10-K 1 tdy-20131229x10k.htm 10-K TDY-2013.12.29-10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 2013
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 of organization)
 
(I.R.S. Employer Identification Number)
1049 Camino Dos Rios, Thousand Oaks, California
 
91360-2362
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (805)-373-4545
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $.01 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No  ¨ 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  ¨ No  ý
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.      ý

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 ¨    Smaller reporting company ¨
(Do not check if a 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
The aggregate market value of the registrant’s Common Stock held by non-affiliates on June 28, 2013 was $2.8 billion, based on the closing price of a share of Common Stock on such date, which is the last business day of the registrant’s most recently completed fiscal second quarter. Shares of Common Stock known by the registrant to be beneficially owned by the registrant’s directors and the registrant’s executive officers subject to Section 16 of the Securities Exchange Act of 1934 are not included in the computation. The registrant, however, has made no determination that such persons are “affiliates” within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934.
At February 21, 2014, there were 37,639,870 shares of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the registrant’s proxy statement for its 2014 Annual Meeting of Stockholders (the “2014 Proxy Statement”) are incorporated by reference in Part III of this Report. Information required by paragraphs (d)(1)-(3) and (e)(5) of Item 407 of Regulation S-K shall not be deemed “soliciting material” or to be filed with the Commission as permitted by Item 407 of Regulation S-K.



INDEX
 
 
Page Number
PART I
 
 
 
 
 
 
 
 
 
 
Item 1A. Risk Factors
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part III
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART IV
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Explanatory Notes
In this Annual Report on Form 10-K, Teledyne Technologies Incorporated is sometimes referred to as the “Company” or “Teledyne”.
For a discussion of risk factors and uncertainties associated with Teledyne and any forward looking statements made by us, see the discussion beginning at page 13 of this Annual Report on Form 10-K.

i



PART I
Item 1.
Business
Who We Are
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, electronics design and development, factory automation and medical imaging. Our products include monitoring and control 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.
Total sales in 2013 were $2,338.6 million, compared with $2,127.3 million in 2012 and $1,941.9 million in 2011. Our aggregate segment operating profit and other segment income were $277.9 million in 2013, $279.8 million in 2012 and $260.9 million in 2011. These amounts exclude discontinued operations related to the general aviation piston engine businesses that we sold in April 2011. Approximately 73% of our total sales in 2013 were to commercial customers and the balance was to the U.S. Government, as a prime contractor or subcontractor. Approximately 60% of these U.S. Government sales were attributable to fixed-price type contracts and the balance to cost-plus-fee type contracts. Sales to international customers accounted for approximately 44% of total sales in 2013.
Our businesses are divided into four business segments: Instrumentation, Digital Imaging, Aerospace and Defense Electronics and Engineered Systems. Our four business segments and their respective percentage contributions to our total sales in 2013, 2012 and 2011 are summarized in the following table:
 
 
Percentage of Sales
Segment (a)
 
2013
 
2012
 
2011
Instrumentation
 
44
%
 
38
%
 
33
%
Digital Imaging
 
18
%
 
20
%
 
18
%
Aerospace and Defense Electronics
 
26
%
 
28
%
 
33
%
Engineered Systems
 
12
%
 
14
%
 
16
%
Total
 
100
%
 
100
%
 
100
%
(a)
Reflects a revised segment reporting structure adopted in 2013. All years presented reflect the new structure. See further discussion of our four segments in Note 13 to the Notes to Consolidated Financial Statements
Our principal executive offices are located at 1049 Camino Dos Rios, Thousand Oaks, California 91360-2362. Our telephone number is (805) 373-4545. We are a Delaware corporation that was spun-off as an independent company from Allegheny Teledyne Incorporated (now known as Allegheny Technologies Incorporated) on November 29, 1999.
Strategy
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. At Teledyne, 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.


1



Our Recent Acquisitions
Consistent with our strategy, during 2013, we made the following acquisitions:
To broaden our marine instrumentation capabilities:
RESON A/S (“RESON”) - RESON, headquartered in Slangerup, Denmark, provides multibeam sonar systems and specialty acoustic sensors for hydrography, global marine infrastructure and offshore energy operations.
C.D. Limited (“CDL”) - CDL, headquartered in Aberdeen, Scotland, is a supplier of subsea inertial navigation systems and motion sensors for a variety of marine applications.
To expand our environmental instrumentation product lines:
The assets of SD Acquisition, Inc., d/b/a CETAC Technologies (“CETAC”) - CETAC, headquartered in Omaha, Nebraska, is a designer and manufacturer of automated sample handling and sample introduction equipment for laboratory instrumentation.
To broaden our digital imaging capabilities:
Axiom IC B.V. (“Axiom”) - Axiom, located in Enschede, Netherlands, is a fabless semiconductor company that develops high performance CMOS mixed-single integrated circuits.
The remaining 49% interest in Nova Research, Inc. (“Nova Sensors”) - Nova Sensors, located in Buellton, CA, produces compact short-wave and mid-wave infrared cameras.
In 2013, Teledyne spent $128.2 million on acquisitions.
Available Information
Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K, and any amendments to these reports, are available on our website as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the Securities and Exchange Commission (the “SEC”). The SEC also maintains a website that contains these reports and other information we file, including our proxy statements, at www.sec.gov . Any materials we file with the SEC may be viewed at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, our Corporate Governance Guidelines, our Global Code of Ethical Business Conduct, our Codes of Ethics for Financial Executives, Directors and Service Providers and the Charters of the standing committees of our Board of Directors are available on our website. We intend to post any amendments to these policies, guidelines and charters on our website. Our website address is www.teledyne.com. This information on our website is available free-of-charge, You will, however, be responsible for any costs normally associated with electronic access, such as usage and telephone charges. Alternatively, if you would like a paper copy of any such SEC report (without exhibits) or document, please write to Melanie S. Cibik, Senior Vice President, General Counsel and Secretary, Teledyne Technologies Incorporated, 1049 Camino Dos Rios, Thousand Oaks, California 91360-2362, and a copy of such requested document will be provided to you, free-of-charge.

2


Our Business Segments
Our businesses are divided into four segments: Instrumentation, Digital Imaging, Aerospace and Defense Electronics, and Engineered Systems. Financial information about our business segments can be found in Note 13 to our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Instrumentation
Our Instrumentation segment provides monitoring and control instruments for marine, environmental, industrial and other applications, as well as electronic test and measurement equipment. We also provide power and communications connectivity devices for distributed instrumentation systems and sensor networks deployed in mission critical, harsh environments.
Marine Instrumentation
We offer a variety of products designed for use in harsh underwater environments, sensors that measure currents and distances and create images of what is below the surface, and vehicles for applying and moving sensors around and below the surface.
We design and manufacture geophysical streamer cables, hydrophones and specialty products used in offshore hydrocarbon exploration to locate oil and gas reserves beneath the ocean floor. Our Acoustic Doppler Current profilers (“ADCPs”) precisely measure currents at varying depths in oceans and rivers, and our Doppler Velocity Logs (“DVLs”) are used for navigation by civilian and military surface ships, unmanned underwater vehicles and naval divers. In addition to our DVLs, which are acoustic navigation devices, we design and manufacture inertial sensing and navigation products, as well as subsea pipe and cable detection systems for offshore energy, oceanographic and military marine markets.  With the 2013 acquisition of CDL, we obtained additional inertial sensing and navigation products, and our goal is to accelerate the development and deployment of real-time motion sensing and communication systems for our subsea oil and gas customers. 
Additionally, we design and manufacture hydrographic survey instrumentation used in port surveys, dredging, pre- and post-installation of offshore energy infrastructure and other challenging underwater applications. With the acquisition of RESON A/S, our multibeam sonar systems range from portable high-resolution systems used on autonomous underwater vehicles (“AUVs”) to full ocean depth vessel-mounted oceanographic systems.  As a result of the RESON acquisition, coupled with the 2012 acquisitions of BlueView Technologies and a majority interest in Optech’s parent company, we now offer 3D imaging systems for use from aircraft, fixed platforms, surface vessels and AUVs over a wide range of distances and water depths.  Our multibeam sonar systems are used for creating highly accurate maps of underwater offshore constructions, wrecks or quay walls in harbors. In particular, the multibeam sonars are used to produce high quality maps of the seafloor. With advanced imaging capabilities, our sonars create images of hidden structures on the seafloor and are also used for detecting underwater mineral deposits, gas and oil seeps streaming from the seabed. Sonars are used to create real-time images of the environment in the oceans and enable precise navigation of AUVs, which are essentially advanced robots navigating through the oceans autonomously. Our products are being utilized in both commercial and defense applications where we provide systems for detecting mines in the water.
We provide a broad range of end-to-end undersea interconnect solutions to the offshore oil and gas, naval defense, oceanographic and telecom markets. We manufacture subsea, wet-mateable electrical and fiber-optic interconnect systems and subsea pressure vessel penetrators and connector systems with glass-to-metal seals. Our water-proof and splash-proof neoprene and glass reinforced epoxy connectors and cable assemblies are used in underwater equipment and submerged monitoring systems. We also manufacture subsea and topside pipeline corrosion and erosion monitoring detectors as well as flow integrity monitoring solutions for the oil and gas industry. These flow assurance sensors and equipment rely on our wet-mateable interconnect systems and our sensor feed-through systems. Our Teledyne Oil & Gas group and Teledyne Scientific Company have been working collaboratively to improve the reliability of materials exposed to ultra deep sea conditions.
We offer a variety of marine instrumentation products used by the U.S. Navy and in energy exploration, oceanographic research and port and harbor security services. Our products include acoustic modems for networked underwater communication and sidescan and sub-bottom profiling sonar systems. Originally developed with our acoustic technology, we provide quality control and package integrity systems under the Taptone ®  brand to the food and beverage, personal care and pharmaceutical industries. We also manufacture complete autonomous underwater vehicle systems. Our marine gliders use a silent buoyancy engine for propulsion that takes advantage of changes in buoyancy in conjunction with wings and tail steering to convert vertical motion to horizontal displacement, thereby propelling the system on a programmed route with very low power consumption. Glider applications range from oceanographic research to military persistent surveillance systems as part of a mobile underwater sensing and communication network. The modular design of our battery-powered, man-portable Gavia  AUV allows for rapid sensor bay reconfiguration and battery replacement capability. Our Slocum gliders, as well as our ADCPs, are being used as part of the National Science Foundation’s Ocean Observatories Initiative to collect physical, chemical, geological and biological data from the ocean and the seafloor on coastal, regional and global scales.

3


Environmental Instrumentation
We offer a wide range of products for environmental monitoring. Our instrumentation monitors trace levels of gases such as sulfur dioxide, carbon monoxide, carbon dioxide, oxides of nitrogen and ozone in order to measure the quality of the air we breathe. Our instrumentation also monitors particulate air pollution, and we supply environmental monitoring systems for the detection, measurement and automated reporting of air pollutants from industrial stack emissions. We serve the process control and monitoring needs of industrial plants with instruments that include gas analyzers, vacuum and flow measurement devices and torque measurement sensors. We were a pioneer in the development of precision trace oxygen analyzers, and we now manufacture a wide range of process gas and liquid analysis products for the measurement of process contaminants, hydrocarbons, combustibles, oil-in-water, moisture, pH and many other parameters. Our instrumentation is also used to detect a variety of water quality parameters. Our sampler products include portable, refrigerated and specialty samplers used in hazardous location applications. Flow meters include ultrasonic, submerged probe, bubbler and area velocity models. Most recently we have added laser technology to our flow capabilities. Our custom analyzer systems provide turn-key solutions to complex process monitoring and/or control applications found in petrochemical and refinery facilities. Our broad line of instruments for precise measurement and control of vacuum and gas flow are used in varied applications such as semiconductor manufacturing, refrigeration, metallurgy and food processing.
We provide laboratory instrumentation that complements our process or field environmental instrumentation. We manufacture laboratory instrumentation that automates the preparation and concentration of organic samples for the analysis of trace levels of volatile organic compounds by a gas chromatograph and mass spectrometer. We also provide laboratory instrumentation for the detection of total organic carbon and total nitrogen in water and wastewater samples. In addition, we provide inductively coupled plasma laboratory spectrometers, atomic absorption spectrometers, mercury analyzers and calibration standards. With the CETAC acquisition, we enhanced our elemental and chemical analysis systems. Our advanced elemental analysis products are used by environmental and quality control laboratories to detect trace levels of inorganic contaminants in water, foods, soils and other environmental and geological samples. Our high precision, high pressure syringe pumps measure process extraction rates of fluids ranging from liquefied gases to viscous tars. Plus, we manufacture liquid chromatography instruments and accessories for the purification of organic compounds. Our liquid chromatography customers include pharmaceutical laboratories involved in drug discovery and development.
Test and Measurement Instrumentation
Since our August 2012 acquisition of LeCroy, we develop, manufacture, sell and license high-performance oscilloscopes and high-speed protocol analyzers for various computer communication links. We also provide related test and measurement equipment, probes, accessories and application solutions. To a lesser extent, we provide extended warranty contracts, maintenance contracts and repairs and calibrations on our instruments after their warranties expire.
Our oscilloscopes are tools used by designers and engineers to measure and analyze complex electronic signals in order to develop high-performance systems, validate electronic designs and improve time to market. We offer eight families of real-time oscilloscopes, which address different needs: HDO4000/HDO6000, our 12-bit, high definition oscilloscopes; LabMaster 10 Zi-A, our highest bandwidth performance oscilloscope; WaveMaster, our industry leading high-end oscilloscope family; WavePro, which is targeted at the mid-to high-range performance sector; WaveRunner, designed for the general purpose and bench-top sector; WaveSurfer designed for users in the lower bandwidth bench-top sector of the market; WaveJet, designed for value-oriented users in the economy sector of the market; and WaveAce, our entry-level oscilloscope products. In addition to our real-time oscilloscopes, we have the WaveExpert family of sampling oscilloscopes and modules. In 2013, we demonstrated the world’s first 100 GHz real-time oscilloscope, which should prove useful in the development of high-speed digital networks. In collaboration with Teledyne Scientific Company, we also completed the design of a next generation indium phosphide (InP) chip. The integrated circuit represents the first device in an expansive chip set planned for future generations of high speed oscilloscopes.
Our protocol analyzers are used by designers and engineers to reliably and accurately monitor communications traffic and diagnose operational problems in a variety of communications devices to ensure that they comply with industry standards.
Our test and measurement products are sold into a broad range of industry sectors, including computer, semiconductor, consumer electronics, data storage, automotive, industrial, military, aerospace and telecommunications. We believe designers in all of these industry sectors are developing products which rely on increasingly complex electronic signals to provide the features and performance their customers require.

4


Digital Imaging
Our Digital Imaging segment includes high performance sensors, cameras and systems, within the visible, infrared and X-ray spectra for use in industrial, government and medical applications, as well as micro electro-mechanical systems (“MEMS”). It also includes our sponsored and centralized research laboratories benefiting government programs and businesses.
We design, develop and manufacture image capture products, primarily consisting of high performance image sensors and digital cameras for use in industrial, scientific, medical and professional applications. We also design, develop and manufacture image processing products, primarily consisting of hardware and software for image processing in industrial and medical applications. We continue to develop high-resolution, low dose X-ray sensors for medical, dental and industrial applications. Our high performance image sensors utilize both charge coupled device (“CCD”) and complementary metal-oxide semiconductor (“CMOS”) technology. In particular, our CMOS image sensing technology is used in our large flat panel detectors for X-ray imaging. Our image processing software allows original equipment manufacturers (“OEMs”) and systems integrators to develop vision applications using our image acquisition and processing hardware. Our smart camera products are user-friendly, cost-effective vision appliances for task-specific factory floor applications such as gauging, high-precision alignment, inspection, assembly verification and machine guidance. Unlike our OEM imaging products, this category of cameras is designed to be quickly deployed by technicians on the factory floor.
Additionally, we produce and provide manufacturing services for MEMS and high voltage CMOS devices and complete integrated circuit (“IC”) products. The majority of our semiconductor manufacturing capacity is consumed by external customers with the remaining capacity applied towards supplying unique CCD fabrication services for our internal image sensor requirements.
Axiom’s mixed signal design experience strengthened our design capabilities, complementing our existing capabilities in CMOS image sensor design, high voltage driver chips for MEMS and embedded software development.
Our Digital Imaging segment also provides Light Detection and Ranging (“LIDAR”) systems for airborne terrestrial mapping, mobile mapping, bathymetry and laser-based 3D imaging applications through our majority-owned subsidiary, Optech.  These imaging and mapping systems are used by commercial and government customers serving energy, natural resources and infrastructure applications.
We provide research and engineering capabilities primarily in the areas of electronics, materials, optics and information science to military, aerospace and industrial customers, as well as to various businesses throughout Teledyne. We collaborate with the Defense Advanced Research Products Agency (“DARPA”), and researchers at universities and national laboratories to stay at the forefront of emerging technologies. We have developed high speed electronics, MEMS sensors and actuators, as well as compound semiconductors. We have developed functional materials, structural materials, liquid-crystal based optical devices and image processing algorithms.
We produce advanced focal plane arrays, sensors, and subsystems that cover a broad spectrum of frequencies from X-ray wavelengths to 18 micron long-wave infrared wavelengths. We develop imaging process algorithms and manufacture compact mid-wave and short-wave infrared camera systems. We are a leader in the development and production of large format focal plane array sensors for both military and space science markets.
We deliver advanced imaging solutions to the U.S. Department of Defense, NASA, prime system integrators, foreign space agencies and commercial customers. Our sensor technologies are on the Hubble space telescope and weather satellites, are orbiting the Moon and Mars, are on the way to Pluto and asteroid missions, and can be found at major ground-based telescopes. In the U.S. defense arena, our sensors are integrated into several major systems for space surveillance, persistent surveillance, chemical detection and target identification, among others. We have developed various sensors, subassemblies and cameras for air- and ground-based applications. We have developed infrared cameras and hyperspectral sensors for unmanned aerial vehicles. We also design and manufacture advanced military laser protection eyewear. Finally, we develop low-noise, high performance cameras for use in laboratory instruments.
 

