10-K 1 tdy-2017x10k.htm 10-K 2017 FORM 10K Document

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 31, 2017
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.      ¨
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 30, 2017, was $4.2 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 23, 2018, there were 35,696,521 shares of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the registrant’s proxy statement for its 2018 Annual Meeting of Stockholders (the “2018 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 on page 13 of this Annual Report on Form 10-K.

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PART I
Item 1.
Business
Who We Are
Teledyne Technologies Incorporated provides enabling technologies for industrial growth markets that require advanced technology and high reliability. These markets include aerospace and defense, factory automation, air and water quality environmental monitoring, electronics design and development, oceanographic research, deepwater oil and gas exploration and production, medical imaging and pharmaceutical research. Our products include digital imaging sensors, cameras and systems within the visible, infrared and X-ray spectra, monitoring and control instrumentation for marine and environmental applications, harsh environment interconnects, electronic test and measurement equipment, aircraft information management systems, and defense electronics 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.
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 on November 29, 1999.
Total sales in 2017 were $2,603.8 million, compared with $2,149.9 million in 2016 and $2,298.1 million in 2015. Sales to international customers accounted for approximately 46% of total sales in 2017. Approximately 24% of our total sales in 2017 were to the U.S. Government, as a prime contractor or subcontractor. Of the 24% U.S. Government sales, approximately 58% were attributable to fixed-price type contracts with the balance attributable to cost-plus-fee type contracts.
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 continue to focus on balanced and disciplined capital deployment among capital expenditures, acquisitions and share repurchases. 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.

Our Recent Acquisitions
Consistent with our strategy, during 2017, we made acquisitions and investments totaling $774.1 million, net of cash acquired, which included the following:
To expand our digital imaging, space science, semiconductor and microwave solutions capabilities:
e2v technologies plc (“e2v”) principally located in Chelmsford, United Kingdom and Grenoble, France, which provides high performance image sensors and custom camera solutions and application specific standard products for the machine vision market. In addition, e2v provides high performance space qualified imaging sensors and arrays for space science and astronomy. e2v also produces components and subsystems that deliver high reliability radio frequency power generation for healthcare, industrial and defense applications. Finally, the company provides high reliability semiconductors and board-level solutions for use in aerospace, space and communications applications. We paid $740.6 million for e2v, net of cash acquired.
To expand our environmental and laboratory instrumentation capabilities:
Assets of Scientific Systems, Inc. (“SSI”), located in State College, PA, which manufactures precision components and specialized subassemblies used primarily in analytical and diagnostic instrumentation, such as high performance liquid chromatography systems and specific medical devices. We paid $31.3 million for SSI, which includes a $0.3 million purchase price adjustment.

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Our Business Segments
Our businesses are aligned in four segments: Instrumentation, Digital Imaging, Aerospace and Defense Electronics and Engineered Systems. Financial information about our business segments can be found in Note 12 of our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
The respective percentage contributions of our four business segments to our total sales are summarized in the following table:
 
 
Percentage of Sales
Segment contribution to total sales (a)
 
2017
 
2016
 
2015
Instrumentation
 
36
%
 
41
%
 
46
%
Digital Imaging
 
27
%
 
18
%
 
16
%
Aerospace and Defense Electronics
 
26
%
 
29
%
 
26
%
Engineered Systems
 
11
%
 
12
%
 
12
%
Total
 
100
%
 
100
%
 
100
%
(a)
For further discussion of our four segments see Note 12 to the Notes to Consolidated Financial Statements.
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, instruments that measure currents and other physical properties in the water column, systems that create acoustic images of objects beneath the water’s surface, including the bottom of a body of water, and sensors that determine the geologic structure below the bottom. We also design and manufacture vehicles that utilize and transport these sensors over and beneath the water’s surface.
We design and manufacture geophysical streamer cables, hydrophones, seismic energy sources and specialty products used in offshore hydrocarbon exploration to locate oil and gas reserves beneath the ocean floor. We are a leading supplier of marine seismic energy sources and replacement parts for offshore energy exploration. 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. We also design and manufacture remotely-controlled and tethered instrumentation deployment vehicles used for current measurement, seafloor mapping and measurement of physical parameters such as salinity.
Additionally, we design and manufacture single and multibeam hydrographic survey instrumentation used in port surveys, dredging, pre- and post-installation of offshore energy infrastructure and other challenging underwater applications. Our multibeam sonar systems range from portable high-resolution systems used on tripods, autonomous and remotely-operated underwater vehicles (“AUVs” and “ROVs”) to full ocean depth vessel-mounted oceanographic systems as well as sub bottom profilers that can survey structures beneath the seafloor. They can also be used to detect objects in front of the mounted system. Our multibeam sonar systems can be used to create highly accurate maps of underwater offshore constructions, wrecks or quay walls in harbors, and in particular, high-quality maps of the seafloor. They can also be used to detect objects in front of the mounted system. With advanced imaging capabilities, our sonars create images of hidden structures on the seafloor and are also used to create real-time images of the environment in the oceans and enable precise navigation of AUVs and ROVs. Our products are being utilized in both commercial and defense applications where we provide systems for detecting mines in the water. We provide solutions that are ready-to-operate and fully-installed, including a comprehensive software package that ties together the variety of sensors that may be configured on an AUV or ROV platform.
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, subsea pressure and temperature sensors 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

