Net sales
$
555.4

 
$
601.1

 
$
1,698.1

 
$
1,771.7

Costs and expenses
 
 
 
 
 
 
 
Cost of sales
345.8

 
375.4

 
1,049.4

 
1,095.5

Selling, general and administrative expenses
140.1

 
151.4

 
443.0

 
461.6

Total costs and expenses
485.9

 
526.8

 
1,492.4

 
1,557.1

Operating income
69.5

 
74.3

 
205.7

 
214.6

Interest expense, net
(6.0
)
 
(4.6
)
 
(17.9
)
 
(13.9
)
Other income (expense), net
(2.1
)
 
(1.8
)
 
2.1

 
7.0

Income before income taxes
61.4

 
67.9

 
189.9

 
207.7

Provision for income taxes
13.1

 
13.0

 
49.9

 
51.0

Net income
48.3

 
54.9

 
140.0

 
156.7

Noncontrolling interest

 
0.7

 
0.3

 
0.8

Net income attributable to Teledyne
$
48.3

 
$
55.6

 
$
140.3

 
$
157.5


 
Third Quarter
 
%
 
Nine Months
 
%
(Dollars in millions)
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Net sales(a):
 
 
 
 
 
 
 
 
 
 
 
Instrumentation
$
243.2

 
$
280.4

 
(13.3
)%
 
$
784.8

 
$
815.9

 
(3.8
)%
Digital Imaging
95.7

 
95.6

 
0.1
 %
 
276.9

 
301.2

 
(8.1
)%
Aerospace and Defense Electronics
151.3

 
151.8

 
(0.3
)%
 
439.5

 
457.3

 
(3.9
)%
Engineered Systems
65.2

 
73.3

 
(11.1
)%
 
196.9

 
197.3

 
(0.2
)%
Total net sales
$
555.4

 
$
601.1

 
(7.6
)%
 
$
1,698.1

 
$
1,771.7

 
(4.2
)%
Operating income:
 
 
 
 
 
 
 
 
 
 
 
Instrumentation
$
38.6

 
$
46.9

 
(17.7
)%
 
$
126.4

 
$
128.2

 
(1.4
)%
Digital Imaging
10.4

 
7.9

 
31.6
 %
 
28.5

 
29.3

 
(2.7
)%
Aerospace and Defense Electronics
23.5

 
21.6

 
8.8
 %
 
63.5

 
68.3

 
(7.0
)%
Engineered Systems
5.9

 
8.5

 
(30.6
)%
 
17.4

 
21.4

 
(18.7
)%
Corporate expense
(8.9
)
 
(10.6
)
 
(16.0
)%
 
(30.1
)
 
(32.6
)
 
(7.7
)%
Total operating income
$
69.5

 
$
74.3

 
(6.5
)%
 
$
205.7

 
$
214.6

 
(4.1
)%
(a) After elimination of inter-segment sales, which are not significant.



19


The table below presents sales and cost of sales by segment and total company:
 
 
Third Quarter
 
Nine Months
(Dollars in millions)
 
2015
 
2014
 
2015
 
2014
Instrumentation
 
 
 
 
 
 
 
 
Sales
 
$
243.2

 
$
280.4

 
$
784.8

 
$
815.9

Cost of sales
 
$
137.3

 
$
156.8

 
$
438.8

 
$
456.5

Cost of sales % of sales
 
56.5
%
 
55.9
%
 
55.9
%
 
56.0
%
Digital Imaging
 
 
 
 
 
 
 
 
Sales
 
$
95.7

 
$
95.6

 
$
276.9

 
$
301.2

Cost of sales
 
$
56.5

 
$
59.7

 
$
165.5

 
$
187.4

Cost of sales % of sales
 
59.0
%
 
62.4
%
 
59.8
%
 
62.2
%
Aerospace and Defense Electronics
 
 
 
 
 
 
 
 
Sales
 
$
151.3

 
$
151.8

 
$
439.5

 
$
457.3

Cost of Sales
 
$
98.0

 
$
99.7

 
$
281.9

 
$
291.9

Cost of sales % of sales
 
64.8
%
 
65.7
%
 
64.2
%
 
63.9
%
Engineered Systems
 
 
 
 
 
 
 
 
Sales
 
$
65.2

 
$
73.3

 
$
196.9

 
$
197.3

Costs of sales
 
$
54.0

 
$
59.2

 
$
163.2

 
$
159.7

Cost of sales % of sales
 
82.9
%
 
80.8
%
 
82.9
%
 
81.0
%
Total Company
 
 
 
 
 
 
 