5


Aerospace and Defense Electronics
Our Aerospace and Defense Electronics segment provides sophisticated electronic components and subsystems and communications products, including defense electronics, harsh environment interconnects, data acquisition and communications equipment for aircraft, and components and subsystems for wireless and satellite communications, as well as general aviation batteries.
Over the years, principally through focused acquisitions, we have expanded our microwave components and subsystems business with a goal of providing more highly integrated microwave subsystems and solutions to our customers. Historically, we designed and manufactured helix traveling wave tubes, commonly called TWTs, used to provide broadband power amplification of microwave signals. Military applications include radar, electronic warfare and satellite communication. We make TWTs for commercial applications as well, such as electromagnetic compatibility test equipment and satellite communication terminals. More recently, we have designed and delivered high power solid state TWT replacement amplifiers and complete amplifiers that incorporate a TWT and a power supply.
We design and manufacture solid state radio frequency (“RF”) and microwave components and subassemblies used in a wide variety of applications.  As components which form the building blocks for electronic systems, we produce amplifiers, voltage-controlled oscillators, YIGs, BAWs, low noise amplifiers "LNAs", microwave mixers, and detectors using LDMOS, GaAs, GaN, InP, and SiC technologies.  These components form the basis for our line of solid state power amplifiers, RF converters, and modems which are used in systems that provide communications links between ground stations, mobile units, UAVs, and orbiting satellites. Such products are also used in mobile telephone, TV broadcast and commercial data communications networks.  In addition, some of our products are modified to design and manufacture higher level subsystems including: UAV, mobile, and fixed location radar transmitters and receivers; test and measurement systems; and Instantaneous Frequency Measurement "IFM"-based systems and subsystems. The latter includes integrated frequency locked sources and set-on receiver jammers used for the U.S. Navy and Air Force training.
We supply a variety of connectors and cable assemblies, including specialized high voltage connectors and subassemblies and coax microwave cable and connectors, for defense, aerospace and industrial applications. We also provide custom, high-reliability bulk wire and cable assemblies to a number of marine, environmental and industrial markets. Additionally, we produce pilot helmet mounted display components and subsystems for the Joint Helmet Mounted Cueing System (“JHMCS”) used in the F-15, F-16 and F-18 aircrafts. The JHMCS system is a multi-role system designed to enhance pilot situational awareness and provides visual control of aircraft targeting systems and sensors. We manufacture microprocessor-controlled aircraft ejection seat sequencers and related support elements to military aircraft programs. We continue to pursue the development of electronic safe and arm devices for use in a number of military applications.
We provide specialty electronic manufacturing services. We develop and manufacture custom microelectronic modules that provide both high reliability and extremely dense packaging for military applications. We also develop custom tamper-resistant microcircuits designed to provide enhanced security in military communication. We serve the market for high-mix, low-volume manufacturing of sophisticated military electronics equipment. We manufacture advanced packaging solutions for military and commercial aircraft using rigid and rigid-flex printed circuit boards.
We supply electromechanical relays, solid-state power relays and coaxial switching devices to military, aerospace and other industrial markets. Applications include microwave and wireless communication infrastructure, RF and general broadband test equipment, test equipment used in semiconductor manufacturing, and industrial and commercial machinery and control equipment. On commercial aircraft, our solid state and electromechanical relays are used in a variety of applications, including jet engine fuel control, management of control surfaces and other on-board applications.
We are a leading supplier of digital flight data acquisition and analysis systems to the civil aviation market. These systems acquire data for use by the aircraft’s flight data recorder as well as record additional data for the airline’s operation, such as aircraft and engine condition monitoring. We provide the means to transfer this data, using Teledyne’s patented wireless technology, from the aircraft to the airline operation center. We also design and manufacture airborne networking products, including servers, as well as aircraft data loading equipment, flight line maintenance terminals and data distribution software used by commercial airlines and the U.S. military. The Boeing Company recently awarded us a single source contract to develop and supply the next generation of aircraft data acquisition and information management systems for the majority of future Boeing commercial aircraft.
We also provide lead acid aircraft batteries for general aviation, and business and light jet applications.

6


Engineered Systems
Our Engineered Systems segment provides innovative systems engineering and integration, advanced technology development, and manufacturing solutions for defense, space, environmental and energy applications. This segment also designs and manufactures electrochemical energy systems and small turbine engines.
Engineered Products and Services
Teledyne Brown Engineering, Inc. is a well-recognized full-service space, missile defense, marine systems, and energy company. With changes in U.S. fiscal policy, we have been working to shift its focus from chiefly supporting U.S. government space and defense programs to increasing its commercial portfolio.
We lead and support air and missile defense programs, including the Objective Simulation Framework (“OSF”) and Test Execution Services and Launch Augmentation programs (“TESTLA”). As the Missile Defense Agency (“MDA”) prime contractor for the OSF contract, we design, develop, test, implement and maintain the OSF. The OSF is being designed to support full scale simulations, ground tests and live fire events throughout the life cycle of the Ballistic Missile Defense System. Under the 2013-awarded TESTLA contract, we will continue development, manufacturing and integration of advanced technology solutions in support of the warfighter.
We specialize in marine systems design and manufacturing. For the U.S. Special Operations Command, we are the prime contractor engaged to design, develop, test, manufacture and sustain the Shallow Water Command Submersible (“SWCS”) vehicle to replace the current SEAL Delivery Vehicle. With the design of the SWCS vehicle nearing completion, we expect to begin the manufacturing and test phase in 2014. We are producing the Littoral Battlespace Sensing Glider (“LBS-G”) system for the U.S. Navy Program Executive Office - Command, Control, Computer and Intelligence (“PEO-C4I”). Teledyne Webb Research is the glider developer and manufacturer on the LBS-G program. We manufacture gun mounts for the Littoral Combat Ship program, most recently outfitting the U.S.S. Freedom. Under contract to Raytheon Company, we continue to manufacture advanced mine detection and neutralization systems.
We are active in U.S. space programs and continue to play a vital role in the science operations area of the International Space Station (“ISS”) program. We provide 24-hour-per-day payload operations in the ISS Payload Operations and Integration Center located at NASA’s Marshall Space Flight Center. In 2012, NASA awarded us a cooperative agreement to foster the commercial utilization of the ISS. Under this agreement, we continue to work to develop a commercial earth imaging platform known as the Multi-User System for Earth Imaging (“MUSES”). We also design, develop, and manufacture components for liquid rocket engines, scientific payloads, and manned space vehicles.
We operate a full service radiological analysis laboratory in Knoxville, Tennessee. While this laboratory principally supports nuclear power plants in United States, most recently it broadened its services to cover the mining and ore industry. We also manage and operate a separation, purification and analysis of atmospheric samples laboratory for the U.S. Government. Additionally, we provide engineering and manufacturing for customers in the commercial nuclear market.
Extending our historic facilities and plant management services to the commercial arena, in November 2012, we were awarded a three-year lab and office facility management contract for research services from the Dow Chemical Company. We are currently leading on-site and off-site management and support research services at three Dow Chemical research facilities.
We manufacture products that are primarily highly engineered and high quality machined and metal fabricated components and assemblies for external customers across the spectrum of our core business base, including NASA, U.S. Department of Defense customers and the U.S. Department of Energy, as well as commercial customers. Through our UK-based operations, we manufacture advanced composites for the commercial aviation industry.
Energy Systems
We manufacture hydrogen/oxygen gas generators used worldwide in electrical power generation plants, semiconductor manufacturing, optical fiber production, chemical processing, specialty metals, float glass and other industrial processes. Our sales of hydrogen generators have been primarily in developing countries and domestic applications where delivered merchant gas is not practical. We also provide thermoelectric and electrochemical energy technology solutions for use in U.S. Government programs.
Turbine Engines
We design, develop and manufacture small turbine engines primarily used in tactical missiles for military markets. Our engines power the Boeing Harpoon and Standoff Land Attack Missile systems, and we are the sole source provider of engines for the baseline Lockheed Martin Joint Air-to-Surface Standoff Missile (“JASSM”). We also continue to work on advanced technology for small turbine engines and components for programs sponsored by the U.S. Air Force Research Laboratory.


7


Customers
We have hundreds of customers in the various industries we serve. No commercial customer accounted for more than 10% of our total sales, nor more than 10% of any segment sales, during 2013, 2012 or 2011. Our largest commercial customer, a customer of our Instrumentation segment, accounted for 3.6%, 3.4% and 2.9% of total sales in 2013, 2012 and 2011, respectively.
Sales to international customers accounted for approximately 44% of total sales in 2013, compared with 39% in 2012 and 36% in 2011. In 2013, we sold products to customers in over 100 foreign countries. Approximately 90% of our sales to foreign customers were made to customers in 22 foreign countries. The 2013 top five countries for international sales were the United Kingdom, Norway, China, Germany and South Korea and constituted approximately 23% of our total sales.
Approximately 27%, 32% and 36% of our total sales for 2013, 2012 and 2011, respectively, were derived from contracts with agencies of, and prime contractors to, the U.S. Government. Information on our sales to the U.S. Government, including direct sales as a prime contractor and indirect sales as a subcontractor, is as follows (in millions):
 
  
2013
 
2012
 
2011
Instrumentation
  
$
40.6

 
$
39.9

 
$
38.6

Digital Imaging
  
120.2

 
128.8

 
110.2

Aerospace and Defense Electronics
  
260.2

 
269.9

 
303.6

Engineered Systems
  
209.2

 
245.4

 
242.0

Total U.S. Government sales
  
$
630.2

 
$
684.0

 
$
694.4

Our principal U.S. Government customer is the U.S. Department of Defense. These sales represented 21%, 26% and 29% of our total sales for 2013, 2012 and 2011, respectively. In 2013, our largest program with the U.S. Government was the Objective Simulation Framework contract with the Missile Defense Agency, which represented 1.4% of our total sales. In both 2012 and 2011, our largest program with the U.S. Government was the Systems Development and Operations Support contract with NASA’s Marshall Space Flight Center, which represented 1.9% of our total sales in both years.
As described under risk factors, there are risks associated with doing business with the U.S. Government. In 2013, approximately 60% of our U.S. Government prime contracts and subcontracts were fixed-price type contracts, compared to 59% in 2012 and 60% in 2011. Under these types of contracts, we bear the inherent risk that actual performance cost may exceed the fixed contract price. Such contracts are typically not subject to renegotiation of profits if we fail to anticipate technical problems, estimate costs accurately or control costs during performance. Additionally, U.S. Government contracts are subject to termination by the U.S. Government at its convenience, without identification of any default. When contracts are terminated for convenience, we typically recover costs incurred or committed, settlement expenses and profit on work completed prior to termination. We had four U.S. Government contracts terminated for convenience in 2013, compared to six in 2012 and seven in 2011.
Our total backlog of confirmed orders was approximately $941.2 million at December 29, 2013, compared with $952.5 million at December 30, 2012 and $944.6 million at January 1, 2012. We expect to fulfill 99% of such backlog of confirmed orders during 2014.
Raw Materials and Suppliers
Generally, our businesses have experienced minimal fluctuations in the supply of raw materials, but not without some price volatility. While some of our businesses provide services, for those businesses that sell hardware and product, a portion of the value that we provide is labor oriented, such as design, engineering, assembly and test activities. In manufacturing our products, we use our own production capabilities and also third party suppliers and subcontractors, including international sources. Some of the items we purchase for the manufacture of our products, including certain gyro components for some marine navigation applications, certain magnets and helix wire for our traveling wave tubes and certain infrared detectors substrates, as well as certain scintillator materials use in the production of our X-ray detectors, are purchased from limited or single sources, including international sources, due to technical capability, price and other factors. While over the years we have not experienced much difficulty in procuring raw materials, components, sub-assemblies and other supplies required in our manufacturing processes, disruption in the global economy and financial markets could trigger increased pricing and otherwise affect our suppliers as well as our ability to procure some supplies.

8


Sales and Marketing
Our sales and marketing approach varies by segment and by products within our segments. A shared fundamental tenet is the commitment to work closely with our customers to understand their needs, with an aim to secure preferred supplier and longer-term relationships.
Our segments use a combination of internal sales forces, distributors and commissioned sales representatives to market and sell our products and services. Our Teledyne Instruments companies and other businesses have been working over the years to consolidate or share internal sales and servicing efforts. Several Teledyne businesses have been marketing and selling products collaboratively to similar customers to promote “one-stop” shopping under singular “brand” names, including Teledyne Oil & Gas, Teledyne Marine, Teledyne Nuclear, Teledyne Water Quality and Teledyne Microwave Solutions.
Products are also advertised in appropriate trade journals and by means of various websites. To promote our products and other capabilities, our personnel regularly participate in relevant trade shows and professional associations.
Many of our government contracts are awarded after a competitive bidding process in which we seek to emphasize our ability to provide superior products and technical solutions in addition to competitive pricing.
Through Teledyne Technologies International Corp. and other subsidiaries, the Company has established offices in foreign countries to facilitate international sales for various businesses. Locations include Brazil, China, France, Germany, Italy, Japan, Malaysia, Singapore, South Korea, Switzerland and the United Arab Emirates.
Competition
We believe that technological capabilities and innovation and the ability to invest in the development of new and enhanced products are critical to obtaining and maintaining leadership in our markets and the industries in which we compete. Although we have certain advantages that we believe help us compete effectively in our markets, each of our markets is highly competitive. Because of the diversity of products sold and the number of markets we serve, we encounter a wide variety of competitors. Our businesses vigorously compete on the basis of quality, product performance and reliability, technical expertise, price and service. Many of our competitors have, and potential competitors could have, greater name recognition, a larger installed base of products, more extensive engineering, manufacturing, marketing and distribution capabilities and greater financial, technological and personnel resources than we do.
  Research and Development
Our research and development efforts primarily involve engineering and design related to improving products and developing new products and technologies in the same or similar fields. We spent a total of $388.2 million in 2013, $364.2 million in 2012 and $315.7 million in 2011 on research and development and bid and proposal costs. Customer-funded research and development, most of which was attributable to work under contracts with the U.S. Government, represented approximately 57% of total research and development costs for 2013, compared with 64% in 2012 and 68% in 2011.
In 2013, we incurred $167.0 million in Company-funded research and development and bid and proposal costs. We expect the level of Company-funded research and development and bid and proposal costs to be approximately $174.2 million in 2014.
Intellectual Property
While we own and control various intellectual property rights, including patents, trade secrets, confidential information, trademarks, trade names, and copyrights, which, in the aggregate, are of material importance to our business, we believe that our business as a whole is not materially dependent upon any one intellectual property or related group of such properties. We own several hundred active patents and are licensed to use certain patents, technology and other intellectual property rights owned and controlled by others. Similarly, other companies are licensed to use certain patents, technology and other intellectual property rights owned and controlled by us.
Patents, patent applications and license agreements will expire or terminate over time by operation of law, in accordance with their terms or otherwise. We do not expect the expiration or termination of these patents, patent applications and license agreements to have a material adverse effect on our business, results of operations or financial condition.

9


Employees
We consider our relations with our employees to be good. At December 29, 2013, our total workforce consisted of approximately 9,600 employees, of which approximately 7,140 employees were located in the United States.
Executive Management
Teledyne’s executive management includes:
Name and Title
 
Age
 
Principal Occupations Last 5 Years
Executive Officers:
 
 
 
 
Robert Mehrabian*
Chairman, President and Chief Executive Officer; Director
 
72

 
Dr. Mehrabian has served as Chairman, President and Chief Executive Officer of Teledyne for more than five years. He is a director of Teledyne and PPG Industries, Inc.
Aldo Pichelli*
Executive Vice President - Instrumentation and Aerospace and Defense Electronics Segments
 
62

 
Mr. Pichelli has been an Executive Vice President of Teledyne having responsibility for the Instrumentation and Aerospace and Defense Electronics segments since July 1, 2013. Prior to that he had been President and Chief Operating Officer of Teledyne’s Instrumentation and Aerospace and Defense Electronics segments since January 2, 2011. From September 1, 2007, to that date, he had been President and Chief Operating Officer of the Electronics and Communications segment.
Rex D. Geveden*
Executive Vice President - Engineered Systems and Digital Imaging Segments
 
52

 
Mr. Geveden has been an Executive Vice President of Teledyne having responsibility for the Engineered Systems and Digital Imaging segments since July 1, 2013. From August 1, 2007 until his promotion, he had been President of the Engineered Systems segment. Since August 1, 2007, he has been the President of Teledyne Brown Engineering, Inc. From January 16, 2012 to July 1, 2013, he had also been the President and Chief Executive Officer of Teledyne Scientific & Imaging, LLC. From January 1, 2008 through January 2, 2011, he had been the President of the Energy and Power Systems segment.

Melanie S. Cibik* Senior Vice President, General Counsel and Secretary
 
54

 
Miss Cibik has been Senior Vice President, General Counsel and Secretary of Teledyne since September 1, 2012. For more than five years prior to that she had been Vice President, Associate General Counsel and Assistant Secretary of Teledyne.
Susan L. Main* Senior Vice President and Chief Financial Officer
 
55

 
Ms. Main has been Senior Vice President and Chief Financial Officer of the Company since November 19, 2012. For more than five years prior to that she had been Vice President and Controller of Teledyne.

Jason VanWees*
Senior Vice President, Strategy and Mergers & Acquisitions
 
42

 
Mr. VanWees has been Senior Vice President, Strategy and Mergers & Acquisitions since July 1, 2013. Prior to his promotion, he had been Vice President, Strategy and Mergers & Acquisitions since September 1, 2012. Prior to that, he had been Vice President, Corporate Development and Investor Relations of the Company, for more than five years.
Wajid Ali* Vice President and Controller
 
40

 
Mr. Ali has been Vice President and Controller of the Company since November 19, 2012. For more than five years prior to that he had been Vice President and Chief Financial Officer of Teledyne DALSA, Inc. (formerly known as DALSA Corporation).
George C. Bobb III*
Vice President, Chief Compliance Officer and Deputy General Counsel - Litigation
 
39

 
Mr. Bobb has been Vice President, Chief Compliance Officer and Deputy General Counsel - Litigation of Teledyne since September 1, 2012. He had been an Associate General Counsel of Teledyne and the General Counsel of the Engineered Systems and Digital Imaging segments since August 2011. Since December 20, 2011, he has been Teledyne’s Chief Ethics Officer. Prior to that, he held numerous legal roles since he joined Teledyne in July 2008.


10


Name and Title
 
Age
 
Principal Occupations Last 5 Years
Other Officers:
  
 
 
 
Cynthia Belak
Vice President, Business Risk
Assurance
 
57

 
Ms. Belak has been Vice President, Business Risk Assurance since January 24, 2012. Prior to that, since January 4, 2010, she had been Group Controller within the Aerospace and Defense Electronics segment. From February 2008 until joining Teledyne, she was the Vice President of Finance of Sypris Electronics LLC, and prior thereto, she was Vice President of Finance and Controller of Sypris Data Systems Inc.
Stephen F. Blackwood
Vice President and Treasurer
 
51

 
Mr. Blackwood has been Vice President and Treasurer of Teledyne for more than five years.
Robyn E. McGowan
Vice President, Administration, Human Resources and Assistant Secretary
 
49

 
Ms. McGowan has been Vice President - Administration, Human Resources and Assistant Secretary of the Company for more than five years.
Patrick Neville
Vice President and Chief Information Officer
 
40

 
Mr. Neville has been Vice President and Chief Information Officer since October 4, 2010. From January 2010 to June 2010, he was Director of IT Global Operations at Iberdrola S.A. and from January 2003 to December 2009 he was Vice President of Information Technology at Energy East Corporation.
Edwin Roks
Vice President and Chief Technology Officer

 
49

 
Mr. Roks has been Vice President and Chief Technology Officer since January 2, 2014. Prior to that and since April 2010, Mr. Roks served as Executive Vice President and General Manager of the professional imaging division of Teledyne DALSA, Inc. (formerly known as DALSA Corporation). Before that he had been Vice President and General Manager of both the professional imaging and CMOS integrated circuits groups of DALSA.

 * Such officers are subject to the reporting and other requirements of Section 16 of the Securities Exchange Act of 1934, as amended.