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Teledyne Marine group and Teledyne Scientific Company continue to work collaboratively to improve the reliability of materials exposed to ultra deep-sea conditions.
Other marine products used by the U.S. Navy and commercial customers include acoustic modems for networked underwater communication and optical underwater cameras and LED lighting sources.
We manufacture complete AUV 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 low power consumption. Glider applications range from oceanographic research to persistent surveillance systems for the U.S. Navy. The modular design of our battery-powered, man-portable Gavia™ AUV allows for rapid sensor bay reconfiguration and battery replacement capability. Our SeaRaptor™ AUV will permit deep water survey with operational depths of 6000 meters. 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. We design and manufacture Inspection Class ROVs used in maritime security, military, search and rescue, aquaculture, and scientific research applications.
Using our acoustic technology, we also provide quality control and package integrity systems under the Taptone® brand to the food and beverage, personal care and pharmaceutical industries.
Environmental Instrumentation
We offer a wide range of products used for environmental monitoring, instruments that enable measurement and monitoring of key air environmental parameters as well as gas purity and content for industrial and manufacturing applications, sensors for the measurement and monitoring of the physical and chemical properties of untreated water, and laboratory systems that improve sample acquisition, handling, and preparation for analysis.
Our instrumentation monitors trace levels of gases such as sulfur dioxide, carbon monoxide, 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. In November 2016, we acquired assets of IN USA, Inc., which expanded our product portfolio to include a range of ozone generators, ozone analyzers and other gas monitoring instruments. We serve the process control and monitoring needs of industrial plants with instruments that include gas analyzers, and vacuum and flow measurement devices. 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 and water samplers that utilize vacuum technology. Flow meters include ultrasonic, submerged probe, bubbler and area velocity models. Laser technology is now part of 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.
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. We provide laboratory automation and sample introduction 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. Since our July 2017 acquisition of assets of SSI, we manufacture and sell positive-displacement piston pumps utilized in a wide variety of analytical, clinical, preparative and fluid-metering applications. In addition, we manufacture liquid chromatography instruments and accessories for the purification of organic compounds, which include highly sensitive evaporative light scanning detectors. Our liquid chromatography customers include pharmaceutical laboratories involved in drug discovery and development. In December 2016, we acquired Hanson Research Corporation, a manufacturer of the systems used in testing of pharmaceutical products, including FDA-mandated dissolution rates of oral dosage forms and systems used in the research and development of topical creams, ointments, and gels containing active pharmaceutical ingredients.

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Test and Measurement Instrumentation
We develop, manufacture, sell and license high-performance oscilloscopes and high-speed protocol analyzers for various communication links. We also provide related test and measurement equipment, probes, accessories and application solutions. With these additional capabilities, we are able to configure our platforms to provide high-value-testing solutions for customers, developing products in all industry sectors, that rely on increasingly complex electronic signals. To a lesser extent, we provide extended warranty contracts, maintenance contracts and repairs and calibrations on our instruments after their warranties expire.
We believe our test and measurement products provide unique, world-class capabilities that enable the designers of complex electronic systems in many industry sectors to bring their products to market reliably and quickly. Our customers use our equipment in the design, development, manufacture, installation, deployment and operation of electronics equipment in broad range of industry end markets, including, aerospace and defense, internet infrastructure, automotive, industrial, computer and semiconductor, consumer electronics and power electronics.
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 a broad range of real-time oscilloscopes addressing different end user needs. Our four high-definition oscilloscope product families address needs from the lower-bandwidth bench top sector to the mid-range general-purpose sector of the market. The HDO families offer superior signal fidelity for the ultimate in measurement accuracy and repeatability. Our LabMaster and WaveMaster product families are industry leading high-end oscilloscopes with bandwidths extending to 100GHz. Our WavePro product family covers the mid-to high-range performance and the WaveRunner product family, which was enhanced and extended to higher bandwidths in 2016, covers the mid-range performance and general purpose and bench-top sector. Our WaveSurfer and WaveJet product-lines are designed for users in the lower bandwidth bench-top sector of the market and value-oriented users in the economy sector. In March 2017, as part of the acquisition of e2v, we also added Sweden-based SP Devices, a manufacturer of high-speed, high-resolution analog-to-digital conversion systems. These systems are used in many applications including test and measurement, medical imaging, LIDAR and software defined radio. SP Devices extends our leadership and complements our oscilloscope offering in the market sectors that require high-speed, high-resolution, digitizing capabilities.
Designers and engineers use our protocol analyzers to accurately and reliably monitor communications traffic and diagnose operational problems in a variety of communications devices to ensure that they comply with industry standards, including the area of internet infrastructure, where PCI Express and related standards are required to enable high performance data centers that support cloud networks. Our 2016 acquisitions of Frontline, allowed us to expand our protocol test portfolio into wireless technologies, including Bluetooth and 802.11 (Wi-Fi) and the 2016 acquisition of assets of Quantum Data broadened our protocol offering to penetrate emerging video technologies, such as HDMI, SDI and other important digital video standards.
We also manufacture torque sensors and automatic data acquisition systems that are used to test critical control valves in nuclear power and industrial plants. Our torque sensors are also used in other markets, including automotive and power tools.
Digital Imaging
Our Digital Imaging segment includes high-performance sensors, cameras and systems, within the visible, infrared, ultraviolet and X-ray spectra for use in industrial, government and medical applications, as well as micro electro-mechanical systems (“MEMS”) and high-performance, high-reliability semiconductors including analog-to-digital and digital-to-analog converters. This segment also includes our sponsored and centralized research laboratories benefiting government programs and businesses. Our 2017 acquisition of e2v has added further depth in the design and supply of specialist components and sub-systems within the medical, aerospace and defense and commercial and industrial markets.
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 photogrammetry applications. We also design, develop and manufacture image processing products, primarily consisting of hardware and software for image processing and automatic data collection in industrial and medical applications. We 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 and in most of our sensors used for industrial machine vision applications. 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. Our smart cameras are designed to be quickly deployed by technicians on the factory floor. The 2015 acquisition of Belgium-based Industrial Control Machines SA (“ICM”) added