 
Sales
 
$
555.4

 
$
601.1

 
$
1,698.1

 
$
1,771.7

Costs of sales
 
$
345.8

 
$
375.4

 
$
1,049.4

 
$
1,095.5

Cost of sales % of sales
 
62.3
%
 
62.5
%
 
61.8
%
 
61.8
%
Third quarter of 2015 compared with the third quarter of 2014
Our third quarter 2015 sales were $555.4 million, compared with sales of $601.1 million for the third quarter of 2014, a decrease of 7.6%. Net income attributable to Teledyne was $48.3 million ($1.34 per diluted share) for the third quarter of 2015, compared with $55.6 million ($1.47 per diluted share) for the third quarter of 2014, a decrease of 13.1%.  
Sales
The third quarter of 2015, compared with the third quarter of 2014, reflected lower sales in each segment except the Digital Imaging segment. Third quarter 2015 sales included the impact of acquisitions. Incremental revenue in the third quarter of 2015 from recent acquisitions was $13.5 million.
Cost of Sales
Cost of sales decreased by $29.6 million in the third quarter of 2015, compared with the third quarter of 2014, which primarily reflected the impact of lower sales. Cost of sales as a percentage of sales for the third quarter of 2015 decreased slightly to 62.3% from 62.5% in the third quarter of 2014.
Certain contracts are accounted for under the percentage of completion (“POC”) method and related contract cost and revenue estimates for significant contracts are reviewed and reassessed quarterly. The aggregate effects of these changes in estimates on contracts accounted for under the POC accounting method, in the third quarter of 2015 and 2014, were $7.0 million and $4.6 million of favorable operating income and $10.1 million and $7.1 million of unfavorable operating income, respectively. None of the effects of changes in estimates on any individual contract were material to the condensed consolidated statements of income for any period presented.

20


Selling, general and administrative expenses
Selling, general and administrative expenses, including research and development and bid and proposal expense, decreased by $11.3 million in the third quarter of 2015, compared with the third quarter of 2014, and primarily reflected the impact of lower sales. Selling, general and administrative expenses for the third quarter of 2015, as a percentage of sales remained at 25.2% compared with the third quarter of 2014. Corporate expense was $8.9 million for the third quarter of 2015, compared with $10.6 million for the third quarter of 2014 and reflected lower compensation expense. In the third quarter of 2015 and 2014, we recorded a total of $2.6 million and $3.9 million, respectively, in stock option compensation expense. The lower amount in 2015 primarily reflected the absence of stock option grants in 2015. Employee stock option grants are expensed evenly over the three year vesting period.
Pension Income/Expense
The third quarter of 2015 included pension expense of $1.0 million, compared with pension income of $0.3 million in the third quarter of 2014. In the first quarter of 2015, Teledyne froze the non-qualified pension plan for top executives which resulted in a one-time gain of $1.2 million in the first quarter of 2015. For 2015, the discount rate to determine the benefit obligation for the domestic plan was 4.5%, compared with 5.4% in 2014. Pension expense allocated to contracts pursuant to U.S. Government Cost Accounting Standards (“CAS”) was $3.4 million in both the third quarter of 2015 and the third quarter of 2014. Pension expense determined allowable under CAS can generally be recovered through the pricing of products and services sold to the U.S. Government.
Operating Income
Operating income was $69.5 million for the third quarter of 2015, compared with $74.3 million for the third quarter of 2014, a decrease of 6.5%. The third quarter of 2015, compared with the third quarter of 2014, reflected lower operating income in the Instrumentation and Engineered Systems segments, partially offset by higher operating income in the Digital Imaging and Aerospace and Defense segments and lower corporate expense. The incremental operating loss included in the results for the third quarter of 2015 from recent acquisitions was $0.3 million which included $0.9 million in intangible asset amortization expense.
Interest Expense and Other Income
Interest expense, net of interest income, was $6.0 million for the third quarter of 2015, compared with $4.6 million for the third quarter of 2014. The increase in interest expense primarily reflected the impact of higher outstanding debt levels, due to recent acquisitions and stock repurchases. Other income and expense was expense of $2.1 million for the third quarter of 2015, compared with expense of $1.8 million for the third quarter of 2014.
Income Taxes
The income tax provision is calculated using an estimated annual effective tax rate, based upon estimates of annual income, permanent items, statutory tax rates and planned tax strategies in the various jurisdictions in which we operate except that certain loss jurisdictions and discrete items, such as the resolution of uncertain tax positions, are treated separately. The Company’s effective income tax rate for the third quarter of 2015 was 21.4% compared with 19.2% for the third quarter of 2014.
The third quarter of 2015 reflected $7.4 million in net discrete income tax benefits which included the remeasurement of uncertain tax positions due to expiration of statute of limitations, favorable resolution of tax matters, and certain deferred tax adjustments. The third quarter of 2014 reflected $6.1 million in net discrete income tax benefits which included the remeasurement of uncertain tax positions including the expiration of statute of limitations and a favorable resolution of a tax matter. Excluding the net discrete income tax benefits in both periods, the effective tax rates would have been 33.5% for third quarter of 2015 and 28.1% for the third quarter of 2014. The higher effective tax rate, after net discrete income tax items, in 2015, compared with 2014, primarily reflects a change in the mix of U.S. and foreign earnings. The Company’s effective tax rate for fiscal year 2015 is expected to be 30.8%, based on the projected mix of earnings before tax by jurisdiction, excluding the impact of any matters that would be treated as discrete.