Dr. Robert Mehrabian and Teledyne have entered into a Fifth Amended and Restated Employment Agreement dated as of October 22, 2013. Under the agreement, we will employ Dr. Mehrabian as the Chairman, President and Chief Executive Officer of Teledyne through December 31, 2017, at an annual base salary of $930,000. The agreement provides that Dr. Mehrabian is entitled to participate in Teledyne’s annual incentive bonus plan (“AIP”) and other executive compensation and benefit programs. The agreement provides Dr. Mehrabian with a non-qualified pension arrangement, under which Teledyne will pay him annually starting six months following his retirement and for a period of 10 years, as payments supplemental to any accrued pension under our qualified pension plan, an amount equal to 50% of his base compensation as in effect at retirement.
Sixteen current members of management (including the named executives) have entered into change of control severance agreements. The agreements have a three-year, automatically renewing term, except as noted below. The executive is entitled to severance benefits if (1) there is a change in control of the Company and (2) within three months before or 24 months after the change in control, either we terminate the executive’s employment for reasons other than cause or the executive terminates the employment for good reason. “Severance benefits” currently consist of:
 
A cash payment equal to three times in the case of Dr. Mehrabian or two times in the other cases the sum of (i) the executive’s highest annual base salary within the year preceding the change in control and (ii) the Annual Incentive Plan bonus target for the year in which the change in control occurs or the average actual bonus payout for the three years immediately preceding the change in control, whichever is higher.
A cash payment for the current Annual Incentive Plan bonus cycle based on the fraction of the year worked times the Annual Incentive Plan target objectives at 100%.
Payment in cash for unpaid performance share program awards, assuming applicable goals are met at 120% of performance targets.
Continued equivalent health and welfare (e.g., medical, dental, vision, life insurance and disability) benefits at our expense for a period of up to 36 months (24 months in some agreements) after termination (with the executive bearing any portion of the cost the executive bore prior to the change in control); provided, however, such benefits would be discontinued to the extent the executive receives similar benefits from a subsequent employer.
Removal of restrictions on restricted stock issued under our restricted stock award programs.
Full vesting under the Company’s pension plans (within legal parameters) such that the executive shall be entitled to receive the full accrued benefit under all such plans in effect as of the date of the change in control, without any actuarial reduction for early payment.
Up to $25,000 ($15,000 in some agreements) reimbursement for actual professional outplacement services.
Immediate vesting of all stock options, with options being exercisable for the full remainder of the term.
There is no “gross up payment” to hold the executive harmless against the impact, if any, of federal excise taxes imposed on executive as a result of “excess parachute” payments as defined in Section 280G of the Internal Revenue Code. The executive will receive the better of, on an after-tax basis, (a) the unreduced excess parachute

11


payment with no tax gross up payment, or (b) a parachute payment reduced to a level below which an excise tax is imposed.
Certain payments are deferred for six months following a separation of service to assure compliance with Section 409A of the Internal Revenue Code.
The Company has entered into individual Indemnification Agreements with directors and certain officers and executives of Teledyne, including those then members of Executive Management listed above. The Indemnification Agreements provide the directors and executives who are parties to the agreements with a stand-alone contractual right to indemnification and expense advancement to the greatest extent allowable under Delaware law. The Indemnification Agreements also provide:
In a third-party proceeding, an indemnitee is entitled to indemnification if the indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company and, if in a criminal action or proceeding, if the indemnitee had no reason to believe that his or her conduct was unlawful. In a third party proceeding, the indemnification obligation covers reasonable expenses, judgment fines, and amounts paid in settlement actually and reasonably incurred by the indemnity.
In proceedings by or in the name of the Company (e.g., derivative suits), an indemnitee is entitled to indemnification if the indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company. In derivative suits, the indemnification obligation covers reasonable expenses, but in proceedings where the Company is alleging harm caused by the indemnitee, the indemnitee would generally not be entitled to be indemnified for judgments, fines and amounts paid in settlement (otherwise the Company would effectively not recover any damages), unless perhaps a Delaware or other court determines otherwise despite the finding of liability.
The Company has an obligation to advance, on an unsecured and interest free basis, reasonable expenses incurred by the indemnitee within 30 days of the indemnitee’s request. The indemnitee does not need to meet any standard of conduct to be entitled to advancement of expenses and there is no determination requirement to be made by the Board in connection with the advancements of expenses. An indemnity must repay any amounts advanced if it ultimately determined that the indemnity is not entitled to indemnification.
Our indemnification obligations do not cover the following situations: (1) where indemnification payments have been made under director’s & officer’s insurance or other indemnification provisions; (2) where the claim is based on disgorgement of short-swing profits under Section 16(b) of the Exchange Act; (3) where the claim is based on reimbursement by the indemnitee to the Company of a bonus or other incentive-based or equity-based compensation if required under the Exchange Act (e.g., in connection with a restatement as a result of the company’s noncompliance with the financial reporting requirements required by Section 304 of the Sarbanes-Oxley Act); or (4) where the proceeding is initiated by the indemnitee (other than proceedings that are consented to by the Board or that the indemnitee initiates against the Company to enforce the Agreement).
Under the Indemnification Agreements, in the event of a change in control or we reduce or do not renew our director’s & officer’s insurance coverage, we are required to purchase (or cause the acquirer or successor to the Company to purchase or maintain) a six-year tail policy, subject to a 200% premium cap. The agreements continue until the later of (i) 10 years after the indemnitee ceases to serve as a director or officer, and (ii) one year following the final termination of any proceeding subject to the agreement.

12



Item 1A.
Risk Factors
Risk Factors; Cautionary Statement as to Forward-Looking Statements
The following text highlights various risks and uncertainties associated with Teledyne. These factors could materially affect “forward-looking statements” (within the meaning of the Private Securities Litigation Reform Act of 1995) that we may make from time to time, including forward-looking statements contained in “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K and in Teledyne’s 2013 Annual Report to Stockholders. It is not possible for management to predict all such factors, and new factors may emerge. Additionally, management cannot assess the impact of each such factor on Teledyne or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
  
A new global recession, continued economic uncertainty in Europe or an economic downturn in China may adversely affect us.
If another global recession emerges, if economic uncertainty in Europe continues or worsens, or if economic growth in China substantially slows, we may experience declines in revenues, profitability and cash flows from reduced orders, payment delays, collection difficulties, increased price pressures for our products, increased risk of excess and obsolete inventories or other factors caused by the economic problems of customers. If negative conditions in the global credit markets prevent our customers’ access to credit or render them insolvent, orders for our products may decrease, which would result in lower revenue. Likewise, if our suppliers face challenges in obtaining credit, in selling their products, or otherwise in operating their businesses or remaining solvent, they may become unable to offer the materials we use to manufacture our products. These events could adversely impact our ability to manufacture affected products and could also result in reductions in our revenue, increased price competition, and increased operating costs, which could adversely affect our business, financial condition, results of operations, and cash flows.
We develop and manufacture products for customers in the energy exploration and production markets, domestic and international commercial aerospace markets, the semiconductor industry, the consumer electronics and automotive industries, each of which has been cyclical and suffered from fluctuating market demands. A cyclical downturn in these markets may materially affect future operating results.
In addition, we sell products and services to customers in industries that are sensitive to the level of general economic activity and consumer spending habits and in more mature industries that are sensitive to capacity. Adverse economic conditions affecting these industries may reduce demand for our products and services, which may reduce our revenues, profits or production levels. Some of our businesses serve industries such as power generation and petrochemical refining, which may be negatively impacted by reductions in global capital expenditures and manufacturing capacity.

United States and global responses to terrorism, the winding down of war in Afghanistan, continuing turmoil in Middle Eastern countries, concerns regarding nuclear proliferation and the safety of nuclear energy, potential epidemics, financial issues facing airlines and volatile energy prices increase uncertainties with respect to many of our businesses and may adversely affect our business and results of operations.
United States’ and global responses to terrorism, the winding down of war in Afghanistan, continuing turmoil in Middle Eastern countries and nuclear proliferation concerns increase uncertainties with respect to U.S. and other business and financial markets and could adversely affect our business and operations.
Air travel declines have occurred after terrorist attacks and heightened security alerts, as well as after the H1N1 virus, SARS and bird flu scares. While travel by our sales and service personnel to various regions has been affected by such factors, additional declines in air travel resulting from such factors and other factors could adversely affect the financial condition of many of our commercial airline and aircraft manufacturer customers and, in turn, could adversely affect our Aerospace and Defense Electronics segment. In addition, a prolonged virus epidemic or pandemic, or the threat thereof, could result in worker absences, lower productivity, voluntary closure of our offices and manufacturing facilities, disruptions in our supply chain, travel restrictions on our employees, and other disruptions to our businesses. Moreover, health epidemics may force local health and government authorities to mandate the temporary closure of our offices and manufacturing facilities.
 Deterioration of financial performance of airlines could result in a reduction of discretionary spending for upgrades of avionics and in-flight communications equipment, which would adversely affect our Aerospace and Defense Electronics segment.
Higher oil prices could adversely affect commercial airline-related customers of our Aerospace and Defense Electronics segment. Conversely, lower oil prices could decrease oil exploration and petrochemical refining activities and hinder our

13


marine and other instrumentation businesses. In addition, instability in the Middle East or other oil-producing regions could adversely affect expansion plans of the oil and gas industry customers of our instrumentation and cable solutions businesses.
Acquisitions involve inherent risks that may adversely affect our operating results and financial condition.
Our growth strategy includes acquisitions. Acquisitions involve various inherent risks, such as:
our ability to assess accurately the value, strengths, weaknesses, internal controls, contingent and other liabilities and potential profitability of acquisition candidates;
the potential loss of key personnel of an acquired business;
our ability to integrate acquired businesses and to achieve identified financial, operating and other synergies anticipated to result from an acquisition;
our ability to assess, integrate and implement internal controls of acquired businesses in accordance with Section 404 of the Sarbanes-Oxley Act of 2002;
the distraction of management resulting from the need to integrate acquired businesses;
increased competition for acquisition targets, which may increase acquisition costs;
the potential impairment of assets;
potential unknown liabilities associated with a business we acquire or in which we invest;
the risks associated with acquiring privately-held companies, which generally do not have as formal or comprehensive internal controls and compliance systems in place as public companies;
production delays associated with consolidating acquired facilities and manufacturing operations;
risks associated with owning and operating businesses internationally, including those arising from U.S. and foreign government policy changes or actions and exchange rate fluctuations; and
unanticipated changes in business and economic conditions affecting an acquired business.
 
While we conduct financial and other due diligence in connection with our acquisitions and generally seek some form of protection, including indemnification from a seller and sometimes an escrow of a portion of the purchase price to cover potential issues, such acquired companies may have weaknesses or liabilities that are not accurately assessed or brought to our attention at the time of the acquisition. Further, indemnities or escrows may not fully cover such matters, particularly matters identified after a closing.
As they have over the last few years, acquisitions may also change the nature and level of various risks faced by Teledyne. For example, the DALSA acquisition in 2011 and the LeCroy acquisition in 2012 increased the percentage of sales attributable to commercial customers as opposed to the U.S. Government. These acquisitions, coupled with our acquisitions of additional Canada-based companies (Optech and VariSystems) and U.K.-based PDM-Neptec in 2012 and also our 2013 acquisitions of Denmark-based RESON, U.K.-based CDL and Netherlands-based Axiom, also increased the percentage of revenues and expenses that arise from international sources and consequently our exposure to U.S. and foreign policy changes and exchange rate fluctuations. Additionally, both DALSA’s and LeCroy’s businesses have been more capital intensive than other Teledyne businesses, increasing Teledyne’s capital requirements.
Under SEC rules, Teledyne must issue a report on management’s assessment of the effectiveness of internal controls over financial reporting. The SEC permits a limited time-based exclusion for acquisitions to give a company an opportunity to evaluate more fully the internal controls of acquired companies and correct deficiencies and institute new or additional internal controls. Our 2013 management’s report specifically excludes from its scope and coverage our 2013 acquisitions of RESON, Axiom, CETAC and CDL, allowing us additional time to evaluate existing internal controls and implement additional controls as appropriate. With regard to future acquisitions, we can provide no assurance that we will be able to provide a report that contains no significant deficiencies or material weaknesses with respect to these acquired companies or other acquisitions.
 In connection with our acquisitions, including ones which we do not complete, we may incur significant transaction costs. We are required to expense, as incurred, such transaction costs, which may have an adverse impact on our quarterly financial results.
We are subject to the risks associated with international sales, which could harm our business or results of operations.
During 2013, sales to international customers accounted for approximately 44% of our total revenues, compared with 39% in 2012 and 36% in 2011. In 2013, we sold products to customers in over 100 countries. The 2013 top five countries for international sales were the United Kingdom, Norway, China, Germany and South Korea, constituting 23% of our total sales. Our acquisitions, including RESON in 2013, LeCroy in 2012 and DALSA in 2011, contributed to greater international sales. We anticipate that future sales to international customers will continue to account for a significant and increasing percentage of our revenues, particularly since business and growth plans for many Teledyne businesses focus on sales outside of the United States, including to emerging markets such as China, Brazil and West Africa.

14


Risks associated with international sales include: 
political and economic instability;
international terrorism;
export controls, including U.S. export controls related to China and increased scrutiny of exports of marine instruments, digital imaging and other products;
changes in legal and regulatory requirements;
U.S. and foreign government policy changes affecting the markets for our products;
changes in tax laws and tariffs;
changes in U.S. - China relations;
difficulties in protection and enforcement of intellectual property rights;
transportation, including piracy in international waters; and
exchange rate fluctuations.
Any of these factors could have a material adverse effect on our business, results of operations and financial condition. Exchange rate fluctuations may negatively affect the cost of our products to international customers and therefore reduce our competitive position. With the 2011 acquisition of Canada-based DALSA and the 2012 acquisitions of the majority interest in the parent company of Optech, also Canada-based, volatility in the value of the Canadian dollar relative to the U.S. dollar, or other foreign currencies, could adversely affect the business, operations and the financial condition of our Digital Imaging segment.
Sales of our products and services internationally are subject to U.S. and local government regulations and procurement policies and practices including regulations relating to import-export control. Violations of export control rules could result in the suspension of our ability to export items from one or more businesses or the entire corporation. Depending on the scope of the suspension, this could have a material effect on our ability to perform certain international contracts.
Among other things, we are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, which generally prohibits U.S. companies and their intermediaries from bribing foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment. Further, in 2011, the United Kingdom also implemented the U.K. Bribery Act, which raised the bar for anti-bribery law enforcement and compliance relative to the FCPA. Any determination that we had violated the FCPA, the U.K. Bribery Act, or equivalent anti-bribery and corruption laws in countries in which we do business could result in sanctions that could have a material adverse effect on our business, financial condition and results of operations. While we have procedures and compliance programs in place and conduct FCPA and other trainings, we cannot provide assurance that our internal controls will always protect us from misconduct by our employees, agents or business partners.
An increasingly material amount of our total revenues is derived from companies in the offshore oil and gas industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility of oil and gas prices.
An increasingly material amount of our total revenues is derived from customers in or connected to the offshore oil and gas exploration, development and production industry.  Our largest commercial customer is in this industry and accounted for 3.6%, 3.4% and 2.9% of total sales in 2013, 2012 and 2011, respectively.   The offshore oil and gas industry is a historically cyclical industry characterized by significant changes in the levels of exploration and development activities. Oil and gas prices, and market expectations of potential changes in those prices, significantly affect the levels of those activities. Worldwide political, economic and military events have contributed to oil and gas price volatility and are likely to continue to do so in the future. Any prolonged reduction in the overall level of offshore oil and gas exploration and development activities, whether resulting from changes in oil and gas prices or otherwise, could materially and adversely affect our financial condition and results of operations of our businesses within our Instrumentation  segment.  Some factors that have affected and are likely to continue affecting oil and gas prices and the level of demand for our services and products include the following:
worldwide demand for oil and gas;
general economic and business conditions and industry trends;
the ability of the Organization of Petroleum Exporting Countries, or OPEC, to set and maintain production levels;
the level of production by non-OPEC countries;
the ability of oil and gas companies to generate funds for capital expenditures;
domestic and foreign tax policy;
laws and governmental regulations that restrict exploration and development of oil and gas in various offshore jurisdictions;
technological changes;
the political environment of oil-producing regions; and
the price and availability of alternative fuels.

15


Our dependence on revenue from government contracts subjects us to many risks:
Our revenue from government contracts depends on the continued availability of funding from the U.S. Government, and, accordingly, we have the risk that funding for our existing contracts may be canceled or diverted to other uses or delayed.
We perform work on a number of contracts with the Department of Defense and other agencies and departments of the U.S. Government including sub-contracts with government prime contractors. Sales under contracts with the U.S. Government as a whole, including sales under contracts with the Department of Defense, as prime contractor or subcontractor, represented approximately 27% of our total revenue in 2013, compared with 32% in 2012 and 36% in 2011. Performance under government contracts has inherent risks that could have a material effect on our business, results of operations, and financial condition.
Government contracts are conditioned upon the continuing availability of Congressional appropriations and the failure of Congress to appropriate funds for programs in which we participate could negatively affect our results of operations. The U.S. Government shutdown during 2013 negatively affected many of our businesses, and the failure by Congress to approve future budgets on a timely basis could delay procurement of our services and products and cause us to lose future revenues. Additionally, defense spending is expected to continue to decline in some areas over the next few years. A continued emphasis on Federal deficit and debt reduction could lead to a further decrease in overall defense spending. The continued war on terrorism and the winding down of the war in Afghanistan also could result in a diversion of funds from programs in which Teledyne participates. Budgetary concerns could result in future contracts being awarded more on price than on other competitive factors, and smaller defense budgets could result in government in-sourcing of programs and more intense competition on programs that are not in-sourced, which could result in lower revenues and profits.
The sequestration provision of the Budget Control Act of 2011 originally imposed $500 billion of defense cuts over nine years starting in fiscal year 2013, which represented approximately 9% of planned defense funding over the period. While the recent two-year budget agreement set forth in the Bipartisan Budget Act of 2013 lessened the across-the-board cuts of sequestration, sequestration continues to be in effect, including for the U.S. Department of Defense. The two-year budget agreement reduced the $52 billion that the U.S. Department of Defense was supposed to lose in 2014 by $21 billion, which translates to a 1.2% reduction compared to 2013, as compared to the originally set 6% reduction. Cuts for 2015 were reduced by $10 billion. Sequestration has already negatively affected some of the defense programs in which we participate as well, including the Missile Defense Agency’s Objective Simulation Framework program, and we expect our defense programs to continue to be negatively impacted by the continuing effects of sequestration or other defense spending delays and cuts. 
Continued defense spending does not necessarily correlate to continued business for us, because not all of the programs in which we participate or have current capabilities may be provided with continued funding. Changes in policy and budget priorities by the President, his Administration and our Congress for various Defense and NASA programs could continue to impact our Engineered Systems and Aerospace and Defense Electronics segments. For example, changes in national space policy that affect NASA’s budget have occurred. There have also been significant reductions in missile defense budgets. We anticipate continuing scrutiny of those budgets to impact our revenues. Our Engineered Systems segment may be further impacted by delays in production runs under the JASSM and Harpoon missile programs. The timing of program cycles can affect our results of operations for a particular quarter or year. It is not uncommon for the Department of Defense to delay the timing of awards for major programs for six to twelve months, or more, beyond the original projected timeframe, as evidenced by the 2013-awards of the Test Execution Services and Launch Augmentation program. Reductions and delays in research and development funding by the U.S. Government may continue to impact our revenues. As DARPA reviews its programs aimed to technologically enhance U.S. military capabilities and national security, changes to the DARPA research and technology development programs in which we participate could occur. Finally, various Department of Defense initiatives, such as the emphasis on in-sourcing positions to the Government and anticipated reductions or cancellations of existing programs, could negatively impact our Engineered Systems segment.
Our participation in government programs may decrease or be subject to renegotiation as those programs evolve over time.
The U.S. Government has been placing emphasis on small business quotas and increasing small business contract set asides and minimum work percentages. In some cases, prime contractors are required to reduce participation by large subcontractors like Teledyne in order to fill small business quotas and be responsive to proposals and bids. As a result, our Engineered Systems segment could be significantly impacted.
Over time, and for a variety of reasons, programs can evolve and affect the extent of our participation. For example, Teledyne Brown Engineering, Inc.’s Ground-based Midcourse Defense program was negatively impacted by both the nominal end date of development activity and the change in focus of the current Administration relative to missile defense.