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lightweight X-ray sources for the inspection of materials and structures, ranging from light aviation parts to thick steel pipelines in harsh and extreme environments. ICM’s mobile X-ray inspection systems are provided to government, security and explosive ordinance disposal personnel for the analysis of suspicious objects.
We produce and provide manufacturing services for MEMS. The majority of our semiconductor manufacturing capacity is consumed by external customers with the remaining capacity applied towards supplying unique CCD and microbolometer (for long-wave infrared detection) fabrication services for our internal image sensor requirements.
Additionally, e2v produces components and sub-systems that deliver high performance and high reliability radio frequency power generation for healthcare, transportation and industrial applications. Products include critical components used in radiotherapy applications for cancer treatment, magnetrons and thyratrons for X-ray cargo scanning systems and microwave sources for marine and airborne radar.
We also provide high performance semiconductors, sub-systems, and signal and data processing solutions. As a partner of choice for high performance signal and data conditioning solutions for professional applications, we provide solutions that meet the demanding specifications of our customers. Our design capability enables us to partner with customers and ascend the value chain by providing multi-chip modules and boards. Our proprietary high-speed analog-to-digital and digital-to-analog data converters provide market leading performance for space and radio frequency communications.
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 Optech business.  These imaging and mapping systems are used by commercial and government customers serving energy, natural resources and infrastructure applications. As a result of our acquisition of CARIS in April 2016, we also provide geospatial software designed for the hydrographic and marine community.
We provide research and engineering capabilities primarily in the areas of electronics, materials, optical systems, and information science to military, aerospace and industrial customers, as well as to various businesses throughout Teledyne. We receive funding from the Defense Advanced Research Products Agency (“DARPA”) and various other U.S. Department of Defense funding agencies, and we collaborate with researchers at universities and national laboratories to stay at the forefront of emerging technologies. We have developed high-speed electronics, MEMS sensors and actuators, advanced functional and 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 image processing 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 astronomy, defense, commercial and space science markets.
We deliver advanced imaging solutions to the U.S. Department of Defense, National Aeronautics and Space Administration (“NASA”), the European Space Agency (“ESA”), prime system integrators, other foreign space agencies and commercial customers. Our sensor technologies are on many of NASA’s major astronomy missions (including Hubble, James Webb Space Telescope and are on Earth science and weather satellites, are orbiting Mars, are on spacecraft involved in missions to Jupiter and on asteroids, and can be found operating at nearly every major ground-based observatory telescope. We are a leading supplier of space-grade image sensors for low light imaging applications. Our image sensors play a critical role in defense applications in airborne and satellite systems. In the U.S. defense arena, our sensors are integrated into several major systems for space surveillance, airborne surveillance, chemical detection and target identification. We have developed sensors, subassemblies and cameras for air- and ground-based applications, including hyperspectral sensors for long-wave infrared and for simultaneous visible-shortwave infrared applications. We provide focal plane electronics for our own sensors and for sensors produced by other companies. We integrate our low-noise, high-performance sensors into cameras for commercial laboratory instrumentation. We also design and manufacture advanced military laser eye protection spectacles and sensor protection filters, and we are developing advanced technologies and components for assured position, navigation, and timing applications, such as Chip-Scale Atomic Clocks and MEMS resonators for compact gyroscopes.

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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.
We provide a range of microwave products to our customers ranging from components to highly integrated subsystems and solutions. Our 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. We also provide 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, we also provide higher level microwave subsystems and systems for electronic warfare, UAV, radar and military communication applications.
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. 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 also provide initiators and electronic safe and arm devices for use in 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. Since our acquisition of e2v, we provide high performance, high reliability semiconductor solutions which address critical functions of the complete signal chain, including assembly and test, packaging, qualification and long term support for customer's semiconductor life cycle management.
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 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. We also provide lead acid aircraft batteries for general aviation, and business and light jet applications.
Engineered Systems
Our Engineered Systems segment provides innovative systems engineering and integration and advanced technology development as well as complex manufacturing solutions for defense, space, environmental and energy applications. This segment also designs and manufactures electrochemical energy systems and small turbine engines.
Teledyne Brown Engineering, Inc. is a well-recognized whole life-cycle space, missile defense, marine systems, environmental 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, specifically with the commercialization of space.

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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 continue development, manufacturing and integration of product solutions in support of the war-fighter.
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 Combat Submersible (“SWCS”) vehicle which will replace the current SEAL Delivery Vehicle. With the design and development test phase of the SWCS engineering development model vehicle completed, we began low-rate initial production in late 2016 and continued production in 2017. We are producing the Littoral Battlespace Sensing Glider (“LBS-G”) system for the U.S. Navy Program Executive Office - Command, Control, Communications, Computers and Intelligence (“PEO-C4I”). Teledyne Webb Research is the glider developer and manufacturer on the LBS-G program. For Northrop Grumman, we manufacture gun mounts on the Littoral Combat Ship program. 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 (“MSFC”). Under contract with MSFC, we have designed, developed, and we are manufacturing, assembling, and testing the Launch Vehicle Stage Adapter, a critical element of NASA’s Space Launch System. In 2012, NASA awarded us a cooperative agreement to foster the commercial utilization of the ISS. Under this agreement, we have developed a commercial platform that will host payloads for earth imaging and other scientific applications. The platform known as the Multi-User System for Earth Sensing (“MUSES”) launched in June 2017 and was declared fully operational on the ISS in September 2017. The first instrument to be affixed to MUSES is scheduled to launch in mid-2018. We also design, develop, and manufacture components for scientific payloads and human space flight vehicles.
We operate a full service radiological analysis laboratory in Knoxville, Tennessee, which principally supports nuclear power plants in the United States. We also manage and operate a separation, purification and analysis of atmospheric samples laboratory for the U.S. Government, as well as, design, build, and test systems for processing the nation’s enriched uranium at the United States Department of Energy National Security Complex. Additionally, we provide engineering and manufacturing for customers in the commercial nuclear market.
Continuing our historic facilities and plant management services to the commercial arena, in December 2015, we extended by another three years our lab and office facility management contract to support The Dow Chemical Company.   We currently lead on-site and off-site management and support of research services at three Dow Chemical research facilities in North America. In addition, we manage and support the maintenance of Dow’s Collegeville, Pennsylvania facility which is made up of over 1 million square feet of floor space.
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, the U.S. Department of Defense customers and the U.S. Department of Energy, as well as commercial customers. Through our U.K.-based operations, we manufacture advanced composites for the government and commercial aviation customers.
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 provide advanced thermoelectric material technology and generators for challenging applications. The NASA Curiosity rover is powered by a thermoelectric generator designed and built by Teledyne Energy Systems, Inc., and we are developing the next generation system based on advanced thermoelectric materials.
We provide leading edge battery and fuel cell energy technology solutions for use in U.S. Government programs. These are lightweight compact systems for underwater vehicles, aircraft, launch vehicles, and spacecraft. Both technologies can be customized to meet challenging applications for extended duration missions.
We manufacture small turbine engines for military markets. Our engines power the Boeing/U.S. Navy Harpoon Missile systems.