21


First nine months of 2015 compared with the first nine months of 2014
Our first nine months of 2015 sales were $1,698.1 million, compared with sales of $1,771.7 million for the first nine months of 2014, a decrease of 4.2%. Net income attributable to Teledyne was $140.3 million ($3.88 per diluted share) for the first nine months of 2015, compared with $157.5 million ($4.13 per diluted share) for the first nine months of 2014, a decrease of 10.9%.  
Sales
The first nine months of 2015, compared with the first nine months of 2014, reflected lower sales in each segment. The first nine months of 2015 sales included the impact of acquisitions. Incremental revenue in the first nine months of 2015 from recent acquisitions was $35.7 million.
Cost of Sales
Cost of sales decreased by $46.1 million in the first nine months of 2015, compared with the first nine months of 2014, which reflected the impact of lower sales. Cost of sales as a percentage of sales for the first nine months of 2015 remained at 61.8%, compared with the first nine months of 2014.
The aggregate effects of changes in estimates on contracts accounted for under the POC accounting method, in the first nine months of 2015 and 2014, were $19.3 million and $14.8 million of favorable operating income and $33.3 million and $21.5 million of unfavorable operating income, respectively. None of the effects of changes in estimates on any individual contract were material to the condensed consolidated statements of income for any period presented.
Selling, general and administrative expenses
Selling, general and administrative expenses, including research and development and bid and proposal expense, decreased by $18.6 million in the first nine months of 2015, compared with the first nine months of 2014, and reflected the impact of lower sales. Selling, general and administrative expenses for the first nine months of 2015, as a percentage of sales, remained at 26.1%, compared with the first nine months of 2014. Corporate expense was $30.1 million for the first nine months of 2015, compared with $32.6 million for the first nine months of 2014 and reflected lower compensation expense. In the first nine months of 2015 we recorded a total of $9.7 million in stock option compensation expense, compared with $10.1 million in the first nine months of 2014.
Pension Income/Expense
The first nine months of 2015 included pension expense of $1.9 million, compared with pension income of $1.0 million in the first nine months of 2014. Pension expense allocated to contracts pursuant to CAS was $10.3 million in both the first nine months of 2015 and the first nine months of 2014.
Operating Income
Operating income was $205.7 million for the first nine months of 2015, compared with $214.6 million for the first nine months of 2014, a decrease of 4.1%. The first nine months of 2015, compared with the first nine months of 2014, reflected lower operating income in each segment, partially offset by lower corporate expense. The incremental operating loss included in the results for the first nine months of 2015 from recent acquisitions was $1.0 million which included $2.9 million in additional intangible asset amortization expense.
Interest Expense and Other Income and Expense
Interest expense, net of interest income, was $17.9 million for the first nine months of 2015, compared with $13.9 million for the first nine months of 2014. The increase in interest expense primarily reflected the impact of higher outstanding debt levels, due to recent acquisitions and stock repurchases. Other income was $2.1 million for the first nine months of 2015, compared with income of $7.0 million for the first nine months of 2014. Other income and expense for the first nine months of 2015 and 2014 included net gains on legal settlements of $3.0 million and $7.0 million, respectively.
Income Taxes
The Company’s effective income tax rate for the first nine months of 2015 was 26.3% compared with 24.6% for the first nine months of 2014. The first nine months of 2015 reflected $8.5 million in net discrete income tax benefits which included the remeasurement of uncertain tax positions due to expiration of statute of limitations, favorable resolution of tax matters, and certain deferred tax adjustments. The first nine months of 2014 reflected $8.2 million in net discrete income tax benefits which included the remeasurement of uncertain tax positions, primarily due to an expiration of statute of limitations and a favorable resolution of a tax matter. Excluding the net discrete income tax benefits in both periods, the effective tax rates would have been 30.8% for the first nine months of 2015 and 28.5% for the first nine months of 2014. The higher effective tax rate, after net discrete income tax items in 2015, compared with 2014, primarily reflects a change in the mix of U.S. and foreign earnings.