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We have been a significant participant in NASA programs, primarily through our Engineered Systems segment and through Teledyne Scientific Company. The current Administration introduced significant changes to the national space policy, including the cancellation of the NASA’s Constellation Program which includes Ares launch vehicles. The Administration plans to utilize commercial launch vehicles for crew and cargo ISS expeditions, and develop a NASA heavy lift launch vehicle for space exploration. As a result of these changes, we have been attempting to transition our business to meet the needs of the new policy and programs, with the further understanding that the existing ISS will continue to be fully functional and supported and that the U.S. will continue investment in human space flight. While most recently, in early 2014, we were awarded a five-year $60 million contract by NASA’s Marshall Space Flight Center to develop and manufacture the Launch Vehicle Stage Adapter for the Space Launch System, failure to further transition our business successfully could result in reduced sales. In addition, delayed funding and changes in support for NASA’s current space policy could negatively impact our business.
Our contracts with the U.S. Government are subject to termination rights that could adversely affect us.
Most of our U.S. Government contracts are subject to termination by the U.S. Government either at its convenience or upon the default of the contractor. Termination for convenience provisions provide only for the recovery of costs incurred or committed, settlement expenses, and profit on work completed prior to termination. Termination for default clauses impose liability on the contractor for excess costs incurred by the U.S. Government in re-procuring undelivered items from another source. We had four U.S. Government contracts terminated for convenience in 2013, compared with six in 2012 and seven in 2011. No contracts were terminated for default during such three-year period.
We may lose money or generate less than expected profits on our fixed-price government contracts and we may lose money if we fail to meet certain pre-specified targets in government contracts.
There is no guarantee that U.S. Government contracts will be profitable. A number of our U.S. Government prime contracts and subcontracts are fixed-price type contracts (60% of our total U.S. Government contracts were fixed-price in 2013, 59% in 2012 and 60% in 2011). Under these types of contracts, we bear the inherent risk that actual performance cost may exceed the fixed contract price. Under such contracts, we must absorb cost overruns, notwithstanding the difficulty of estimating all of the costs we will incur in performing these contracts. We cannot assure that our contract loss provisions in our financial statements will be adequate to cover all actual future losses. We may lose money on some contracts if we fail to meet these estimates.
Our business is subject to government contracting regulations and our failure to comply with such laws and regulations could harm our operating results and prospects.
We, like other government contractors, are subject to various audits, reviews and investigations (including private party “whistleblower” lawsuits) relating to our compliance with federal and state laws. More routinely, the U.S. Government may audit the costs we incur on our U.S. Government contracts, including allocated indirect costs. Such audits could result in adjustments to our contract costs. Any costs found to be improperly allocated to a specific contract will not be reimbursed, and such costs already reimbursed would need to be refunded. We have recorded contract revenues based upon costs we expect to realize on final audit. In a worst case scenario, should a business or division involved be charged with wrongdoing, or should the U.S. Government determine that the business or division is not a “presently responsible contractor”, that business or division, and conceivably our Company as a whole, could be temporarily suspended or, in the event of a conviction, could be debarred for up to three years from receiving new government contracts or government-approved subcontracts. In addition, we could expend substantial amounts defending against such charges and in damages, fines and penalties if such charges were proven or were to result in negotiated settlements.
Our indebtedness, and any failure to comply with our covenants that apply to our indebtedness, could materially and adversely affect our business.
As of December 29, 2013, we had $540.2 million in total outstanding indebtedness. This indebtedness included $250.0 million in senior unsecured notes, $200.0 million in term loans, $74.2 million under our $750.0 million 2013-amended credit facility and $16.0 million in other debt. Our indebtedness could harm our business by, among other things, reducing the funds available to make new strategic acquisitions or reducing our flexibility in planning for or reacting to changes in our business and market conditions. Our indebtedness exposes us to interest rate risk since a portion of our debt obligations are at variable rates. Our indebtedness could also have a material adverse effect on our business by increasing our vulnerability to general adverse economic and industry conditions or a downturn in our business. General adverse economic and industry conditions or a downturn in our business could result in our inability to repay this indebtedness in a timely manner. We may elect to raise other forms of debt capital, depending on financial, market and economic conditions.

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Product liability claims, product recalls and field service actions could have a material adverse effect on our reputation, business, results of operations and financial condition and we may have difficulty obtaining product liability and other insurance coverage.
As a manufacturer and distributor of a wide variety of products, including monitoring instruments, products used in offshore oil and gas production, products used in commercial aviation and products used in medical devices (most recently including X-ray detectors), our results of operations are susceptible to adverse publicity regarding the quality or safety of our products. In part, product liability claims challenging the safety of our products may result in a decline in sales for a particular product, which could adversely affect our results of operations. This could be the case even if the claims themselves are proven untrue or settled for immaterial amounts.
While we have general liability and other insurance policies concerning product liabilities, we have self-insured retentions or deductibles under such policies with respect to a portion of these liabilities. Awarded damages could be more than our accruals. We could incur losses above the aggregate annual policy limit as well. We cannot assure that, for 2014 and in future years, insurance carriers will be willing to renew coverage or provide new coverage for product liability.
Product recalls can be expensive and tarnish our reputation and have a material adverse effect on the sales of our products.
We have been joined, among a number of defendants (often over 100), in lawsuits alleging injury or death as a result of exposure to asbestos. In addition, because of the prominent “Teledyne” name, we may continue to be mistakenly joined in lawsuits involving a company or business that was not assumed by us as part of our 1999 spin-off. To date, we have not incurred material liabilities in connection with these lawsuits. However, our historic insurance coverage, including that of its predecessors, may not fully cover such claims and the defense of such matters. Coverage typically depends on the year of purported exposure and other factors. Nonetheless, we intend to vigorously defend our position against these claims.
Certain gas generators historically manufactured by Teledyne Energy Systems, Inc. contained a sealed, wetted asbestos component. While the company has transitioned to a replacement material, had placed warning labels on its products and took care in the handling of this discontinued material by employees, there is no assurance that the company will not face product liability or workers compensation claims involving this component.
Our Teledyne Brown Engineering, Inc.’s laboratory in Knoxville, Tennessee performs radiological analyses. Errors and omissions in analyses may occur. Our insurance coverage or indemnities may not be adequate to cover potential problems associated with faulty radiological analyses.
Teledyne Brown Engineering, Inc. and other Teledyne companies manufacture components for customers in the nuclear power market, including utilities and certain governmental entities. Certain liabilities associated with such products are covered by the Price Anderson Act and other statutory and common law defenses, and we have received indemnities from some of our customers. However, there is no assurance we will not face product liability claims related to such products or that our exposure will not exceed the amounts for which we have liability coverage or protection.
We cannot assure that we will not have additional product liability claims or that we will not recall any products.
Our pension expense and the value of our pension assets are affected by factors outside of our control, including the performance of plan assets, the stock market, interest rates and actuarial experience.
We have a defined benefit qualified pension plan covering most of our U.S. employees hired prior to 2004 or approximately 20% of our active employees. The value of the combined pension assets is currently greater than our pension benefit obligation. The accounting rules applicable to our qualified pension plan require that amounts recognized in the financial statements be determined on an actuarial basis, rather than as contributions are made to the plan. Two significant elements in determining our pension income or pension expense are the expected return on plan assets and the discount rate used in projecting pension benefit obligations. Declines in the stock market and lower rates of return could increase required contributions to our qualified pension plan and/or result in a change to shareholders’ equity. Our investment strategy may not produce the expected returns if the credit, financial or stock markets deteriorate. Any decreases or increases in market interest rates will affect the discount rate assumption used in projecting pension benefit obligations. In 2012, in an effort to reduce the risks associated with our current and future domestic pension obligation, we amended the pension plan to change the rate at which pension benefits accrue after February 29, 2012 and offered and made lump sum payments to certain participants in the plan whose employment with Teledyne had terminated. In 2013, 2012 and 2011, we have made aggregate voluntary pretax cash contributions of $244.8 million to the domestic pension plan. If, and to the extent, decreases in our pension assets are not offset by voluntary contributions, recovered through future asset returns, mitigated by an increase in the rate at which the benefit obligation is discounted, or other actions, our required cash contributions and pension expense could increase under the plans. For additional discussion of pension matters, see the discussion under “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition” and Notes 2 and 12 to Notes to Consolidated Financial Statements.

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Our future financial results could be adversely impacted by asset impairment charges.
December 29, 2013, Teledyne’s goodwill was $1,037.8 million and net acquired intangible assets were $270.9 million. Under current accounting guidance, we are required to test annually both acquired goodwill and other indefinite-lived intangible assets for impairment based upon a fair value approach, rather than amortizing them over time. We have chosen to perform our annual impairment reviews of goodwill and other indefinite-lived intangible assets during the fourth quarter of each fiscal year. Based on this most recent annual impairment test, we recorded a $1.2 million asset impairment related to acquired intangible assets, but we determined that there was no impairment of goodwill. We also are required to test goodwill for impairment between annual tests if events occur or circumstances change that would more likely than not reduce our enterprise fair value below its book value. These events or circumstances could include a significant change in the business climate, including a significant sustained decline in an entity’s market value, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business, or other factors. If the fair market value is less than the carrying value, including goodwill, we could be required to record an impairment charge. The valuation of reporting units requires judgment in estimating future cash flows, discount rates and estimated product life cycles. In making these judgments, we evaluate the financial health of the business, including such factors as industry performance, changes in technology and operating cash flows. As we have grown through acquisitions, the amount of goodwill and net acquired intangible assets is significant compared with our total assets. As a result, the amount of any annual or interim impairment could be significant and could have a material adverse effect on our reported financial results for the period in which the charge is taken. We also may be required to record an earnings charge or incur unanticipated expenses if, as a result of a change in strategy or other reason, we were to determine the value of other assets had been impaired.
We may not have sufficient resources to fund all future research and development and capital expenditures or possible acquisitions.
In order to remain competitive, we must make substantial investments in research and development of new or enhanced products and continuously upgrade our process technology and manufacturing capabilities. In September 2006, we acquired a provider of research and development services primarily in the areas of electronics, optics, information sciences and materials technologies that is currently Teledyne Scientific Company, and in 2013, 2012 and 2011, we acquired RESON, LeCroy and DALSA, respectively, each of which had historically made significant investments in research and development relative to total revenues. Our Teledyne Scientific Company subsidiary has been actively promoting and funding joint research and development projects with other Teledyne businesses, including our Teledyne Oil & Gas businesses, Teledyne Reynolds, Inc., Teledyne Brown Engineering, Inc., DALSA and LeCroy. Additionally, some of our businesses are actively pursuing governmental support and funding for some of their research and development initiatives, including DALSA with respect to its CMOS and uncooled infrared image sensor development efforts. Nonetheless, we may be unable to fund all of our research and development and capital investment needs or possible acquisitions. Our ability to raise additional capital will depend on a variety of factors, some of which will not be within our control, including the existence of bank and capital markets, investor perceptions of us, our businesses and the industries in which we operate, and general economic conditions. Failure to successfully raise needed capital on a timely or cost-effective basis could have a material adverse effect on our business, results of operations and financial condition. In addition, if we fail to accurately predict future customer needs and preferences or fail to produce viable technologies, we may invest heavily in research and development of products that do not lead to significant revenue, which would adversely affect our profitability.
We may be unsuccessful in our efforts to increase our participation in new markets.
We intend to both adapt our existing technologies and develop new products to expand into new market segments. We may be unsuccessful in accessing these and other new markets if our products do not meet our customers’ requirements, as a result of changes in either technology and industry standards or because of actions taken by our competitors.
Limitations in customer funding for applied research and development and technology insertion projects and government support for research and development expenditures may reduce our ability to apply our ongoing investments in some market areas.
 We may be unable to successfully introduce new and enhanced products in a timely and cost-effective manner, which could harm our growth and prospects.
Our operating results depend in part on our ability to introduce new and enhanced products on a timely basis. In order to improve our product development capabilities we purchased the research center that is now Teledyne Scientific Company in 2006 and in 2011 we purchased DALSA, which has access to a well-equipped MEMS research and development center. In 2013, we opened a 52,000-square-foot technology development center in Daytona Beach, Florida primarily to serve the offshore oil and gas production and exploration industries. Deepwater and harsh environments demand new materials and technology from our Teledyne Oil & Gas businesses to support high temperature, high pressure locations. Successful product development and introduction depend on numerous factors, including our ability to anticipate customer and market requirements, changes in technology and industry standards, our ability to differentiate our offerings from offerings of our

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competitors, and market acceptance. We may not be able to develop and introduce new or enhanced products in a timely and cost-effective manner or to develop and introduce products that satisfy customer requirements.
Our new products also may not achieve market acceptance or correctly address new industry standards and technological changes. We may also lose any technological advantage to competitors if we fail to develop new products in a timely manner.
Additionally, new products may trigger increased warranty costs as such products are tested further by actual usage. Accelerated entry of new products to meet heightened market demand and competitive pressures may cause additional warranty costs as development and testing time periods might be accelerated or condensed.
Technological change and evolving industry and regulatory standards could cause some of our products or services to become obsolete or non-competitive.
The markets for some of our products and services are characterized by rapid technological development, evolving industry standards, changes in customer requirements and new product introductions and enhancements. A faster than anticipated change in one or more of the technologies related to our products or services, or in market demand for products or services based on a particular technology, could result in faster than anticipated obsolescence of certain of our products or services and could have a material adverse effect on our business, results of operations and financial condition. Currently accepted industry and regulatory standards are also subject to change, which may contribute to the obsolescence of our products or services.
We may not be able to reduce the costs of our products to satisfy customers’ cost reduction mandates, which could harm our sales or margins.
More and more customers continue to seek price reductions of our products. While we continually work to reduce our manufacturing and other costs of our products, without affecting product quality and reliability, there is no assurance that we will be able to do so and do so in a timely manner to satisfy the pricing pressures of our customers. Cost reductions of raw materials and other components used in our products may be beyond our control depending on market, credit and economic conditions. Customers may seek lower cost products from China and other developing countries where manufacturing costs are lower.
The airline industry is heavily regulated, and if we fail to comply with applicable requirements, our results of operations could suffer.
Governmental agencies throughout the world, including the U.S. Federal Aviation Administration, or the FAA, prescribe standards and qualification requirements for aircraft components, including virtually all commercial airline and general aviation products. Specific regulations vary from country to country, although compliance with FAA requirements generally satisfies regulatory requirements in other countries. If any material authorization or approval qualifying us to supply our products is revoked or suspended, then the sale of the product would be prohibited by law, which would have an adverse effect on our business, financial condition and results of operations.
From time to time, the FAA or equivalent regulatory agencies in other countries propose new regulations or changes to existing regulations, which are usually more stringent than existing regulations. If these proposed regulations are adopted and enacted, we may incur significant additional costs to achieve compliance, which could have a material adverse effect on our business, financial condition and results of operations.
 Increasing competition could reduce the demand for our products and services.
Each of our markets is highly competitive. Many of our competitors have, and potential competitors could have, greater name recognition, a larger installed base of products, more extensive engineering, manufacturing, marketing and distribution capabilities and greater financial, technological and personnel resources than we do. New or existing competitors may also develop new technologies that could adversely affect the demand for our products and services. Industry acquisition and consolidation trends, particularly among aerospace and defense contractors, have adversely impacted demand for our aerospace and defense related engineering services as large prime contractors in-source increased amounts of major acquisition programs and also require significant expansion in small business participation to meet Government contracting goals. Low-cost competition from China and other developing countries could also result in decreased demand for our products. Increasing competition could reduce the volume of our sales or the prices we may charge, which would negatively impact our revenues. Smaller defense budgets both in the United States and Europe could result in additional competition for new and existing defense programs.

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We sell products to customers in industries that may again undergo rapid and unpredictable changes, which could adversely affect our operational results or production levels.
We develop and manufacture products for customers in industries that have undergone rapid changes in the past, including the semiconductor and the telecommunications industries. In 2009, DALSA experienced a significant decline in demand for its products for the semiconductor and electronics inspection industries. These industries, or others that we serve, may exhibit rapid changes in the future and may adversely affect our operating results, or our production levels, or both.
Our business and financial results could be adversely affected by conditions and other factors associated with our suppliers.
Some items we purchase for the manufacture of our products are purchased from limited or single sources of supply due to technical capability, price and other factors. For example, DALSA has an internal single source of supply for CCD semiconductor wafers used to assemble image sensors and an external single source of supply for CMOS semiconductor wafers used to assemble X-ray panel products. LeCroy continues to outsource a portion of its research and development activities to a third party engineering firm in Malaysia where it may be more difficult for us to enforce our intellectual property rights. We have also outsourced from time to time the manufacturing of certain parts, components, subsystems and even finished products to single or limited sources, including international sources. Disruption of these sources could cause delays or reductions in shipments of our products or increases in our costs, which could have an adverse effect on our financial condition or operations. International sources possess additional risks, some of which are similar to those described above in regard to international sales. With any continuing disruption in the global economy and financial markets, some of our suppliers may also continue to face issues gaining access to sufficient credit and materials to maintain their businesses, which could reduce the availability of some components and, to the extent such suppliers are single source suppliers, could adversely affect our ability to continue to manufacture and sell our products. Continuing economic pressure on suppliers may also trigger increased pricing or workforce reductions or reduced workweeks possibly creating longer lead times to obtain needed components for our products.
Some of our commercial product lines may have one or a limited number of customers, the loss of which could adversely affect our business or financial results.
While no commercial customer accounted for more than 10% of our total sales during 2013, 2012 and 2011 and we have hundreds of customers in the various industries that we serve, certain product lines may have one or a few key customers the loss of which could adversely affect our business or financial results. Teledyne’s largest commercial customer, a customer of our Instrumentation segment, accounted for 3.6%, 3.4% and 2.9% of total sales in 2013, 2012 and 2011, respectively.
Newer products, such as our X-ray panel products, may initially be more heavily dependent on a singular or limited number of customers until market acceptance is obtained or due to contractual terms. Similarly, some older product lines may be more heavily dependent on a singular or limited number of customers. In either such case, program delays of such customer or customers, as well as the loss of such customer or customers, could adversely affect our business or financial results.
We face risks related to sales through distributors and other third parties that we do not control, which could harm our business.
We sell a portion of our products through third parties such as distributors, value-added resellers and OEMs (collectively “distributors”). Using third parties for distribution exposes Teledyne to many risks, including competitive pressure, concentration, credit risk and compliance risks. We may rely on one or more key distributors for a product, and the loss of these distributors could reduce our revenue. Distributors may face financial difficulties, including bankruptcy, which could harm our collection of accounts receivables and financial results. Violations of the FCPA or similar anti-bribery laws by distributors or other third party intermediaries could have a material impact on our business. Failing to manage risks related to our use of distributors may reduce sales, increase expenses, and weaken our competitive position, and could result in sanctions against us.
Compliance with increasing environmental and climate change regulations, as well as the effects of potential environmental liabilities, could have a material adverse financial effect on us.
We, like other industry participants, are subject to various federal, state, local and international environmental laws and regulations. We may be subject to increasingly stringent environmental standards in the future, particularly as greenhouse gas emissions and climate change regulations and initiatives increase. Future developments, administrative actions or liabilities relating to environmental and climate change matters could have a material adverse effect on our business, results of operations or financial condition. Environmental regulations on hydraulic fracturing could adversely affect some product lines of our Instrumentation segment.
 