7


Customers
We have hundreds of customers in the various industries we serve. No commercial customer accounted for more than 10% of any segment net sales, during 2017, 2016 or 2015. No commercial customer in 2017, 2016 or 2015 accounted for more than 3.0% of total net sales.
Sales to international customers accounted for approximately 46% of total sales in 2017, compared with 43% in 2016 and 44% in 2015. In 2017, we sold products to customers in over 100 foreign countries. Approximately 90% of our sales to foreign-based customers were made to customers in 25 foreign countries. In 2017, the top five countries for international sales were China, the United Kingdom, Germany, Japan and South Korea and constituted approximately 21% of our total sales.
Approximately 24%, 27% and 26% of our total sales for 2017, 2016 and 2015, 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):
U.S. Government sales by segment:
  
2017
 
2016
 
2015
Instrumentation
  
$
65.2

 
$
74.4

 
$
61.2

Digital Imaging
  
85.6

 
73.1

 
78.9

Aerospace and Defense Electronics
  
225.0

 
210.4

 
223.5

Engineered Systems
  
243.9

 
219.8

 
234.4

Total U.S. Government sales
  
$
619.7

 
$
577.7

 
$
598.0

Our principal U.S. Government customer is the U.S. Department of Defense. These sales represented 18%, 21% and 19% of our total sales for 2017, 2016 and 2015, respectively. In both 2017 and 2016, our largest program with the U.S. Government was the Mission Operations and Integration contract with the NASA Marshall Space Flight Center which represented 1.5% of our total sales in both years. In 2015, our largest program with the U.S. Government was the Engineering Solutions and Prototyping contract with the NASA Marshall Space Flight Center, which represented 1.5% of our total sales.
As described under risk factors, there are risks associated with doing business with the U.S. Government. In 2017, approximately 58% of our U.S. Government prime contracts and subcontracts were fixed-price type contracts, compared to 54% in 2016 and 54% in 2015. 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 recover costs incurred or committed, settlement expenses and profit on work completed prior to termination. We had nine U.S. Government contract terminated for convenience in 2017, compared with one in 2016 and eight in 2015.
Our total backlog of confirmed orders was approximately $1,250.2 million at December 31, 2017, compared with $916.4 million at January 1, 2017, and $802.8 million at January 3, 2016. We expect to fulfill 93% of such backlog of confirmed orders during 2018. The increase in total backlog in 2017 primarily reflects backlog related to e2v, which was acquired in 2017.
Seasonality
No material portion of our business is considered to be seasonal.
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 use 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, certain infrared detectors substrates and certain ceramics and molding compounds used in our sonar systems, as well as certain scintillator materials used 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. At times we have experienced difficulty in procuring raw materials, components, sub-assemblies and other supplies required in our manufacturing processes due to shortages and supplier imposed allocation of components.

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, third-party 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 Marine, Teledyne Oil & Gas, Teledyne Water Quality, Teledyne Microwave Solutions, Teledyne HiRel Electronics and Teledyne Advanced Chemistry Systems.
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, we have established offices in foreign countries to facilitate international sales for various businesses. Locations include Brazil, China, France, Germany, Italy, Japan, Malaysia, Singapore, South Korea 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. With regard to our defense businesses, it is common in the defense industry for work on programs to be shared among a number of companies, including competitors. In any event, because of the diversity of products sold and the number of markets we serve, we encounter a wide variety of competitors, none of which we believe offer all of the same product and service lines or serve all of the same markets as we do. 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 existing products and developing new products and technologies in the same or similar fields. We incurred a total of $508.4 million in 2017, $458.3 million in 2016 and $476.6 million in 2015 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 65%, 63% and 66% of total research and development and bid and proposal costs for 2017, 2016 and 2015, respectively.
In 2017, we incurred $177.7 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 $180.0 million in 2018.
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 31, 2017, our total workforce consisted of approximately 10,340 employees, of which approximately 6,760 employees were located in the United States.
Executive Officers of the Registrant
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
 
76

 
Dr. Mehrabian has served as Chairman, President and Chief Executive Officer of Teledyne for more than five years.
Aldo Pichelli*
Chief Operating Officer
 
66

 
Mr. Pichelli has been the Chief Operating Officer of Teledyne since October 2015. Prior to his promotion, Mr. Pichelli had been an Executive Vice President of Teledyne having responsibility for the Instrumentation and Aerospace and Defense Electronics segments since July 2013. Prior to that, he had been President and Chief Operating Officer of Teledyne’s Instrumentation and Aerospace and Defense Electronics segments since January 2011.
Melanie S. Cibik* Senior Vice President, General Counsel, Chief Compliance Officer
 and Secretary
 
58

 
Miss Cibik has been Senior Vice President, General Counsel and Secretary since September 2012 and Chief Compliance Officer since August 2016. 
Susan L. Main* Senior Vice President and Chief Financial Officer
 
59

 
Ms. Main has been Senior Vice President and Chief Financial Officer of Teledyne since November 2012. In July 2017, Ms. Main became a director of Ashland Global Holdings, Inc.

Cynthia Belak*
Vice President and Controller
 
61

 
Ms. Belak has been Vice President and Controller of Teledyne since May 2015.  Prior to her promotion, Ms. Belak had been Vice President, Business Risk Assurance of Teledyne since January 2012. 
Jason VanWees*
Senior Vice President, Strategy and Mergers & Acquisitions
 
46

 
Mr. VanWees has been Senior Vice President, Strategy and Mergers & Acquisitions since July 2013. Prior to his promotion, he had been Vice President, Strategy and Mergers & Acquisitions since September 2012. Prior to that, he had been Vice President, Corporate Development and Investor Relations of Teledyne for more than five years.
George C. Bobb III*
Vice President of Teledyne and President - Teledyne Aerospace Electronics and Teledyne Scientific & Imaging LLC
 
43

 
Mr. Bobb has been Vice President of Teledyne and President - Teledyne Aerospace Electronics and Teledyne Scientific & Imaging LLC since August 2017. He was Vice President-Contracts, Information Technology and Selected Operations and Deputy General Counsel for Litigation of Teledyne from August 2016 to August 2017. From July 2014 to August 2016, he was Chief Compliance Officer, Vice President-Information Technology and Deputy General Counsel for Litigation of Teledyne. Prior to that he had been Vice President, Chief Compliance Officer and Deputy General Counsel for Litigation since September 2012.
Edwin Roks*
Vice President of Teledyne and Group President - Teledyne DALSA and Teledyne e2v Digital Imaging
 
53

 
Dr. Roks has been a Vice President of Teledyne since January 2014 and Group President - Teledyne DALSA and Teledyne e2v Digital Imaging since March 2017. Dr. Roks has been President of Teledyne DALSA, Inc. since October 2015. From January 2014 to October 2015, Dr. Roks had been the Chief Technology Officer of Teledyne. Prior to that since April 2010, Dr. Roks served as Executive Vice President and General Manager of the professional imaging division of Teledyne DALSA, Inc. (formerly known as DALSA Corporation).
Thomas H. Reslewic*
Vice President of Teledyne and Group President - Teledyne Environmental and Electronic Measurement Instrumentation (“EEMI”) and Teledyne Defense Electronics

 
59

 
Mr. Reslewic has been Vice President and Group President - Teledyne Environmental and Electronic Measurement Instrumentation EEMI and Teledyne Defense Electronics since April 2017. Prior to that, since June 2013, he was President of Teledyne EEMI. Mr. Reslewic has been President and Chief Executive Officer, Teledyne LeCroy, since 2012. Prior to its acquisition by Teledyne in 2012, Mr. Reslewic was President and Chief Executive Officer of LeCroy Corporation since 2002.