22


Segment Results
Segment results include net sales and operating income by segment but excludes noncontrolling interest, equity income or loss, unusual non-recurring legal matter settlements, interest income and expense, gains and losses on the disposition of assets, sublease rental income and non-revenue licensing and royalty income, domestic and foreign income taxes and corporate office expenses. See Note 13 to these condensed consolidated financial statements for additional segment information.

Instrumentation
 
Third Quarter
 
Nine Months
(Dollars in millions)
2015
 
2014
 
2015
 
2014
Sales
$
243.2

 
$
280.4

 
$
784.8

 
$
815.9

Cost of sales
$
137.3

 
$
156.8

 
$
438.8

 
$
456.5

Selling, general and administrative expenses
$
67.3

 
$
76.7

 
$
219.6

 
$
231.2

Operating income
$
38.6

 
$
46.9

 
$
126.4

 
$
128.2

Cost of sales % of sales
56.5
%
 
55.9
%
 
55.9
%
 
56.0
%
Selling, general and administrative expenses % of sales
27.6
%
 
27.4
%
 
28.0
%
 
28.3
%
Operating income % of sales
15.9
%
 
16.7
%
 
16.1
%
 
15.7
%
Third quarter of 2015 compared with the third quarter of 2014
The Instrumentation segment’s third quarter 2015 sales were $243.2 million, compared with $280.4 million in the third quarter of 2014, a decrease of 13.3%. Operating income for the third quarter of 2015 was $38.6 million, compared with operating income of $46.9 million in the third quarter of 2014, a decrease of 17.7%.
The third quarter 2015 sales decrease resulted from lower sales of marine instrumentation and electronic test and measurement instrumentation, partially offset by higher sales of environmental instrumentation. Sales for marine instrumentation decreased by $30.9 million and primarily reflected lower sales of geophysical sensors for offshore oil exploration, interconnect systems for land-based energy applications, and other marine sensors and systems, especially for international markets, partially offset by $10.8 million in incremental sales from recent acquisitions. Sales of electronic test and measurement instrumentation decreased $7.6 million and sales of environmental instrumentation increased $1.3 million.
The decrease in operating income primarily reflected the impact of lower sales. The third quarter of 2015 reflected $0.6 million in higher severance costs compared with the third quarter of 2014. The incremental operating loss included in the results for the third quarter of 2015 from recent acquisitions was $0.5 million, which included $0.8 million of intangible asset amortization expense.
Third quarter 2015 cost of sales decreased by $19.5 million, compared with the third quarter of 2014, and primarily reflected the impact of lower sales. The cost of sales percentage increased slightly to 56.5% from 55.9%. Third quarter 2015 selling, general and administrative expenses, including research and development and bid and proposal expense, decreased by $9.4 million, compared with the third quarter of 2014, and reflected the impact of lower sales. The selling, general and administrative expense percentage increased slightly to 27.6% in the third quarter of 2015 from 27.4% in the third quarter of 2014.
First nine months of 2015 compared with the first nine months of 2014
The Instrumentation segment’s first nine months of 2015 sales were $784.8 million, compared with $815.9 million in the first nine months of 2014, a decrease of 3.8%. Operating income for the first nine months of 2015 was $126.4 million, compared with operating income of $128.2 million in the first nine months of 2014, a decrease of 1.4%.
The first nine months of 2015 sales decreased from lower sales of marine instrumentation and electronic test and measurement instrumentation, partially offset by higher sales of environmental instrumentation. Sales for marine instrumentation decreased by $20.3 million and primarily reflected lower sales of geophysical sensors for offshore oil exploration, interconnect systems for land-based energy applications, and other marine sensors and systems, partially offset by $32.5 million in incremental sales from recent acquisitions. Sales of electronic test and measurement instrumentation decreased $16.8 million primarily as a result of lower international sales due in part to the impact of foreign exchange rates. Sales of environmental instrumentation increased $6.0 million.
The decrease in operating income primarily reflected the impact of lower sales. The first nine months of 2015 reflected $1.7 million in higher acquired intangible amortization expense primarily due to recent acquisitions and $1.9 million in higher

23


severance costs compared with the first nine months of 2014. The incremental operating loss included in the results for the first nine months of 2015 from recent acquisitions was $1.1 mill