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Our manufacturing operations could expose us to material environmental liabilities and companies we acquire may have environmental liabilities that are not accurately assessed or brought to our attention at the time of the acquisition. In 2013, we established an environmental reserve of $5.3 million related to potential soil remediation activities at a former leased facility.
For additional discussion of environmental matters, see the discussion under the caption “Other Matters - Environmental” of “Item 7. Management’s Discussion and Analysis of Results of Operation and Financial Condition” and Note 15 to our Notes to Consolidated Financial Statements.
The U.S. Environmental Protection Agency (“EPA”) has focused on greenhouse gases (“GHGs”), maintaining GHGs threaten the public health and welfare of the American people. The EPA also maintains that GHG emissions from on-road vehicles contribute to that threat. The EPA’s endangerment finding covers emissions of six greenhouse gases. The EPA’s continuing efforts to limit GHG emissions could adversely affect our U.S. manufacturing operations, increase prices for energy, fuel and transportation, require us to accommodate changes in parameters, such as the way parts are manufactured, and may, in some cases, require us to redesign of certain products. This could lead to increased costs, which we may not be able to recover from customers, delays in product shipments and loss of market share to competitors.
Our inability to attract and retain key personnel could have a material adverse effect on our future success.
Our future success depends to a significant extent upon the continued service of our executive officers and other key management and technical personnel and on our ability to continue to attract, retain and motivate qualified personnel. We also have a maturing work force. While we have engaged in succession planning, the loss of the services of one or more of our key employees or our failure to attract, retain and motivate qualified personnel could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to sell, exit or reconfigure businesses that we determine no longer meet with our growth strategy.
Consistent with our strategy to emphasize growth in our core markets, we continually evaluate our businesses to ensure that they are aligned with our strategy. This review led to the decision to sell our general aviation piston engine businesses, which sale was completed in April 2011. As a result of our review and declines in our electronic manufacturing services businesses, in 2013, we closed our Teledyne Microelectronics Technologies’ facility in Marina del Rey, California and relocated several of its product lines to other Teledyne locations. In further response to downturns in our defense businesses, in 2013, we also began consolidating some of our microelectronic component operations into our Mountain View, California facility and also our Shipley, England facility, and relatedly sold a former manufacturing site in Sunnyvale, California. Additionally, we closed Teledyne CML Group Limited’s precision machining and fabrications business in Birkenhead, England to focus more on its advanced composites manufacturing business. For 2014, we are planning to consolidate certain instrumentation operations and complete the consolidation of some microelectronic component product lines.
Our ability to dispose of, exit or reconfigure businesses that may no longer be aligned with our growth strategy will depend on many factors, including the terms and conditions of any asset purchase and sale agreement, as well as industry, business and economic conditions. We cannot provide any assurance that we will be able to sell non-strategic businesses on terms that are acceptable to us, or at all. In addition, if the sale of any non-strategic business cannot be consummated or is not practical, alternative courses of action, including relocation of product lines or closure, may not be available to us or may be more costly than anticipated.
Our inability to efficiently implement changes to our enterprise resource planning software could result in higher than expected costs or otherwise adversely impact our internal controls environment, operations and profitability.
We are implementing an enterprise resource planning software system, which is intended to improve our business processes in certain business units. The costs associated with such systems are significant and we could incur costs in excess of budgeted costs. Any technical or other difficulties in developing or implementing this initiative may increase the costs of the project and have an adverse effect on our operations and reporting processes, including our internal controls over financial reporting. As we make adjustments to operations as a result of this project, we may incur incremental expenses prior to realizing the benefits of a more efficient workforce and operating structure. Although implementation has occurred in only selected business units to date and efforts have been made to minimize adverse impacts on our controls, we cannot assure that all such impacts have been mitigated. Further, we may not realize anticipated cost improvements and greater efficiencies from the project.

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Natural and man-made disasters could adversely affect our business, results of operations and financial condition.
Several of our facilities, as a result of their locations, could be subject to a catastrophic loss caused by earthquakes, hurricanes, tornados, floods, ice storms or other natural disasters. Many of our production facilities and our headquarters are located in California and thus are in areas with above average seismic activity and may also be at risk of damage in wildfires. Teledyne DALSA’s semiconductor facilities in Quebec, Canada have been impacted by severe ice storms, including a storm in 2013. In addition, we have manufacturing facilities in the Southeastern United States and Texas that have been threatened and struck by major hurricanes. In October 2012, LeCroy and other Teledyne facilities incurred business interruptions and were without power for several days as a result of Hurricane Sandy. Our facilities in Alabama, Florida, Nebraska, Tennessee and Virginia have also been threatened by tornados. In June 2012, a tornado caused substantial damage to and interrupted business at our Teledyne Hastings Instruments facility in Hampton, Virginia. In April 2011, tornados caused substantial damage in Huntsville, Alabama. While Teledyne Brown Engineering’s main facility in Huntsville, Alabama incurred minimal building damage and business interruption, the facility was without power for several days. If any of our California facilities, including our California headquarters, were to experience a catastrophic earthquake or wildfire loss or if any of our Alabama, Florida, Louisiana, Nebraska, Tennessee or Texas facilities were to experience a catastrophic hurricane, storm, tornado or other natural disaster, or if DALSA’s facilities in Quebec experience long-term loss of electrical power, such event could disrupt our operations, delay production, shipments and revenue, and result in large expenses to repair or replace the facility or facilities. While Teledyne has property insurance to partially reimburse it for losses caused by windstorm and earth movement, such insurance would not cover all possible losses. In addition, our existing disaster recovery and business continuity plans (including those relating to our information technology systems) may not be fully responsive to, or minimize losses associated with, catastrophic events.
The environmental disaster triggered by the Deepwater Horizon rig explosion and oil spill in 2010 resulted in a moratorium on offshore oil and gas production in the Gulf of Mexico that adversely affected the results of operations of some of our Teledyne oil and gas businesses, although such adverse impact was offset, in part, by the products we manufacture that supported well-capping and environmental clean-up efforts. Environmental regulations enacted in the wake of this oil spill have resulted in increased compliance costs to some of our Teledyne oil and gas businesses. Similar future man-made disasters that limit or cease offshore oil and gas production or further exploration in the regions in which we sell our products could have a material adverse effect on our business, results of operations and financial condition.
Disasters that do not directly impact us can have an indirect adverse impact on our business. For example, in 2011 the earthquake in northern Japan and the related tsunami and severe flooding in Thailand resulted in certain of our customers delaying orders for our products because they were unable to obtain critical supplies from vendors in the impacted areas.
Teledyne Brown Engineering, Inc. is building an imaging platform to be affixed to the ISS. For the program to be financially successful, the 15 year-old ISS must continue to fly in a safe and human tended condition. While certain spaceflight risks, such as a high velocity debris impact to the station causing significant structural damage or necessitating the evacuation of the ISS, have been regarded as small, if such event were to occur, the ISS program continuation could be threatened, jeopardizing our investment and potential revenue generation from ISS-based Earth imaging.
We may not be able to enforce or protect our intellectual property rights, or third parties may claim infringement of their intellectual rights, each which may harm our ability to compete and thus harm our business.
Our ability to enforce and protect our patents, copyrights, software licenses, trade secrets, know how, and other intellectual property rights is subject to general litigation risks, as well as uncertainty as to the enforceability of our intellectual property rights in various countries. When we seek to enforce our rights, we have found that various claims may be asserted against us, including claims that our intellectual property right is invalid, is otherwise not enforceable or is licensed to the party against whom we are asserting a claim. In addition, we may be the target of aggressive and opportunistic enforcement of patents by third parties. If we are not ultimately successful in defending ourselves against these claims in litigation, we may not be able to sell a particular product or family of products due to an injunction, or we may have to pay damages that could, in turn, harm our results of operations. Our inability to enforce our intellectual property rights under these circumstances may harm our competitive position and our business.

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Our business and operations could suffer in the event of cyber security breaches.
Attempts by others to gain unauthorized access to our information technology systems have become more sophisticated and are sometimes successful. These attempts, which might be related to industrial or foreign government espionage, or activism, include covertly introducing malware to our computers and networks, performing reconnaissance, and impersonating authorized users, among other activities. We continue to update our infrastructure and processes to protect against security incidents, including both external and internal threats, and to prevent their recurrence. Company personnel and third parties have been tasked to detect and investigate such incidents, but it is possible that we might not be aware of an incident or its magnitude and effects. The theft, unauthorized use or publication of our intellectual property and/or confidential business information could harm our competitive position, reduce the value of our investment in research and development and other strategic initiatives or otherwise adversely affect our business. The U.S. Department of Defense has recently promulgated additional regulations applicable to certain types of data residing on or transiting through certain information systems, and we expect these regulations will be implemented into certain contracts we hold. To the extent that any security breach results in inappropriate disclosure of confidential or controlled information of third parties or the U.S. Government, we may incur liability or the loss of security clearances as a result. In addition, we expect to continue devoting additional resources to the security of our information technology systems. More resources may be required in the defense arena to the extent the U.S. Government increases its cyber security mandates.
Increases in our effective tax rate may harm our results of operations.
Our effective tax rate for 2013 was 17.7%, compared with 28.7% for 2012 and 32.9% for 2011. Fiscal years 2013, 2012 and 2011 included net discrete tax benefits of $21.3 million, $5.4 million and $2.4 million, respectively. Excluding these items, Teledyne’s effective tax rates for 2013, 2012 and 2011 would have been 27.1%, 31.0% and 34.0%, respectively. While there continues to be Congressional discussion about lowering the corporate tax rate in the U.S. to improve global competitiveness, a number of factors may impact our effective tax rates, which could reduce our net income, including:

the relative amount of income we earn in jurisdictions;
changes in tax laws or their interpretation, including changes in the U.S. to the taxation of foreign income and expenses, changes in tax laws in foreign jurisdictions, and changes in U.S. generally accepted accounting principles and governing body pronouncements and interpretations;
the resolution of issues arising from tax audits;
changes in valuation of our deferred tax assets and liabilities, including deferred tax valuation allowances;
adjustments to income taxes upon finalization of tax returns;
increases in expense not deductible for tax purposes;
changes in available tax credits; and
any decision to repatriate non-U.S. earnings for which we have not previously provided for U.S. taxes.
Our financial statements are based on estimates required by GAAP, and actual results may differ materially from those estimated under different assumptions or conditions.
Our financial statements are prepared in conformity with generally accepted accounting principles in the United States. These principles require our management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. For example, estimates are used when accounting for items such as asset valuations, allowances for doubtful accounts, allowance for excess and obsolete inventory, depreciation and amortization, impairment assessments, employee benefits, taxes, recall and warranty costs, product and general liability and contingencies. While we base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances at the time made, actual results may differ materially from those estimated. Our most critical accounting estimates are described in the Management Discussion in this Form 10-K and in Teledyne’s 2013 Annual Report to Stockholders, under "Critical Accounting Estimates."
While we believe our internal control systems are effective, there are inherent limitations in all control systems, and misstatements resulting from error or fraud may occur and may not be detected.
We continue to take action to assure compliance with the internal controls, disclosure controls and other requirements of the Sarbanes-Oxley Act of 2002. Our management, including our Chief Executive Officer and Chief Financial Officer, cannot guarantee that our internal controls and disclosure controls will prevent all possible errors or all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns

24


can occur because of simple error or mistake. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may be inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements resulting from error or fraud may occur and may not be detected.
Provisions of our governing documents, applicable law, and our Change in Control Severance Agreements could make an acquisition of Teledyne more difficult.
Our Restated Certificate of Incorporation, our Amended and Restated Bylaws and the General Corporation Law of the State of Delaware contain several provisions that could make the acquisition of control of Teledyne, in a transaction not approved by our board of directors, more difficult. We have also entered into Change in Control Severance Agreements with 16 members of our current management, which could have an anti-takeover effect. These provisions may prevent or discourage attempts to acquire our company.
The market price of our Common Stock has fluctuated significantly since we became a public company, and could continue to do so.
Since we became an independent public company on November 29, 1999, the market price of our Common Stock has fluctuated substantially and fluctuations in our stock price could continue. Among the factors that could affect our stock price are:
quarterly variations in our operating results;
strategic actions by us or our competitors;
acquisitions;
divestitures;
stock repurchases;
adverse business developments;
war in the Middle East or elsewhere;
terrorists activities;
military or homeland defense activities;
changes to the U.S. Federal budget;
changes in the energy exploration or production, semiconductor, digital imaging, telecommunications, commercial aviation, and electronic manufacturing services markets;
general market conditions;
changes in tax laws;
general economic factors unrelated to our performance;
changes from analysts’ expectations in revenues, earnings or other financial results; and
one or more of the risk factors described in this report.
The stock markets in general, and the markets for high technology companies in particular, have experienced a high degree of volatility that is not necessarily related to the operating performance of these companies. We cannot provide assurances as to our stock price.


25



Item 1B.    Unresolved Staff Comments
None.

Item 2.
Properties
The Company has 62 principal operating facilities in 17 states and four foreign countries. Of these facilities, 23 are owned by the Company and 39 are leased. The Companys executive offices are located in Thousand Oaks, California. Its principal research and development center is also located in Thousand Oaks, California. Our facilities are considered to be suitable and adequate for the purposes for which they are intended and overall have sufficient capacity to conduct business as currently conducted.
Information on the number, ownership and location of principal operating facilities by segment was as follows at February 21, 2014:
  
 
 
 
 
 
 
Location of Facilities
Segment
 
Owned
 
Leased
 
States
  
Countries
 
 
 
 
 
 
 
Instrumentation
 
9

  
 
16

  
California, Colorado,
Florida, Louisiana,
Massachusetts, Nebraska,
New Hampshire, New York, Ohio,
Texas and Virginia
  
United States,
United Kingdom, The Netherlands and Denmark
 
 
 
 
 
Digital Imaging
 
6

  
 
4

  
California, Massachusetts, North Carolina and
Pennsylvania
  
United States,
Canada and The
Netherlands
 
 
 
 
 
Aerospace and Defense Electronics
 
7

  
 
14

  
California, Illinois, New Hampshire, Pennsylvania,
Tennessee and Texas
  
United States and
United Kingdom
 
 
 
 
 
Engineered Systems
 
1

  
 
5

  
Alabama, Colorado,
Maryland, Ohio and
Tennessee
  
United States and
United Kingdom
Total
 
23

  
 
39

  
 
  
 

Item 3.
Legal Proceedings
From time to time, we become involved in various lawsuits, claims and proceedings related to the conduct of our business, including those pertaining to product liability, patent infringement, commercial, employment and employee benefits. While we cannot predict the outcome of any lawsuit, claim or proceeding, our management does not believe that the disposition of any pending matters is likely to have a material adverse effect on our financial condition or liquidity. The resolution in any reporting period of one or more of these matters, however, could have a material adverse effect on the results of operations for that period.
On December 20, 2013, the Superior Court of the Justice of Ontario dismissed with prejudice the previously disclosed lawsuit commenced by Cold Creek Enterprises, Inc. and Bob DaSilva against DALSA Corporation and related entities arising out of a joint venture and discontinued business of DALSA.   Under a settlement agreement, the parties settled all claims and DALSA paid $5.5 million in exchange for all shares of DALSA Digital Cinema Inc. held by Cold Creek Enterprises, Inc. or to which Cold Creek Enterprises, Inc. might have been entitled.

Item 4.
Mine Safety Disclosures
Not applicable


26



PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Price Range of Common Stock and Dividend Policy
Our Common Stock is listed on the New York Stock Exchange and traded under the symbol “TDY.” The following table sets forth, for the periods indicated, the high and low sale prices for the Common Stock as reported by the New York Stock Exchange. 
 
 
 
 
 
High
 
Low
2012
 
 
 
 
1st Quarter
 
$
63.83

  
$
54.74

2nd Quarter
 
$
66.29

  
$
56.90

3rd Quarter
 
$
66.22

  
$
59.07

4th Quarter
 
$
67.03

  
$
59.61

2013
 
 
 
 
1st Quarter
 
$
78.71

  
$
63.00

2nd Quarter
 
$
79.04

  
$
72.49

3rd Quarter
 
$
87.10

  
$
76.26

4th Quarter
 
$
93.77

  
$
82.42

2014
 
 
 
 
1st Quarter (through February 21, 2014)
 
$
96.94

  
$
87.50

On February 21, 2014, the closing sale price of our Common Stock as reported by the New York Stock Exchange was $96.74 per share. As of February 21, 2014, there were 4,330 holders of record of the Common Stock.
We currently intend to retain any future earnings to fund the development and growth of our businesses, including through acquisitions. Therefore, we do not anticipate paying any cash dividends in the foreseeable future.
Information relating to compensation plans under which our equity securities are outstanding for issuance is set forth in Part III, Item 12 of this Annual Report on Form 10-K.
Issuer Purchases of Equity Securities
On October 25, 2011, our Board of Directors authorized a stock repurchase program for up to 2,500,000 shares of Teledyne common stock. A total of 658,562 shares were repurchased in the fourth quarter of 2011 at an average price per share of $52.92. No shares were repurchased under the program in 2013 or 2012. As of December 29, 2013, 1,841,438 shares remained available for repurchase pursuant to this program. In 2014, the Company has been repurchasing stock under the existing stock repurchase program.