10



Name and Title
 
Age
 
Principal Occupations Last 5 Years
Other Officers:
  
 
 
 
Carl Adams
Vice President, Business Risk
Assurance
 
48

 
Mr. Adams has been Vice President, Business Risk Assurance of Teledyne since May 2015.  Prior to that, upon joining Teledyne in April 2015, he was Senior Director, Finance.  From March 2014 to March 2015, he was the Chief Financial Officer and Vice President of NeuroSigma, Inc., a developer of neurological disorder treatments.  From January 2014 to March 2014, he was the Corporate Controller and Vice President for NeuroSigma, Inc.  From April 2011 to January 2014, he was a founding partner of Technical Accounting and Controllership Solutions, LLP.

Stephen F. Blackwood
Vice President and Treasurer
 
55

 
Mr. Blackwood has been Vice President and Treasurer of Teledyne for more than five years.
Jason Connell
Vice President - Human Resources and Associate General Counsel
 
42

 
Jason Connell has been Vice President - Human Resources since December 2016. Prior to that he was and remains Associate General Counsel and General Counsel of the Engineered Systems segment.

Janice L. Hess
President, Engineered Systems Segment


 
58

 
Ms. Hess has been the President, Engineered Systems segment of Teledyne since May 2014.  Prior to her promotion, Ms. Hess was the Executive Vice President and Chief Financial Officer for the Engineered Systems segment and Teledyne Scientific and Imaging since September 2013.  Prior to that she had been the Executive Vice President and Chief Financial Officer for the Engineered Systems segment since August 2007. 
Scott Hudson
Vice President - Chief Information Officer
 
56

 
Mr. Hudson has been Vice President and Chief Information Officer since August 2017 and Chief Information Officer since June 2014. Prior to that, since 2009 he was Vice President of Administration for Teledyne Brown Engineering, Inc.


Michael Read
President, Teledyne Marine Group


 
59

 
Mr. Read has been President, Teledyne Marine Group since August 2016. Prior to that since August 2009 he was President, Teledyne Oil & Gas.

Glenn A. Seemann
Vice President, Contracts
 
60

 
Mr. Seemann has been Vice President - Contracts since August 2017. Prior to that since April 2015 he was Associate Vice President, Corporate Contracts, Procurement, and Property Management. Prior to that since July 2009 he was Vice President, Contracts - Teledyne Instruments, Inc.

 * 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 are parties to a Fifth Amended and Restated Employment Agreement dated as of October 22, 2013, which was amended on September 28, 2015. Under the amended agreement, we will employ Dr. Mehrabian as the Chairman, President and Chief Executive Officer of Teledyne through December 31, 2019, at an annual base salary that is currently $995,000. 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 on retirement.
Ten current members of management 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.

11


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 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 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 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 and 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 and 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


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 or waivers of 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. Alternatively, if you would like a paper copy of any report we file with the SEC (without exhibits) or other document, please write to Melanie S. Cibik, Senior Vice President, General Counsel, Chief Compliance Officer and Secretary, at 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.
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 2017 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, telecommunications and automotive industries, each of which has been cyclical, exhibited rapid changes and suffered from fluctuating market demands. A cyclical downturn in these markets may materially affect future operating results. In 2015 and 2016, for example, our revenue and income were negatively impacted by the downturn in energy markets.
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 in the event of future reductions in global capital expenditures and manufacturing capacity.
A material amount of our total revenues is derived from companies in the oil and gas industry, especially 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.
A material amount of our total revenues is derived from customers in or connected to the oil and gas exploration, development and production, especially the offshore oil and gas industry.  One of our largest commercial customers is in the offshore oil and gas industry and accounted for 2.3% of total sales in 2015.  In 2017 and 2016, no commercial customer in the offshore oil and gas industry accounted for more than 2% of total sales. The oil and gas industry is a historically cyclical industry characterized by significant changes in the levels of exploration and development activities. In 2014 and again in 2015

13


and 2016, the price of Brent crude oil experienced dramatic declines, from a high of $116 per barrel in June 2014, to a low of $27 per barrel in January 2016 and was approximately $67 per barrel at the end of 2017. 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;
laws and governmental regulation that restrict the use of hydraulic fracturing;
technological changes;
the political environment of oil-producing regions;
the price and availability of alternative fuels; and
climate change regulation that provide incentives to conserve energy or use alternative energy sources.

Teledyne manufactures seismic sources, interconnects and data acquisition products used in offshore energy exploration. When crude oil and natural gas prices are low, the level of marine seismic exploration activity typically decreases, potentially resulting in reduced demand for our products used in offshore energy exploration. In addition, a decline in the level of capital spending by oil and natural gas companies may result in a reduced pace of development of new energy reserves, which could adversely affect demand for our products related to energy production, and, in certain instances, result in the cancellation, modification or rescheduling of existing orders.
With the 2017 acquisition of e2v, the risk profile of Teledyne may differ materially from prior years, which could materially change our results of operations.
On March 28, 2017, Teledyne acquired e2v, a leading designer, developer and manufacturer of radio frequency (“RF”) power systems, imaging solutions and semiconductors to the aerospace, security and defense, space, medical, scientific and industrial markets. e2v is headquartered in the United Kingdom, with key operations in the United Kingdom, France, the United States and Spain. As a result of the acquisition of e2v, a greater percentage of Teledyne’s revenues and expenses arise from international sources. The acquisition also significantly expands Teledyne’s international employee base and manufacturing footprint. As a result of the acquisition of e2v, the financial results of Teledyne are more exposed to currency exchange rate fluctuations and an increased proportion of assets, liabilities and earnings are denominated in non-U.S. dollar currencies. Following the acquisition, a significant proportion of Teledyne’s net assets, expenses and income are in non-U.S. dollar currencies, primarily the British pound, the Canadian dollar and the euro, while Teledyne’s financial results are presented in U.S. dollars. Teledyne’s financial results and capital ratios are therefore more sensitive to movements in foreign exchange rates as a result of the acquisition. A depreciation of non-U.S. dollar currencies relative to the U.S. dollar could have an adverse impact on the combined company’s financial results.
While most of the products made and markets served by e2v are complementary to Teledyne, the acquisition of e2v expanded the size of Teledyne’s Digital Imaging segment relative to its other segments. Continued innovation and research and development efforts will be required to maintain e2v’s leadership position in imaging products and semiconductor production. e2v’s business also may be more capital intensive than many of Teledyne’s other businesses, increasing Teledyne’s capital requirements. Approximately 20 percent of e2v’s revenue relates to long-term contracts, many of which involve advancements in technology and are fixed price. As discussed below, an inherent risk in fixed price contracts is that actual performance costs may exceed the projected costs on which the contracts are agreed. The failure to anticipate technical problems, estimate costs accurately or control costs during the performance of a fixed price contract can reduce its profitability or result in a loss.

14


We may not realize all of the anticipated benefits of the acquisition of e2v, or those benefits may take longer to realize than expected. 
Even if the operations of the businesses of the Teledyne and e2v are integrated successfully, we may not realize the full benefits of the acquisition, including the synergies, cost savings or sales or growth opportunities that we expect, or the full benefits may not be achieved within the anticipated time frame, or at all. Additional unanticipated costs may be incurred in the integration of the two businesses. All of these factors could adversely affect our earnings, decrease or delay the expected accretive effect of the acquisition, or negatively impact the price of our common stock. As a result, we cannot assure that the combination of Teledyne’s and e2v’s businesses will result in the realization of the full benefits anticipated from the acquisition.
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 31, 2017, we had $1,068.2 million in total outstanding indebtedness. This indebtedness included $325.0 million in senior unsecured notes, $300.0 million in Euro denominated notes, $175.5 million in term loans and $165.0 million outstanding under our $750.0 million 2015-amended credit facility. Our indebtedness could harm our business by, among other things, reducing the funds available to make acquisitions, capital expenditures, stock repurchases, 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 are subject to the risks associated with international sales and international operations, which could harm our business or results of operations.
During 2017, sales to international customers accounted for approximately 46% of our total revenues, compared with 43% in 2016 and 44% in 2015. In 2017, we sold products to customers in over 100 countries. In 2017, the top five countries for international sales were China, the United Kingdom, Germany, Japan and South Korea, constituting approximately 21% of our total sales. Our acquisitions, including e2v in 2017 contributed to greater international sales and operations. 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.
Risks associated with international sales include, but are not limited to: 
political and economic instability;
international terrorism;
export controls, including U.S. export controls related to China, sanctions related to Russia, 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 and U.S. - Russia 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. Given our several Canada-based businesses, 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.
In June 2016, the United Kingdom (“U.K.”) held a referendum in which voters approved an exit from the European Union (“E.U.”), commonly referred to as “Brexit.”  The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business.  The announcement of Brexit and the pending withdrawal of the U.K. from the E.U. may also create further global economic uncertainty, which may adversely impact the economies of the U.K., the E.U. countries and other nations, may cause our current and future customers to reduce their spending on our products and services, and may cause certain E.U.-based customers to source products from businesses based outside of the U.K. For example, Brexit-related uncertainty could lead to a reconsideration by Airbus as to future investment and spending in the U.K., which could reduce sales for our U.K.-based businesses that supply Airbus. Potential Brexit-related risks for our U.K.-based businesses also

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include increased import duties, loss of customers in the E.U. delays in the movement of goods between the U.K. and the E.U. and loss of access to the E.U. labor pool. Given our several U.K.-based businesses, including our 2017 acquisition of e2v, volatility in the value of the British pound relative to the U.S. dollar, or other foreign currencies, could increase the cost of raw materials and components for our U.K.-based businesses and could otherwise adversely affect the business, operations and the financial condition of our UK-based businesses.
Regional independence movements in Scotland and Spain could also adversely impact our businesses located in those jurisdictions.
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 impositions of fines and penalties or 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. Attempts by the Presidential Administration to withdraw from or materially modify international trade agreements could adversely affect our business, financial condition and results of operations.
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 increased the level of 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.
Our international operations are subject to risks customarily encountered in foreign operations, including interruption to transportation flows for delivery of parts to us and finished goods to our customers, changes in a specific country’s or region’s political or economic conditions, trade protection measures, import or export licensing requirements, consequences from changes in tax laws and regulatory requirements, difficulty in staffing and managing widespread operations, differing labor regulations, differing protection of intellectual property and geopolitical turmoil, including terrorism and war. We are also exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales and expenses, and assets and liabilities denominated in currencies other than the local functional currency, and may also become subject to interest rate risk inherent in any debt we incur, or financial investments we hold.
The E.U. adopted a comprehensive General Data Privacy Regulation (the “GDPR”) in May 2016 and which will become fully effective in May 2018. The GDPR requires companies to satisfy new requirements regarding the handling of personal and sensitive data, including its use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. Failure to comply with GDPR requirements could result in penalties of up to 4% of worldwide revenue. The GDPR and other similar laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices.
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, including environmental liabilities;
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;

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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. As noted above, our 2017 acquisition of e2v increases our international presence and the percentage of sales related to the Digital Imaging segment. These acquisitions, coupled with our other recently acquired companies, located outside of the United States, 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, the businesses of e2v and DALSA are more capital intensive than other Teledyne businesses, which could result in 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 2017 management’s report specifically excludes from its scope and coverage our 2017 acquisitions of e2v and SSI assets, 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 a material adverse impact on our quarterly financial results. Further, the acquisitions of U.S. public companies, such as Bolt and LeCroy, routinely trigger purported class action lawsuits, filed by shareholders of the target companies, the defense of which has increased transaction costs, among other things.
Changes in future business conditions could cause business investments, goodwill and other long-lived assets to become impaired, resulting in significant losses and write-downs that would reduce our operating income.
On December 31, 2017, Teledyne’s goodwill was $1,776.7 million and net acquired intangible assets were $398.9 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. 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 a significant portion of 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.