27




Item 6.
Selected Financial Data
The following table presents our summary consolidated financial data. We derived the following historical selected financial data from our audited consolidated financial statements. Our fiscal year is determined based on a 52- or 53-week convention ending on the Sunday nearest to December 31. Each fiscal year presented below contained 52 weeks, except fiscal year 2009 which contained 53 weeks. The five-year summary of selected financial data should be read in conjunction with the discussion under “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operation.”
Five-Year Summary of Selected Financial Data 
 
  
2013
 
2012
 
2011
 
2010
 
2009
 
  
(In millions, except per-share amounts)
Sales
  
$
2,338.6

  
$
2,127.3

  
$
1,941.9

  
$
1,644.2

  
$
1,652.1

Net income from continuing operations
  
$
185.0

  
$
161.8

  
$
142.1

  
$
119.9

  
$
115.9

Net income (loss) from discontinued operations
  
$

  
$
2.3

  
$
113.1

 
$
0.6

 
$
(2.6
)
Net income attributable to Teledyne
  
$
185.0

  
$
164.1

  
$
255.2

  
$
120.5

  
$
113.3

Working capital
  
$
381.0

  
$
337.5

  
$
268.5

  
$
306.8

  
$
242.6

Total assets
  
$
2,751.1

  
$
2,406.4

  
$
1,826.1

  
$
1,557.8

  
$
1,421.5

Long-term debt and capital lease obligations, net of current portion
  
$
549.0

  
$
556.2

  
$
311.4

  
$
265.3

  
$
251.6

Total equity
  
$
1,518.7

  
$
1,203.4

  
$
984.1

  
$
787.0

  
$
667.4

Basic earnings per common share-continuing operations
  
$
4.96

  
$
4.41

  
$
3.88

  
$
3.31

  
$
3.22

Diluted earnings per common share-continuing operations
  
$
4.87

  
$
4.33

  
$
3.81

  
$
3.25

  
$
3.17

Basic earnings per common share
  
$
4.96

  
$
4.47

  
$
6.97

  
$
3.33

  
$
3.15

Diluted earnings per common share
  
$
4.87

  
$
4.39

  
$
6.84

  
$
3.27

  
$
3.10


Item 7.
Management’s 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. At Teledyne, 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.
Consistent with this strategy, we made four acquisitions in 2013, five acquisitions in 2012 and three acquisitions in 2011, as well as one significant divestiture in 2011. In addition, in 2013 a subsidiary of Teledyne purchased the remaining 49% interest in Nova Research, Inc. (“Nova Sensors”). We acquired RESON A/S (“RESON”) to increase our capabilities related to multibeam sonar systems and specialty acoustic sensors for hydrography, global marine infrastructure and offshore energy operations. We acquired C.D. Limited (“CDL”) to obtain additional inertial sensing and navigation products, and to accelerate the development of real-time motion sensing and communication systems for our subsea oil and gas customers. We acquired SD Acquisition, Inc. d/b/a CETAC Technologies (“CETAC”) to expand our automated sample handling and sample introduction equipment for laboratory instrumentation capabilities. These three acquisitions are part of the Instrumentation

28


segment. We acquired Axiom IC B.V. (“Axiom”) to add high-performance CMOS mixed-signal integrated circuits to our portfolio. Axiom is part of the Digital Imaging segment.
Our largest acquisition in 2012, LeCroy Corporation (“LeCroy”), broadened our portfolio of analytical instrumentation with the addition of electronic test and measurement solutions. We acquired VariSystems Inc. (“VariSystems”) to expand our portfolio of rugged interconnect solutions. We acquired BlueView Technologies, Inc. (“BlueView”) principally to increase our instrumentation content on AUVs and ROVs used in oil and gas and marine survey applications. Through the acquisition of a majority interest in the parent company of Optech Incorporated (“Optech”), we added 3D imaging capability to our portfolio of visible, X-ray and ultraviolet sensors, cameras. Optechs bathymetric LIDAR systems are used for coastal mapping and shallow water profiling also complement our marine survey sensors and systems. The acquisition of the parent company of PDM Neptec Limited (“PDM Neptec”) expanded our line of harsh environmental marine connectors. In 2011, we focused on the expansion of our digital imaging capabilities first with the acquisition of DALSA Corporation (“DALSA”), followed by the acquisitions of a majority interest in Nova Sensors and a minority interest investment in Optech. In April 2011, we completed the sale of our general aviation piston engine businesses and consequently classified our Aerospace Engines and Components segment as a discontinued operation.
During 2013, in an effort to reduce ongoing costs and improve operating performance we took actions to consolidate and relocate certain facilities and reduce headcount across various businesses, reducing our exposure to weak end markets and high cost locations. In connection with these efforts, in 2013, we incurred pretax charges totaling $24.0 million for severance and facility consolidation expense and environmental reserves. The charges were comprised of $10.4 million in severance related costs and $13.6 million in facility closure and relocation costs, which included $5.3 million of environmental reserves. The actions have been substantially completed by year end 2013. We expect to incur approximately $0.4 million in expense related to the completion of the actions in the first quarter of 2014. At December 29, 2013, we had $11.4 million in reserves related to these actions, of which $9.7 million are classified as short-term reserves.
Given the strength of our commercial businesses, as well as our strategic acquisitions, we were able to achieve record sales and earnings in 2013. In 2013, sales and net income from continuing operations increased by 9.9% and 12.7%, respectively over 2012 results. Earnings per share from continuing operations in 2013 increased 12.5% over 2012. In 2013, sales totaled $2,338.6 million, compared with sales of $2,127.3 million in 2012. Net income from continuing operations for 2013, was $185.0 million or $4.87 per diluted share, compared with $161.8 million or $4.33 per diluted share in 2012. The increase in revenue included incremental sales from acquisitions of $172.0 million, as well as organic growth. Our 2013 net income attributable to Teledyne was $185.0 million or $4.87 per diluted share, compared with $164.1 million or $4.39 per diluted share in 2012. Net income for 2013 and 2012 also included net discrete tax benefits of $21.3 million and $5.4 million, respectively.
With the recent acquisitions in 2013 and the 2012 acquisition of LeCroy and the 2011 acquisition of DALSA, as well as growth in our commercial markets, our business mix has continued to evolve. For 2013, Teledynes sales were approximately 73% to commercial customers and 27% to the U.S. Government. This has changed from about 68% commercial and 32% government in 2012. Our international sales also increased to 44% of total sales in 2013, compared with 39% in 2012. We have worked to transform our product portfolio into that of a high technology industrial company that is less dependent on U.S. Government business.
Recent Acquisitions
The Company spent $128.2 million, $389.2 million and $366.7 million on acquisitions in 2013, 2012 and 2011, respectively.
On October 22, 2013, a subsidiary of Teledyne acquired CDL for $21.8 million in cash, net of cash acquired. CDL is headquartered in Aberdeen, Scotland, is a leading supplier of subsea inertial navigation systems and motion sensors for a variety of marine applications. CDL had sales of £9.9 million for its fiscal year ended December 31, 2012 and is part of the Instrumentation segment.
On August 30, 2013, a subsidiary of Teledyne acquired CETAC for $26.4 million. Teledyne paid a $0.4 million purchase price adjustment in the fourth quarter. CETAC, headquartered in Omaha, Nebraska is a designer and manufacturer of automated sample handling and sample introduction equipment for laboratory instrumentation. CETAC had sales of $24.0 million for its fiscal year ended December 31, 2012, and is part of the Instrumentation segment.
On July 8, 2013, a subsidiary of Teledyne purchased the remaining 49% interest in Nova Sensors that it did not already own for $4.9 million. Nova Sensors produces compact short-wave and mid-wave infrared cameras and operates within the Digital Imaging segment.

29


On May 8, 2013, a subsidiary of Teledyne acquired Axiom, for an initial payment of $4.0 million, net of cash acquired, with an additional $1.3 million expected to be paid in equal installments over three years. Axiom is located in the Netherlands and is a fabless semiconductor company that develops high-performance CMOS mixed-signal integrated circuits and is part of the Digital Imaging segment.
On March 1, 2013, a subsidiary of Teledyne acquired all the outstanding shares of RESON for $69.7 million, net of cash acquired. RESON, headquartered in Slangerup, Denmark, provides multibeam sonar systems and specialty acoustic sensors for hydrography, global marine infrastructure and offshore energy operations. RESON had sales of €50.8 million for its fiscal year ended December 31, 2012 and is part of the Instrumentation segment. Also in 2013, the Company spent $1.4 million on the purchase of a product line.
On August 3, 2012, Teledyne acquired the stock of LeCroy for $301.3 million, net of cash acquired. LeCroy, headquartered in Chestnut Ridge, New York is a leading supplier of oscilloscopes, protocol analyzers and signal integrity test solutions. LeCroy had sales of $178.1 million for its fiscal year ended June 30, 2011 and is part of the Instrumentation segment.
Also on August 3, 2012, a subsidiary of Teledyne acquired the parent company of PDM Neptec for $7.4 million in cash, net of cash acquired.  PDM Neptec, located in Hampshire, United Kingdom, is part of the Instrumentation segment and operates as Teledyne Impulse-PDM Ltd. PDM Neptec had sales of £5.5 million for its fiscal year ended March 31, 2012.
On July 2, 2012, a subsidiary of Teledyne acquired BlueView for $16.3 million in cash, net of cash acquired. BlueView, located in Seattle, Washington, is part of the Instrumentation segment and operates as Teledyne BlueView, Inc. BlueView had sales of $7.1 million for its fiscal year ended December 31, 2011.
On April 2, 2012, Teledyne acquired a majority interest in the parent company of Optech for $27.9 million, net of cash acquired. The purchase increased Teledyne’s ownership percentage to 51% from the original 19% interest purchased in the first quarter of 2011. With the April 2012 purchase, we now consolidate Optech’s financial results into Teledyne’s results with an appropriate adjustment for the minority ownership. At the time of the purchase, the value of Optech’s total equity was based on the same per share price as those shares purchased by Teledyne to obtain the majority interest in 2012 and the value of the non-controlling interest was 49% of Optechs total equity and was equal to $49.8 million. The minority ownership of Optech was $47.3 million and $49.8 million at December 29, 2013 and December 30, 2012, respectively. Optech had sales of CAD $54.7 million for its fiscal year ended March 30, 2012 and is reported as part of the Digital Imaging segment.
On February 25, 2012, Teledyne acquired VariSystems for $34.9 million, net of cash acquired. Teledyne paid a $1.4 million purchase price adjustment in the second quarter of 2012. VariSystems, headquartered in Calgary, Alberta, Canada, is a leading supplier of custom harsh environment interconnects used in energy exploration and production. VariSystems had sales of CAD $27.5 million for its fiscal year ended May 31, 2011 and is part of the Instrumentation segment.
In 2011, the Company acquired the stock of DALSA for an aggregate purchase price of $339.5 million in cash. DALSA designs and manufactures digital imaging products, primarily consisting of high performance sensors, cameras and software for use in industrial, scientific, medical and professional applications products, as well as specialty semiconductors and micro electro mechanical systems (“MEMS”). In addition to the acquisition of DALSA in 2011, the Company completed the acquisition of a majority interest in Nova Sensors for total consideration of $5.1 million in cash and a 19% minority interest in Optech for $18.9 million. We also bought the remaining minority interest in Energy Systems for $3.2 million in 2011.
See Note 3 to our Consolidated Financial Statements for additional information about our recent acquisitions.


30


Our fiscal year is determined based on a 52- or 53-week convention ending on the Sunday nearest to December 31. Fiscal years 2013, 2012 and 2011 each contained 52 weeks. The following is our financial information for 2013, 2012 and 2011 (in millions, except per-share amounts):
 
  
2013
 
2012
 
2011
Sales
  
$
2,338.6

  
$
2,127.3

 
$
1,941.9

Costs and Expenses
  
 
 
 
 
 
Cost of sales
  
1,500.0

  
1,379.1

 
1,290.7

Selling, general and administrative expenses
  
598.3

  
505.1

 
424.0

Total costs and expenses
  
2,098.3

  
1,884.2

 
1,714.7

 
 
 
 
 
 
 
Income before other income and expense and income taxes
  
240.3

  
243.1

 
227.2

Interest and debt expense, net
  
(20.4
)
 
(17.8
)
 
(16.2
)
Other income, net
  
4.1

  
2.9

 
0.6

Income from continuing operations before income taxes
  
224.0

  
228.2

 
211.6

Provision for income taxes(a)
  
39.5

  
65.4

 
69.5

Income from continuing operations including noncontrolling interest
  
184.5

  
162.8

 
142.1

Discontinued operations, net of income taxes
  

 
2.3

 
113.1

Net income
  
184.5

  
165.1

 
255.2

Noncontrolling interest
  
0.5

  
(1.0
)
 

Net income attributable to Teledyne
  
$
185.0

  
$
164.1

 
$
255.2

 
  
 
 
 
 
 
Income from continuing operations including noncontrolling interest
  
$
184.5

  
$
162.8

 
$
142.1

Noncontrolling interest
  
0.5

 
(1.0
)
 

Net income from continuing operations
  
185.0

 
161.8

 
142.1

Discontinued operations, net of income taxes
  

 
2.3

 
113.1

Net income attributable to Teledyne
  
$
185.0

 
$
164.1

 
$
255.2

 
  
 
 
 
 
 
Basic earnings per common share:
  
 
 
 
 
 
  Continuing operations
  
$
4.96

  
$
4.41

 
$
3.88

  Discontinued operations
  

 
0.06

 
3.09

Basic earnings per common share
  
$
4.96

 
$
4.47

 
$
6.97

 
 
 
 
 
 
 
Diluted earnings per common share:
  
 
 
 
 
 
  Continuing operations
  
$
4.87

  
$
4.33

 
$
3.81

  Discontinued operations
  

 
0.06

 
3.03

Diluted earnings per common share
  
$
4.87

 
$
4.39

 
$
6.84

(a)  Fiscal years 2013, 2012 and 2011 include net discrete tax benefits of $21.3 million, $5.4 million and $2.4 million, respectively.
 
 
Our businesses are divided into four business segments: Instrumentation, Digital Imaging, Aerospace and Defense Electronics and Engineered Systems. Our four business segments and their respective percentage contributions to our total sales in 2013, 2012 and 2011 are summarized in the following table: 
 
 
Percentage of Sales
Segment
 
2013
 
2012
 
2011
Instrumentation
 
44
%
 
38
%
 
33
%
Digital Imaging
 
18
%
 
20
%
 
18
%
Aerospace and Defense Electronics
 
26
%
 
28
%
 
33
%
Engineered Systems
 
12
%
 
14
%
 
16
%
 
 
100
%
 
100
%
 
100
%



31


Results of Operations
2013 Compared with 2012
Sales
 
2013
 
2012
 
%
 Change
 
(in millions)
 
 
Instrumentation
 
$
1,022.8

  
$
804.7

  
27.1
 %
Digital Imaging
 
414.8

  
415.9

  
(0.3
)%
Aerospace and Defense Electronics
 
625.1

  
605.3

  
3.3
 %
Engineered Systems
 
275.9

  
301.4

  
(8.5
)%
Total sales
 
$
2,338.6

  
$
2,127.3

  
9.9
 %
 
 
 
 
 
 
 
Operating profit and other segment income
 
2013
 
2012
 
%
 Change
 
(in millions)
 
 
Instrumentation
 
$
162.0

 
$
146.0

  
11.0
 %
Digital Imaging
 
28.2

 
24.8

  
13.7
 %
Aerospace and Defense Electronics
 
65.7

 
80.5

  
(18.4
)%
Engineered Systems
 
22.0

 
28.5

  
(22.8
)%
Segment operating profit and other segment income
 
277.9

 
279.8

 
(0.7
)%
Corporate expense
 
(37.6
)
 
(36.7
)
 
2.5
 %
Interest and debt expense, net
 
(20.4
)
 
(17.8
)
 
14.6
 %
Other income, net
 
4.1

 
2.9

 
41.4
 %
Income from continuing operations before income taxes
 
224.0

 
228.2

 
(1.8
)%
Provision for income taxes(a)
 
39.5

 
65.4

 
(39.6
)%
Income from continuing operations including noncontrolling interest
 
184.5

 
162.8

 
13.3
 %
Discontinued operations, net of income taxes
 

 
2.3

 
*
Net income
 
184.5

 
165.1

 
11.8
 %
Noncontrolling interest
 
0.5

 
(1.0
)
 
*
Net income attributable to Teledyne
 
$
185.0

 
$
164.1

  
12.7
 %
 * not meaningful
 
 
 
 
 
 
 
(a) Fiscal years 2013 and 2012 include net discrete tax benefits of $21.3 million and $5.4 million, respectively,
 
We reported 2013 sales of $2,338.6 million, compared with sales of $2,127.3 million for 2012, an increase of 9.9%. Net income from continuing operations was $185.0 million ($4.87 per diluted share) for 2013, compared with net income from continuing operations of $161.8 million ($4.33 per diluted share) for 2012, an increase of 14.3%.  Net income for 2013 and 2012 also included net discrete tax benefits of $21.3 million and $5.4 million, respectively. Net income attributable to Teledyne, including discontinued operations, was $185.0 million ($4.87 per diluted share) for 2013, compared with $164.1 million ($4.39 per diluted share) for 2012.
The increase in sales in 2013, compared with 2012, reflected higher sales in both the Instrumentation and Aerospace and Defense Electronics segments, partially offset by lower sales in both the Engineered Systems and Digital Imaging segments. Sales in the Instrumentation segment reflected $178.4 million of incremental sales from recent acquisitions, as well as higher organic sales for marine products. Increased sales of test and measurement instrumentation of $103.6 million reflected the full year contribution from the LeCroy acquisition. Sales of marine products increased by $106.7 million and included incremental sales of $65.3 million from recent acquisitions. Sales in the Aerospace and Defense Electronics segment primarily reflected increased sales of $19.3 million from avionics products and electronic relays. Sales in the Digital Imaging segment decreased slightly. The decrease in the Engineered Systems segment revenue primarily reflected lower sales of $23.8 million from engineered products and services. The incremental increase in revenue in 2013 from businesses acquired in 2013 and in 2012 was $172.0 million.

32


Sales under contracts with the U.S. Government were approximately 27% of sales in 2013 and 32% of sales in 2012, principally reflective of our recent acquisitions. Such decline has been consistent with our strategy to be less dependent on U.S. government business. Sales to international customers represented approximately 44% of sales in 2013 and 39% of sales in 2012.
Segment operating profit and other segment income for 2013, compared with 2012, decreased by $1.9 million, or only 0.7%, despite $24.0 million in pretax charges for severance and facility consolidation expense and environmental reserves, compared with $1.7 million of similar charges in 2012. For 2013, the charges impacted each business segment as follows: Aerospace and Defense Electronics, $15.7 million; Digital Imaging, $3.9 million; Instrumentation, $2.5 million; and Engineered Systems, $1.9 million. In 2012, we incurred $1.7 million of similar charges which only impacted the Aerospace and Defense Electronics segment. Segment operating profit and other segment income for 2013 also reflected the impact of acquisitions as well as the impact of higher organic sales in each segment except the Engineered Systems segment. Operating profit included incremental operating profit from acquisitions of $11.7 million, which included intangible amortization of $5.0 million. LIFO income was $0.7 million in 2013 and was less than $0.1 million in 2012.
The table below presents sales and cost of sales by segment and total company:
(Dollars in millions)
2013
 
2012
 
Change
Instrumentation
 
 
 
 
 
Sales
$
1,022.8

 
$
804.7

 
$
218.1

Cost of sales
$
570.9

 
$
458.7

 
$
112.2

Cost of sales % of sales
55.8
%
 
57.0
%
 
 
 
 
 
 
 
 
Digital Imaging
 
 
 
 
 
Sales
$
414.8

 
$
415.9

 
$
(1.1
)
Cost of sales
$
263.7

 
$
266.9

 
$
(3.2
)
Cost of sales % of sales
63.6
%
 
64.2
%
 
 
 
 
 
 
 
 
Aerospace and Defense Electronics
 
 
 
 
 
Sales
$
625.1

 
$
605.3

 
$
19.8

Cost of sales
$
434.6

 
$
406.2

 
$
28.4

Cost of sales % of sales
69.5
%
 
67.1
%
 
 
 
 
 
 
 
 
Engineered Systems
 
 
 
 
 
Sales
$
275.9

 
$
301.4

 
$
(25.5
)
Cost of sales
$
230.8

 
$
247.3

 
$
(16.5
)
Cost of sales % of sales
83.6
%
 
82.0
%
 
 
 
 
 
 
 
 
Total Company
 
 
 
 
 
Sales
$
2,338.6

 
$
2,127.3

 
$
211.3

Cost of sales
$
1,500.0

 
$
1,379.1

 
$
120.9

Cost of sales % of sales
64.1
%
 
64.8
%
 
 
Total company cost of sales increased by $120.9 million in 2013, compared with 2012, and reflected $79.4 million in cost of sales from recent acquisitions, $15.4 million in higher severance and facility consolidation expense and environmental reserves, higher pension expense as well as the impact of organic sales increases. The Instrumentation segment cost of sales increase of $112.2 million reflected the impact of recent acquisitions as well as the impact of organic sales increases. The Aerospace and Defense Electronics segment increase in cost of sales of $28.4 million reflected the impact of higher sales as well as $14.0 million in severance and facility consolidation expense and environmental reserves. The total company cost of sales as a percentage of sales for 2013 was 64.1%, compared with 64.8% for 2012. The lower cost of sales percentage reflected the impact of the LeCroy and Optech cost structures which have a lower cost of sales percentage than the overall Teledyne cost of sales percentage, partially offset by severance and facility consolidation expense and environmental reserves. Excluding the impact of recent acquisitions, cost of sales as a percentage of sales for 2013 would have been 66.8%, compared with 64.8% in 2012. The higher percentage in 2013 reflects the impact of severance and facility consolidation expense and environmental reserves, higher pension expense and product mix differences in 2013.

33


Selling, general and administrative expenses, including research and development and bid and proposal expense, in total dollars were higher in 2013 compared with 2012. The increase reflected the impact of higher sales, higher acquired intangible asset amortization of $5.0 million and higher research and development costs of $37.8 million. Corporate administrative expense in 2013 was $37.6 million, compared with $36.7 million in 2012 an increase of 2.5%. For 2013, we recorded a total of $10.7 million in stock option expense, of which $3.4 million was recorded as corporate expense and $7.3 million was recorded in segment results. For 2012, we recorded a total of $8.0 million in stock option expense, of which $2.4 million was recorded as corporate expense and $5.6 million was recorded in segment results. Selling, general and administrative expenses for 2013, as a percentage of sales, increased to 25.6%, compared with 23.7% for 2012 and reflected the impact of higher research and development costs and the recently acquired LeCroy and Optech cost structures which have a higher selling, general and administrative expense percentage of sales than the overall Teledyne selling, general and administrative expense percentage of sales.
Included in operating profit in 2013 was domestic pension expense of $17.5 million. In accordance with U.S. Government Cost Accounting Standards (“CAS”), $14.5 million was recoverable from certain government contracts. Included in operating profit in 2012 was domestic pension expense of $6.6 million. In accordance with CAS, $12.7 million was recoverable from certain government contracts. The increase in pension expense primarily reflected the impact of using a 4.4% discount rate to determine the benefit obligation for the domestic plan in 2013 compared with a 5.5% discount rate used in 2012. For the Company’s domestic pension plan, the discount rate for 2014 will increase to 5.4% from 4.4% which will decrease pension expense for 2014, compared with 2013. Pension expense determined under CAS can generally be recovered through the pricing of products and services sold to the U.S. Government.
The Company’s effective tax rate for 2013 was 17.7%, compared with 28.7% for 2012. The decrease reflected higher net discrete tax benefits in 2013 as well as a change in the proportion of domestic and international income. Fiscal year 2013 included net discrete tax benefits of $21.3 million primarily related to the statute of limitation expirations, favorable tax audit resolutions, research and development credits and the remeasurement of uncertain tax positions. Fiscal year 2012 included net discrete tax benefits of $5.4 million related to the remeasurement of uncertain tax positions and an expiration of the statute of limitations in the United States. Excluding the impact of the net discrete tax benefits of $21.3 million for 2013 and $5.4 million for 2012, the effective tax rates would have been 27.1% for 2013, compared with 31.0% for 2012, which reflected a change in the proportion of domestic and international income.
 During the next twelve months, it is reasonably possible that favorable tax audit resolutions and expirations of the statutes of limitations could reduce unrecognized tax benefits by $8.3 million, either because our tax positions are sustained on audit, because the Company agrees to their disallowance, or because of the expiration of the statutes of limitations. Of the $8.3 million, $1.3 million would not impact tax expense as it would be offset by the reversal of deferred tax assets.
Total interest expense, including credit facility fees and other bank charges, was $20.9 million in 2013 and $18.2 million in 2012. Interest income was $0.5 million in 2013 and $0.4 million in 2012. The increase in interest expense reflected the impact of higher outstanding debt levels, partially offset by lower overall average interest rates.
Other income and expense in 2013 included $3.6 million from the reversal of reserves no longer needed in connection with a legal settlement. Other income in 2012 included foreign currency translation gains of $0.8 million.

34


2012 Compared with 2011
Sales
 
2012
 
2011
 
%
 Change
 
 
(in millions)
 
 
Instrumentation
 
$
804.7

 
$
648.2

 
24.1
 %
Digital Imaging
 
415.9

 
349.9

 
18.9
 %
Aerospace and Defense Electronics
 
605.3

 
639.2

 
(5.3
)%
Engineered Systems
 
301.4

 
304.6

 
(1.1
)%
Total sales
 
$
2,127.3

 
$
1,941.9

 
9.5
 %
 
 
 
 
 
 
 
Operating profit and other segment income
 
2012
 
2011
 
%
 Change
 
 
(in millions)
 
 
Instrumentation
 
$
146.0

 
$
129.3

 
12.9
 %
Digital Imaging
 
24.8

 
16.1

 
54.0
 %
Aerospace and Defense Electronics
 
80.5

 
87.4

 
(7.9
)%
Engineered Systems
 
28.5

 
28.1

 
1.4
 %
Segment operating profit and other segment income
 
279.8

 
260.9

 
7.2
 %
Corporate expense
 
(36.7
)
 
(33.7
)
 
8.9
 %
Interest and debt expense, net
 
(17.8
)
 
(16.2
)
 
9.9
 %
Other income, net
 
2.9

 
0.6

 
383.3
 %
Income from continuing operations before income taxes
 
228.2

 
211.6

 
7.8
 %
Provision for income taxes(a)
 
65.4

 
69.5

 
(5.9
)%
Income from continuing operations including noncontrolling interest
 
162.8

 
142.1

 
14.6
 %
Discontinued operations, net of income taxes
 
2.3

 
113.1

 
*
Net income
 
165.1

 
255.2

 
(35.3
)%
Noncontrolling interest
 
(1.0
)
 

 
*
Net income attributable to Teledyne
 
$
164.1

 
$
255.2

 
(35.7
)%
 * not meaningful
 
 
 
 
 
 
(a) Fiscal years 2012 and 2011 include net discrete tax benefits of $5.4 million and $2.4 million, respectively.
 
We reported 2012 sales of $2,127.3 million, compared with sales of $1,941.9 million for 2011, an increase of 9.5%. Net income from continuing operations was $161.8 million ($4.33 per diluted share) for 2012, compared with net income from continuing operations of $142.1 million ($3.81 per diluted share) for 2011, an increase of 13.9%.  Net income for 2012 and 2011 also included net discrete tax benefits of $5.4 million and $2.4 million, respectively. Net income attributable to Teledyne, including discontinued operations, was $164.1 million ($4.39 per diluted share) for 2012, compared with $255.2 million ($6.84 per diluted share) for 2011. In April 2011, Teledyne completed the sale of its piston engines businesses and recorded a gain on the sale of $113.8 million.
The increase in sales in 2012, compared with 2011, reflected substantially higher sales in both the Instrumentation and Digital Imaging segments, partially offset by lower sales in both the Engineered Systems and Aerospace and Defense Electronics segments. Sales in the Instrumentation segment reflected $80.8 million from the acquisition of LeCroy, as well as, higher sales of both marine and environmental instrumentation products. Sales of marine products increased by $69.3 million and included incremental sales of $33.0 million from the acquisitions of VariSystems, PDM Neptec and BlueView. The increase in the Digital Imaging segment reflected $66.9 million in incremental revenue from recent acquisitions, primarily Optech, Nova Sensors and DALSA. Sales in the Aerospace and Defense Electronics segment reflected lower sales for electronic manufacturing service products, microwave devices and interconnects, partially offset by higher sales of $12.4 million from avionics products and electronic relays. The decrease in the Engineered Systems segment revenue reflected lower sales of space and defense programs as well as nuclear programs, partially offset by higher sales of energy systems and turbine engines. The incremental increase in revenue in 2012 from businesses acquired in 2012 and in 2011 was $180.7 million.

35


The increase in segment operating profit and other segment income for 2012, compared with 2011, reflected improved results in each operating segment except for the Aerospace and Defense Electronics segment. The increase in operating profit reflected the impact of acquisitions, as well as the impact of higher organic sales for the Instrumentation segment. The decrease in operating profit in the Aerospace and Defense Electronics segment reflected the impact of lower sales, reduced margins, as well as $1.7 million of severance and relocation costs. Operating profit included incremental operating profit from acquisitions of $9.4 million, which included acquisition expenses of $7.1 million and intangible amortization of $5.3 million. LIFO income was less than $0.1 million in 2012 compared with LIFO expense of $0.9 million in 2011.
The table below presents sales and cost of sales by segment and total company:
(Dollars in millions)
2012
 
2011
 
Change
Instrumentation
 
 
 
 
 
Sales
$
804.7

 
$
648.2

 
$
156.5

Cost of sales
$
458.7

 
$
375.8

 
$
82.9

Cost of sales % of sales
57.0
%
 
58.0
%
 
 
 
 
 
 
 
 
Digital Imaging
 
 
 
 
 
Sales
$
415.9

 
$
349.9

 
$
66.0

Cost of sales
$
266.9

 
$
231.5

 
$
35.4

Cost of sales % of sales
64.2
%
 
66.2
%
 
 
 
 
 
 
 
 
Aerospace and Defense Electronics
 
 
 
 
 
Sales
$
605.3

 
$
639.2

 
$
(33.9
)
Cost of sales
$
406.2

 
$
436.4

 
$
(30.2
)
Cost of sales % of sales
67.1
%
 
68.3
%
 
 
 
 
 
 
 
 
Engineered Systems
 
 
 
 
 
Sales
$
301.4

 
$
304.6

 
$
(3.2
)
Cost of sales
$
247.3

 
$
247.0

 
$
0.3

Cost of sales % of sales
82.0
%
 
81.1
%
 
 
 
 
 
 
 
 
Total Company
 
 
 
 
 
Sales
$
2,127.3

 
$
1,941.9

 
$
185.4

Cost of sales
$
1,379.1

 
$
1,290.7

 
$
88.4

Cost of sales % of sales
64.8
%
 
66.5
%
 
 
Total company cost of sales increased by $88.4 million in 2012, compared with 2011, and primarily reflected $94.2 million in cost of sales from recent acquisitions and organic sales increases, partially offset by sales mix differences. Cost of sales from recent acquisitions totaled $54.3 million for the Instrumentation segment and $39.9 million for the Digital Imaging segment. The Instrumentation segment cost of sales increase also reflected the impact of higher organic sales. The Aerospace and Defense Electronics segment also reflected the impact of lower sales. The total company cost of sales as a percentage of sales for 2012 was 64.8%, compared with 66.5% for 2011. The lower cost of sales percentage reflected the impact of the LeCroy and DALSA cost structures which have a lower cost of sales percentage than the overall Teledyne cost of sales percentage. Excluding the impact of recent acquisitions, cost of sales as a percentage of sales for 2012 would have been 66.7%.
Sales under contracts with the U.S. Government were approximately 32% of sales in 2012 and 36% of sales in 2011. Sales to international customers represented approximately 39% of sales in 2012 and 36% of sales in 2011.

36


Selling, general and administrative expenses, including research and development and bid and proposal expense, in total dollars were higher in 2012 compared with 2011. The increase reflected the impact of higher sales, higher acquired intangible asset amortization of $3.7 million and higher research and development costs of $28.8 million. Corporate administrative expense in 2012 was higher by $3.0 million compared with 2011 and reflected higher employee compensation and professional fee expenses. For 2012, we recorded a total of $8.0 million in stock option expense, of which $2.4 million was recorded as corporate expense and $5.6 million was recorded in segment results. For 2011, we recorded a total of $5.8 million in stock option expense, of which $2.1 million was recorded as corporate expense and $3.7 million was recorded in segment results. Selling, general and administrative expenses for 2012, as a percentage of sales, increased to 23.7%, compared with 21.8% for 2011 and reflected the impact of acquisition related expenses, higher research and development costs and the LeCroy and DALSA cost structures which have a higher selling, general and administrative expense percentage of sales than the overall Teledyne selling, general and administrative expense percentage of sales.
Included in operating profit in 2012 was domestic pension expense of $6.6 million. In accordance with CAS, $12.7 million was recoverable from certain government contracts. Included in operating profit in 2011 was domestic pension expense of $6.7 million. In accordance with CAS, $12.6 million was recoverable from certain government contracts.
The Company’s effective tax rate for 2012 was 28.7%, compared with 32.9% for 2011. The decrease reflected higher net discrete tax benefits in 2012, as well as a change in the proportion of domestic and international income. Fiscal year 2012 included net discrete tax benefits of $5.4 million primarily related to the remeasurement of uncertain tax positions and an expiration of the statute of limitations in the United States. Fiscal year 2011 included net discrete tax benefits of $2.4 million related to research and development tax credits. Excluding the impact of the net discrete tax benefits of $5.4 million for 2012 and $2.4 million for 2011 the effective tax rates would have been 31.0% for 2012, compared with 34.0% for 2011.
Total interest expense, including credit facility fees and other bank charges, was $18.2 million in 2012 and $16.7 million in 2011. Interest income was $0.4 million in 2012 and $0.5 million in 2011. The increase in interest expense primarily reflected the impact of higher outstanding debt levels partially offset by lower overall average interest rates.
Other income and expense in 2012 included foreign currency translation gains of $0.8 million, compared with $2.0 million for 2011 and a $0.6 million gain on the purchase of the majority interest in Optech. Other income and expense in 2011 also included $2.3 million related to the reduction of an environmental reserve determined to be no longer needed and a $4.5 million pretax charge to write off a minority investment in a private company.
Segments
In the second quarter of 2013, the Company changed the reporting structure of two of its interconnect business units. The two interconnect business units were formerly reported as part of the Aerospace and Defense Electronics segment and are now reported as part of the Instrumentation segment. These business units primarily serve energy production markets and are now managed by and integrated with our other interconnect businesses within Teledyne Oil & Gas, which is part of the marine instrumentation product line. Previously reported segment data has been restated to reflect this change. Total sales for the two business units transferred to the Instrumentation segment from the Aerospace and Defense Electronics segment were $55.3 million and $31.6 million for fiscal year 2012 and 2011, respectively. The following discussion of our four segments should be read in conjunction with Note 13 to the Notes to Consolidated Financial Statements.


37


Instrumentation
(Dollars in millions)
 
2013
 
2012
 
2011
Sales
 
$
1,022.8

 
$
804.7

 
$
648.2

Cost of sales
 
$
570.9

 
$
458.7

 
$
375.8

Selling, general and administrative expenses
 
$
289.9

 
$
200.0

 
$
143.1

Operating profit
 
$
162.0

 
$
146.0

 
$
129.3

Cost of sales % of sales
 
55.8
%
 
57.0
%
 
58.0
%
Selling, general and administrative expenses % of sales
 
28.4
%
 
24.9
%
 
22.1
%
Operating profit % of sales
 
15.8
%
 
18.1
%
 
19.9
%
International sales % of sales
 
56.3
%
 
53.7
%
 
50.4
%
Governmental sales % of sales
 
4.0
%
 
5.0
%
 
6.0
%
Capital expenditures
 
$
22.0

 
$
14.4

 
$
9.5

Our Instrumentation segment provides monitoring and control instruments for marine, environmental, industrial and other applications, as well as electronic test and measurement equipment. We also provide power and communications connectivity devices for distributed instrumentation systems and sensor networks deployed in mission critical, harsh environments.
2013 compared with 2012
Our Instrumentation segment sales were $1,022.8 million in 2013, compared with sales of $804.7 million in 2012, an increase of 27.1%. Operating profit was $162.0 million in 2013, compared with $146.0 million in 2012, an increase of 11.0%. The 2013 sales increase of $218.1 million, resulted from higher sales of both marine and electronic test and measurement instrumentation. Marine instrumentation had higher sales of $106.7 million which reflected increased sales of marine acoustic sensors and systems, as well as interconnect systems used in offshore energy production, and also included a total of $65.3 million in incremental revenue from recent acquisitions including the March 2013 acquisition of RESON, which contributed $51.4 million in sales. Increased sales of $103.6 million for electronic test and measurement instrumentation resulted from the August 2012 acquisition of LeCroy. Sales for environmental instrumentation increased by $7.8 million, primarily due to the acquisition of CETAC. The increase in operating profit reflected the impact of higher sales from both recent acquisitions and organic sales growth. The incremental operating profit from recent acquisitions was $11.7 million, which included $4.6 million in additional intangible asset amortization. In 2014, we expect increased sales of marine instrumentation for subsea oil and gas production, as well as increased sales of most marine sensors and systems, partially offset by reduced sales of geophysical sensors for oil and gas exploration.
Cost of sales increased by $112.2 million in 2013, compared with 2012, and reflected the impact of higher sales, product mix differences and $2.5 million in severance and facility consolidation expenses. The decrease in the cost of sales percentage to 55.8% from 57.0% largely reflected the impact of recent acquisitions which carry a lower cost of sales percentage than the average for our other businesses in this segment, partially offset by product mix differences. Selling, general and administrative expenses, including research and development and bid and proposal expense, in 2013, increased by $89.9 million, compared with 2012, and reflected the impact of acquisitions, primarily LeCroy and RESON. The LeCroy and RESON acquisitions represented $77.7 million of the increase in selling, general and administrative expenses which included $27.5 million in incremental research and development expenses. Selling, general and administrative expenses for 2013, as a percentage of sales, increased to 28.4%, compared with 24.9% for 2012 and reflected higher research and development costs and the LeCroy cost structure which has a higher selling, general and administrative expense percentage of sales than other instrumentation businesses.
2012 compared with 2011
Our Instrumentation segment sales were $804.7 million in 2012, compared with sales of $648.2 million in 2011, an increase of 24.1%. Operating profit was $146.0 million in 2012, compared with $129.3 million in 2011, an increase of 12.9%.
The 2012 sales change resulted primarily from higher sales of marine instrumentation, test and measurement instrumentation, and environmental instrumentation. The higher sales of $69.3 million for marine instrumentation products reflected increased sales of interconnect systems used in offshore energy production and also included a total of $33.0 million in revenue from the acquisitions of VariSystems, PDM Neptec and BlueView. Increased sales of $80.8 million for test and measurement instrumentation resulted from the acquisition of LeCroy. The increase in sales of $6.4 million for environmental instrumentation primarily reflected higher domestic sales of air quality monitoring instrumentation products. The increase in operating profit reflected the impact of higher sales, improved margins for marine instrumentation, partially offset by $6.8 million in acquisition expenses and $3.9 million in additional intangible asset amortization related to recent

38


acquisitions. The incremental operating profit included in the results for 2012 from recent acquisitions was $3.2 million.
Cost of sales increased by $82.9 million in 2012, compared with 2011, and reflected the impact of higher sales and product mix differences. The decrease in the cost of sales percentage to 57.0% from 58.0% largely reflected the impact of the LeCroy acquisition, whose products which carry a lower cost of sales percentage than the average for other products, partially offset by product mix differences. Segment operating profit in 2012 also reflected LIFO income of $0.3 million compared with LIFO expense of $0.5 million in 2011. Selling, general and administrative expenses for 2012, as a percentage of sales, increased to 24.9%, compared with 22.1% for 2011 and reflected the impact of acquisition related expenses, higher research and development costs and the LeCroy cost structure which has a higher selling, general and administrative expense percentage of sales than other instrumentation businesses.