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United States and global responses to terrorism, concerns regarding nuclear proliferation and the safety of nuclear energy, continuing turmoil in Middle Eastern countries, increasing tension between the U.S. and Russia, potential hostilities involving North Korea, potential epidemics, potential future financial issues impacting 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, 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. Increasing tensions with Russia or the evolving nuclear threat from North Korea could disrupt the global economic recovery.
Air travel declines have occurred after terrorist attacks and heightened security alerts, as well as after the high-profile outbreaks of disease. 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. Terrorist attacks in Spain in 2017 and Paris in 2015 or the Syrian refugee crisis could result in governments in Europe imposing greater restrictions on the movement of personnel or goods, which could adversely impact our businesses located within the European Union or our ability to sell products in that region. 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.
 A future 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 have decreased oil exploration and petrochemical refining activities and have hindered our 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.
Our revenue from government contracts subjects us to many risks:
Our revenue from U.S. 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 U.S. 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 U.S. Department of Defense, as prime contractor or subcontractor, represented approximately 24% of our total revenue in 2017, compared with 27% in 2016 and 26% in 2015. 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 products and services and cause us to lose future revenues. Any renewed emphasis on Federal deficit and debt reduction could lead to a further decrease in overall defense spending. The continued war on terrorism 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 $500.0 billion of defense cuts over nine years starting in fiscal year 2013, which represented approximately 9% of planned defense funding over the period. On November 2, 2015, the Bipartisan Budget Act of 2015 (the “Budget Act”) was signed into law. The Budget Act raises the statutory limit on the amount of permissible federal debt (the debt ceiling) until March 2017 and raises the sequester caps imposed by the Budget Control Act of 2011 by $80.0 billion, split equally between defense and domestic spending ($50.0 billion in government fiscal year 2016 and $30.0 billion in government fiscal year 2017). The President signed a continuing resolution in September 2016, which was extended in December 2016, and provided funding for the U.S. Government at fiscal

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2016 levels through April 28, 2017. In May 2017, the President signed the Consolidated Appropriations Act of 2017 for appropriations through September 30, 2017. Congress has yet to pass a budget for the U.S. Government’s fiscal year 2018, but, to date, the Government has continued to operate through continuing resolutions. Uncertainty around the budget process delays new programs. The total statutory spending cap remains at $1.1 trillion as set by the relief authorized in 2016 and 2017 by the Bipartisan Budget Act of 2015 to the original sequestration specified by the Budget Act of 2011, which set discretionary caps through 2021.
Although the President has indicated his desire for increased defense spending, 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 the U.S. Congress for various Defense and NASA programs could continue to impact our Engineered Systems, Aerospace and Defense Electronics and Digital Imaging 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. Our Turbine Engines business, which is part of our Engineered Systems segment, is being impacted by delays in production runs under the Harpoon missile programs, and may be impacted by U.S. Department of Defense directives to introduce competitive bidding for programs on which we have previously served as sole source. The JASSM missile program comes to an end in mid-2018. The President has expressed concern over the cost of the F-35 Joint Strike Fighter program. Our Aerospace and Defense Electronics segment may be impacted by volume and/or price reductions in connection with this program, to the extent they are imposed. The timing of program cycles can affect our results of operations for a particular quarter or year, and cancellations of significant programs such as the Objective Simulation Framework (“OSF”) Littoral Combat Ship Gun Mission Modules or the Shallow Water Combat Submersible (“SWCS”) would affect our results. It is also not uncommon for the U.S. Department of Defense to delay the timing of awards for major programs for six to twelve months. 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. Uncertainty over budgets or priorities with the Presidential Administration could result in delays in funding, changes in funded programs and the timing of awards that could have a material impact on our revenues in 2018. Finally, various U.S. 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. We have been a significant participant in NASA programs, primarily through our Engineered Systems segment and through Teledyne Scientific Company. The prior Administration introduced significant changes to the national space policy, including the cancellation of the NASA’s Constellation Program which includes Ares launch vehicles. Teledyne Brown Engineering has developed the Multi User System for Earth Sensing (“MUSES”) platform as part of our commercial space business.  The MUSES platform provides opportunities for imaging, technology demonstrations, and space qualification of payloads supporting research, scientific studies, humanitarian efforts for both government and commercial customers. The MUSES platform depends on continued operation of the ISS, and we may not be successful in developing the technology or commercial relationships necessary to make this investment profitable. While MUSES is now operational on the ISS, the delay in launch of equipment for use on the MUSES platform could have an adverse impact on the investment return on the platform. The launch of MUSES was delayed in 2017 by launch failures of SpaceX. Future launch failures could impact future instruments designed for this platform. In early 2014, we were awarded a five-year $60.0 million contract by NASA’s Marshall Space Flight Center to develop and manufacture the Launch Vehicle Stage Adapter for the Space Launch System, but 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. The Presidential Administration could also lead to changes to the nation’s space policy, some or all of which could materially impact our results.
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 nine U.S. Government contracts terminated for convenience in 2017, compared with one in 2016 and eight in

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2015. 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 and other 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 (58% of our total U.S. Government contracts were fixed-price in 2017, 54% in 2016 and 54% in 2015). 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 or generate lower profits on some contracts if we fail to meet these estimates. We may also lose money on non-fixed price, cost-reimbursement contracts that contain dis-incentives or penalties related to cost, schedule or performance.
Our business is subject to government contracting regulations, including increasingly complex regulations on cybersecurity 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. The Department of Defense as well as other U.S. Government contracting agencies have adopted new rules and regulations requiring contractors to implement a set of cyber security measures to attain the safeguarding of contractor systems that process, store, or transmit certain information. Implementation and compliance with these new cyber security requirements is complex and costly, and could result in unforeseen expenses, lower profitability and, in the case of non-compliance, penalties and damages, all of which could have an adverse effect on our business.
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 domestic qualified defined benefit pension plan covering most of our U.S. employees hired prior to 2004 or approximately 13% of our active employees. We also have several smaller domestic and foreign-based pension plans. As of December 31, 2017, the value of the combined pension assets is greater than our combined pension benefit obligations. The accounting rules applicable to our pension plans 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 addition, changes in other actuarial assumptions such as mortality assumptions or change due to legislative or regulatory actions could impact our pension income or expense as well as funding obligations. Each year beginning with 2014, the Society of Actuaries released revised mortality tables, which updated life expectancy assumptions. In consideration of these tables, each year we review the mortality assumptions used in determining our pension and post-retirement benefit obligations. The impact of these mortality assumptions could increase our pension obligation and increase future pension expense.  In 2013, we made a voluntary pretax cash contribution of $83.0 million to the domestic pension plan. No contributions were made to the domestic pension plan since the 2013 contribution. 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. In addition, we have sold approximately $46.1 million in pension liability to third parties in recent years. To the extent any of these counterparties are unable to fulfill their obligations to retirees, we may have residual liability. 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 11 to our Notes to Consolidated Financial Statements.