Digital Imaging
(Dollars in millions)
 
2013
 
2012
 
2011
Sales
 
$
414.8

 
$
415.9

 
$
349.9

Cost of sales
 
$
263.7

 
$
266.9

 
$
231.5

Selling, general and administrative expenses
 
$
122.9

 
$
124.2

 
$
102.3

Operating profit
 
$
28.2

 
$
24.8

 
$
16.1

Cost of sales % of sales
 
63.6
%
 
64.2
%
 
66.2
%
Selling, general and administrative expenses % of sales
 
29.6
%
 
29.8
%
 
29.2
%
Operating profit % of sales
 
6.8
%
 
6.0
%
 
4.6
%
International sales % of sales
 
49.0
%
 
46.1
%
 
47.1
%
Governmental sales % of sales
 
29.0
%
 
31.0
%
 
31.5
%
Capital expenditures
 
$
20.2

 
$
23.5

 
$
13.8

Our Digital Imaging segment includes high performance sensors, cameras and systems, within the visible, infrared and X-ray spectra for use in industrial, government and medical applications, as well as MEMS. It also includes our sponsored and centralized research laboratories benefiting government programs and businesses.
2013 compared with 2012
Our Digital Imaging segment sales were $414.8 million in 2013, compared with sales of $415.9 million in 2012, a decrease of 0.3%. Operating profit was $28.2 million in 2013, compared with $24.8 million in 2012, an increase of 13.7%.
The 2013 sales decrease primarily reflected lower sales of imagers for remote sensing applications, LIDAR systems and MEMS products, nearly offset by increased sales of sensors and cameras for commercial machine vision and medical applications. The increase in operating profit reflected improved margins across multiple product lines, partially offset by $3.9 million in severance and related expenses and a $1.2 million asset impairment charge. The incremental operating loss for 2013 from recent acquisitions was $4.3 million which reflected $0.4 million in additional intangible asset amortization and a $1.2 million asset impairment charge. In 2014, we expect continued growth in sales of sensors and cameras for industrial and medical applications, partially offset by an anticipated decline in sales of infrared sensors for certain government programs.
Cost of sales for 2013 decreased by $3.2 million, compared with 2012, and primarily reflected the impact of product mix differences, partially offset by $2.3 million in severance and related expenses. The decrease in the cost of sales percentage reflected the impact of the Optech acquisition, which carries a lower cost of sales percentage than the average for our other products in this segment. Selling, general and administrative expenses, for 2013, decreased slightly to $122.9 million, compared with $124.2 million in 2012. The selling, general and administrative expense percentage decreased slightly to 29.6% in 2013 from 29.9% in 2012.
2012 compared with 2011
Our Digital Imaging segment sales were $415.9 million in 2012, compared with sales of $349.9 million in 2011, an increase of 18.9%. Operating profit was $24.8 million in 2012, compared with $16.1 million in 2011, an increase of 54.0%. The 2012 sales increase included $66.9 million in incremental revenue from the acquisitions of DALSA, Nova Sensors and Optech. The 2012 sales also reflected increased sales of infrared imaging sensors and optics, offset by lower sales of funded research activities. The increase in operating profit was impacted by the absence of purchase accounting adjustments that were incurred in 2011 for the DALSA acquisition and product mix differences. The incremental operating profit for 2012 from recent acquisitions was $6.2 million. Operating profit in 2011 included $2.6 million of inventory purchase accounting charges resulting from the acquisition of DALSA.

39


Cost of sales increased by $35.4 million, compared with 2011, and primarily reflected the impact of higher sales, offset by the absence in 2012 of the inventory purchase accounting charges for DALSA made in 2011. The lower cost of sales percentage in 2012 reflected the results of the Optech acquisition, which carries a lower cost of sales percentage, as well as the absence of inventory purchase accounting charges for DALSA in 2011.
Aerospace and Defense Electronics
(Dollars in millions)
 
2013
 
2012
 
2011
Sales
 
$
625.1

 
$
605.3

 
$
639.2

Cost of sales
 
$
434.6

 
$
406.2

 
$
436.4

Selling, general and administrative expenses
 
$
124.8

 
$
118.6

 
$
115.4

Operating profit
 
$
65.7

 
$
80.5

 
$
87.4

Cost of sales % of sales
 
69.5
%
 
67.1
%
 
68.2
%
Selling, general and administrative expenses % of sales
 
20.0
%
 
19.6
%
 
18.1
%
Operating profit % of sales
 
10.5
%
 
13.3
%
 
13.7
%
International sales % of sales
 
35.0
%
 
28.6
%
 
25.8
%
Governmental sales % of sales
 
41.6
%
 
44.6
%
 
47.5
%
Capital expenditures
 
$
15.3

 
$
12.6

 
$
12.5

Our Aerospace and Defense Electronics segment provides sophisticated electronic components and subsystems and communications products, including defense electronics, harsh environment interconnects, data acquisition and communications equipment for aircraft, and components and subsystems for wireless and satellite communications, as well as general aviation batteries.
2013 compared with 2012
Our Aerospace and Defense Electronics segment sales were $625.1 million in 2013, compared with sales of $605.3 million in 2012, an increase of 3.3%. Operating profit was $65.7 million in 2013, compared with $80.5 million in 2012, a decrease of 18.4%.
Sales for 2013 increased by $19.8 million and reflected higher sales of $19.3 million from avionics products and electronic relays and higher sales of $3.1 million from microwave and interconnect systems, partially offset by lower sales of electronic manufacturing service products. Operating profit in 2013 reflected $10.4 million for severance and facility consolidation costs and a $5.3 million charge for estimated environmental liabilities, partially offset by the impact of higher sales. Operating profit in 2012 reflected $1.7 million for severance and facility consolidation costs. In 2014, we expect decreased sales of microwave devices, due to the completion of a program with a foreign government.
Cost of sales for 2013 increased by $28.4 million, compared with 2012, and reflected the impact of higher sales, $13.6 million for severance and facility consolidation costs and environmental reserves, $3.6 million in higher pension expense and product mix differences. Cost of sales as a percentage of sales for 2013 increased to 69.5% from 67.1% in 2012 and reflected the impact of severance and facility consolidation costs, environmental reserves and product mix differences. Selling, general and administrative expenses, including research and development and bid and proposal expense, increased to $124.8 million in 2013, compared with $118.6 million in 2012, and reflected $2.1 million in severance and facility consolidation costs. The increase in the selling, general and administrative expense percentage to 20.0% for 2013, compared with 19.6% for 2012 reflected the impact of severance and facility consolidation costs.
2012 compared with 2011
Our Aerospace and Defense Electronics segment sales were $605.3 million in 2012, compared with sales of $639.2 million in 2011, a decrease of 5.3%. Operating profit was $80.5 million in 2012, compared with $87.4 million in 2011, a decrease of 7.9%.
Sales for 2012 decreased by $33.9 million, which resulted from lower sales of $38.0 million for electronic manufacturing service products and $8.3 million from microwave devices and interconnects, partially offset by $12.4 million of higher sales from avionics products and electronic relays. Operating profit in 2012 decreased due to the decrease in sales, reduced margins, as well as $1.7 million of severance and relocation costs.
Cost of sales for 2012 decreased by $30.2 million, compared with 2011, and reflected the impact of lower sales and product mix differences. Cost of sales as a percentage of sales for 2012 decreased to 67.1% from 68.2% in 2011 and reflected increased sales of higher gross margin avionics products, partially offset by decreased sales of lower gross margin electronic manufacturing service products. Operating profit included pension expense of $2.7 million for 2012, compared with $3.9 million for 2011. Pension expense allocated to contracts pursuant to CAS was $4.3 million for 2012, compared with $3.9 million for 2011.

40



Engineered Systems
(Dollars in millions)
 
2013
 
2012
 
2011
Sales
 
$
275.9

 
$
301.4

 
$
304.6

Cost of sales
 
$
230.8

 
$
247.3

 
$
247.0

Selling, general and administrative expenses
 
$
23.1

 
$
25.6

 
$
29.5

Operating profit
 
$
22.0

 
$
28.5

 
$
28.1

Cost of sales % of sales
 
83.6
%
 
82.0
%
 
81.1
%
Selling, general and administrative expenses % of sales
 
8.4
%
 
8.5
%
 
9.7
%
Operating profit % of sales
 
8.0
%
 
9.5
%
 
9.2
%
International sales % of sales
 
12.4
%
 
11.6
%
 
11.1
%
Governmental sales % of sales
 
75.8
%
 
81.4
%
 
79.4
%
Capital expenditures
 
$
3.6

 
$
4.2

 
$
5.9

Our Engineered Systems segment provides innovative systems engineering and integration, advanced technology development, and manufacturing solutions for defense, space, environmental and energy applications. This segment also designs and manufactures electrochemical energy systems and small turbine engines.
2013 compared with 2012
Our Engineered Systems segment sales were $275.9 million in 2013, compared with sales of $301.4 million in 2012, a decrease of 8.5%. Operating profit was $22.0 million in 2013, compared with $28.5 million in 2012, a decrease of 22.8%.
The 2013 sales decrease of $25.5 million reflected lower sales of $23.8 million from engineered products and services and lower sales of energy systems of $3.1 million, partially offset by higher turbine engines sales of $1.4 million. The sales decrease from engineered products and services, primarily reflected lower sales of defense and space programs. Operating profit in 2013 primarily reflected the impact of lower sales, $1.9 million in severance and facility consolidation expenses, as well as higher pension expense. Pension expense was $6.7 million for 2013, compared with $2.7 million for 2012. Pension expense allocated to contracts pursuant to CAS was $8.5 million for 2013, compared with $8.4 million for 2012.
Cost of sales for 2013 decreased by $16.5 million, compared with 2012, and reflected the impact of lower sales, partially offset by the severance and facility consolidation expenses and higher pension expense. Cost of sales as a percentage of sales for 2013 increased to 83.6%, compared with 82.0% in 2012 and reflected the severance and facility consolidation expenses and higher pension expense. Selling, general and administrative expenses, including research and development and bid and proposal expense, decreased to $23.1 million in 2013, compared with $25.6 million in 2012, and reflected the impact of lower sales and lower research and development and bid and proposal expenses of $1.6 million. The selling, general and administrative expense percentage decreased slightly to 8.4% for 2013, compared with 8.5% for 2012.
2012 compared with 2011
Our Engineered Systems segment sales were $301.4 million in 2012, compared with sales of $304.6 million in 2011, a decrease of 1.1%. Operating profit was $28.5 million in 2012, compared with $28.1 million in 2011, an increase of 1.4%.
The 2012 sales decrease of $3.2 million reflected lower sales of $4.9 million from engineered products and services, partially offset by higher sales of $0.9 million for energy systems and $0.8 million for turbine engines. The sales decrease from engineered products and services primarily reflected lower sales of space and defense programs as well as nuclear programs. Operating profit in 2012 improved slightly despite the small decrease in sales.
Cost of sales for 2012 increased by $0.3 million, compared with 2011, and reflected product mix differences. Cost of sales as a percentage of sales for 2012 increased to 82.0%, compared with 81.1% in 2011 and reflected product mix differences. Operating profit included pension expense of $2.7 million for 2012, compared with $2.4 million for 2011. Pension expense allocated to contracts pursuant to CAS was $8.4 million for 2012, compared with $8.7 million for 2011.

41


Financial Condition, Liquidity and Capital Resources
Principal Capital Requirements
Our principal capital requirements are to fund working capital needs, capital expenditures, voluntary and required pension contributions, debt service requirements, share repurchases and acquisitions. It is anticipated that operating cash flow, together with available borrowings under the credit facility described below, will be sufficient to meet these requirements and could be used to fund acquisitions in 2014. To support acquisitions, we may need to raise additional capital. Our liquidity is not dependent upon the use of off-balance sheet financial arrangements. We have no off-balance sheet financing arrangements that incorporate the use of special purpose or unconsolidated entities.
Revolving Credit Agreement and Senior Notes
In March 2013, the Company amended its $550.0 million credit facility to increase the borrowing capacity to $750.0 million and extend the maturity date from February 2016 to March 2018. The other material terms of the credit facility, including covenants, remain unchanged. Excluding interest and fees, no payments are due under the credit facility until it matures. In November 2013, the Company amended its $200.0 million term loan agreements to extend the maturity dates from October 2015 to March 2019 and to lower the applicable interest rate. The other material terms of the term loan agreement, including covenants, remain unchanged. The credit agreements require the Company to comply with various financial and operating covenants, including maintaining certain consolidated leverage and interest coverage ratios. Borrowings under our credit facility and term loans are at variable rates which are, at our option, tied to a Eurocurrency rate equal to LIBOR (London Interbank Offered Rate) plus an applicable rate or a base rate as defined in our credit agreements. Eurocurrency rate loans may be denominated in U.S. dollars or an alternative currency as defined in the agreement. Eurocurrency or LIBOR based loans under the facility typically have terms of one, two, three or six months and the interest rate for each such loan is subject to change if the loan is continued or converted following the applicable maturity date. The Company has not drawn any loans with a term longer than three months under the credit facility. Base rate loans have interest rates that primarily fluctuate with changes in the prime rate. Interest rates are also subject to change based on our consolidated leverage ratio as defined in the credit agreement. The credit facility also provides for facility fees that vary between 0.125% and 0.30% of the credit line, depending on our consolidated leverage ratio as calculated from time to time.
Long-term debt consisted of the following (in millions): 
Balance at
 
December 29, 2013
 
December 30, 2012
4.04% Senior Notes due September 2015
 
$
75.0

 
$
75.0

4.74% Senior Notes due September 2017
 
100.0

 
100.0

5.30% Senior Notes due September 2020
 
75.0

 
75.0

Term Loans due through March 2019, weighted average rate of 1.29% at December 29, 2013 and 1.59% at December 30, 2012
 
200.0

 
200.0

Other debt at various rates due through 2031
 
16.0

 
14.8

$750.0 million revolving credit facility, due March 2018, weighted average rate of 1.26% at December 29, 2013 and 2.44% at December 30, 2012
 
74.2

 
79.1

Total debt
 
540.2

 
543.9

Less: current portion of long-term debt
 
(2.1
)
 
(0.5
)
Total long-term debt
 
$
538.1

 
$
543.4

The Company also has $12.3 million in capital leases, of which $1.4 million is current. At December 29, 2013, Teledyne had $14.6 million in outstanding letters of credit.
The credit agreements require the Company to comply with various financial and operating covenants, including maintaining certain consolidated leverage and interest coverage ratios, as well as minimum net worth levels and limits on acquired debt. At December 29, 2013, the Company was in compliance with these covenants and we had a significant amount of margin between required financial covenant ratios and our actual ratios. Currently, we do not believe our ability to undertake additional debt financing, if needed, is reasonably likely to be materially impacted by debt restrictions under our credit agreements subject to our complying with required financial covenants listed in the table below.

42


At December 29, 2013, the required financial covenant ratios and the actual ratios were as follows: 
$750.0 million Credit Facility expires March 2018 and $200.0 million term loans due March 2019
 
 
 
 
Financial Covenant
Requirement
 
Actual Measure
Consolidated Leverage Ratio (Net Debt/EBITDA) (a)
No more than 3.25 to 1
 
1.6 to 1
Consolidated Interest Coverage Ratio (EBITDA/Interest) (b)
No less than 3.0 to 1
 
16.4 to 1
 
 
 
$250.0 million Private Placement Notes due 2015, 2017 and 2020
 
 
 
 
Financial Covenant
Requirement
 
Actual Measure
Consolidated Leverage Ratio (Net Debt/EBITDA) (a)
No more than 3.25 to 1
 
1.6 to 1
Consolidated Interest Coverage Ratio (EBITDA/Interest) (b)
No less than 3.0 to 1
 
16.4 to 1
(a)
The Consolidated Leverage Ratio is equal to Net Debt/EBITDA as defined in our private placement note purchase agreement and our $750.0 million credit agreement.
(b)
The Consolidated Interest Coverage Ratio is equal to EBITDA/Interest as defined in our private placement note purchase agreement and our $750.0 million credit agreement.
Available borrowing capacity under the $750.0 million credit facility, which is reduced by borrowings and outstanding letters of credit, was $662.0 million at December 29, 2013. Teledyne also has a $5.0 million uncommitted credit line which permits credit extensions up to $5.0 million plus an incremental $2.0 million solely for standby letters of credit. This credit line is utilized, as needed, for periodic cash needs. No amounts are outstanding under this facility at December 29, 2013. The maximum amount that could be borrowed under our $750.0 million credit facility as of December 29, 2013 while still remaining in compliance with our consolidated leverage ratio covenant was $662.0 million.
Permanently Reinvested Earnings
We consider the earnings of material non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash requirements. At December 29, 2013, the amount of undistributed foreign earnings was $128.0 million. We have not recorded a deferred tax liability of approximately $31.2 million related to the $128.0 million of undistributed foreign earnings. Should we decide to repatriate the foreign earnings, we would need to adjust our income tax provision in the period we determined that the earnings will no longer be indefinitely invested outside the United States.
Contractual Obligations
The following table summarizes our expected cash outflows resulting from financial contracts and commitments at December 29, 2013. We have not included information on our normal recurring purchases of materials for use in our operations. These amounts are generally consistent from year to year, closely reflect our levels of production and are not long-term in nature (in millions):
Category
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019 and beyond
 
Total
Long-term debt obligations
 
$

 
$
80.6

 
$
5.6

 
$
108.1

 
$
89.4

 
$
254.4

 
$
538.1

Interest expense(a)