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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, activism, or other motivations, include covertly introducing malware to our computers and networks, performing reconnaissance, impersonating authorized users, stealing, corrupting or restricting our access to data, among other activities.  We continue to update our infrastructure, security tools 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 prevent or be aware of an incident or its magnitude and effects. The theft, corruption, 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.  We are subject to U.S. Department of Defense regulations applicable to certain types of data residing on or transiting through certain information systems, and we expect these regulations will be incorporated into certain contracts we hold.  To the extent that any security breach results in inappropriate disclosure of confidential or controlled information of employees, third parties or the U.S. Government, or any of the deployed security controls are deemed insufficient, we may incur liability or the loss of contracts or 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. Unauthorized access to or control of our products, devices or systems could impact the safely or our customers and other third parties which could result in legal claims against us. Security breaches also could result in a violation of applicable U.S. and international privacy and other laws, including the GDPR, and subject us to private consumer or securities litigation and governmental investigations and proceedings, any of which could result in our exposure to material civil or criminal liability.
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. Our Teledyne Scientific Company subsidiary, which serves as our primary research center, 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. The business of Teledyne e2v, for which the design and development of specialized technology for high performance systems and equipment is integral, also requires substantial investments in research and development. 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 as well as the expansion of DALSA’s semiconductor foundry in Bromont, Quebec. 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 or generate cash flow 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.
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 or increase our participation in new markets, which could harm our profitability 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. We are currently upgrading infrastructure at Teledyne e2v’s facility in Chelmsford, U.K. and subject to customer and governmental support, we are planning to expand Teledyne DALSA’s MEMS foundry in Bromont, Quebec. 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 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.

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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 information on such products is augmented 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.
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.
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 lead to reduced sales of those products, which 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. Failure to comply CE marking directives may prevent some of our products from being sold into Europe and the cost to comply with these directives may make our products non-competitive. The political agenda of the Presidential Administration may affect the level of environmental regulations and enforcement and government spending on scientific research, which could adversely impact the sales of our products and services, including sales of pollution monitoring instruments and instruments used to measure the Earth’s climate and climate change, such as undersea gliders and space-based imaging sensors. A change in China's recent economic policies promoting pollution reduction could result in lower sales or slower sales growth for our pollution monitoring and laboratory instrumentation to that country.
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 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. Recent trends by China’s aviation authority to relax restrictions on airspace may be reversed, and anticipated new regulations loosening airspace restrictions may not materialize, which could impact the future prospects of our commercial aerospace businesses.
 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. In particular, we face increased competition with respect to the sale of our flight data acquisition systems, which may intensify as certain of our patents related to these products expire in 2018 and upcoming years. We also face new competition for our protocol analyzers products. 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

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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.
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 transportation and commercial aviation and products used in medical devices (most recently including X-ray detectors and generators), 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 2018 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 cannot assure that we will not have additional product liability claims or that we will not recall any 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. Our Teledyne DALSA Professional Imaging unit develops image sensors used in medical and dental X-ray applications along with portable X-ray generators used in non-destructive testing and security applications. In addition, our Teledyne DALSA Digital Imaging unit develops equipment and sensors used in eye examination and general surgical vision applications. Errors and omissions in analyses may occur or erroneous images could be captured. 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 Nuclear Industries Indemnity 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.
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 a 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 or supplier-imposed rationing of scarce components 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

23


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 and a shrinking supply base, possibly creating longer lead times to obtain needed components for our products, delays in material acceptance and a greater risk of receiving counterfeit parts.
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 2017, 2016 and 2015 and we have hundreds of customers in the various industries that we serve, some of our product lines may have one or a few key customers the loss of which could adversely affect our business or financial results. In 2017, 2016 or 2015, no commercial customer accounted for more than 3.0% of total sales.
Newer products, such as our X-ray generators and 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.
Weaker demand for coal and gas-fired power plants, as evidenced by recent restructurings at power asset divisions of General Electric and Siemens, could result in lower sales of our instruments, systems and services for liquid and air analysis, process management and emissions compliance.
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 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. Competitors could also block our access to key distributors. 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 and the use of seismic energy sources for offshore energy exploration could adversely affect some product lines of our Instrumentation segment.
Our manufacturing operations, including former operations, could expose us to material environmental liabilities. Additionally, companies we acquire may have environmental liabilities that are not accurately assessed or brought to our attention at the time of the acquisition.
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 certain of our products. This, or other federal or state regulations, 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.
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 14 to our Notes to Consolidated Financial Statements.

24


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 workforce. Some of our businesses, including those in traveling wave tube design and development, draw from a pool of specialized engineering talent that is small and currently shrinking. 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, facilities or product lines that we determine no longer meet with our growth strategy or that should be consolidated.
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 the net assets of the Printed Circuit Technology (“PCT”) business in 2016 and the general aviation piston engine businesses in 2011.   Over the years we have also consolidated some of our business units and facilities, including to deal with downturns in the defense and oil and gas industries, among other reasons.   In 2015, we began to consolidate some of our marine instrumentation businesses units and facilities, and it continued through 2017.  The operations of Teledyne Cormon are currently being relocated from the United Kingdom to Daytona Beach, Florida.   In 2017, we closed our remaining relays operations in Tijuana, Mexico, and relocated them to our owned Teledyne Relays’ facility in Hawthorne, California.   We may not be able to realize efficiencies and cost savings from our consolidation activities.  There is no assurance that our efforts will be successful.  If we do not successfully manage our current consolidation activities, or any other similar activities that we may undertake in the future, expected efficiencies and benefits might be delayed or not realized, and our operations and business could be disrupted.  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.
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 loss of electrical power caused by severe ice storms. In addition, we have manufacturing facilities in the Southeastern United States and Texas that have been threatened and struck by major hurricanes. In 2017 our businesses located in Houston were impacted by Hurricane Harvey and our business in Florida was threatened by Hurricanes Irma and Matthew. 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. 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 the Deepwater Horizon rig explosion and oil spill in 2010 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.

25


Teledyne Brown Engineering, Inc. has developed, built, and launched a multi user system for earth sensing that is affixed to the ISS. For the program to be financially successful, the 19 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.
Higher tax rates may harm our results of operations and cash flow.
Our effective tax rate for 2017 was 20.8%, compared with 20.9% for 2016 and 24.3% for 2015. While in December 2017, the President signed the Tax Cuts and Jobs Act, which in general lowers corporate tax rates in the United States, a number of factors may impact our effective tax rates, which could reduce our net income and increase our tax payments, including:
the relative amount of income we earn in jurisdictions;
changes in tax laws or their interpretation, including changes in the United States 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 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 continue to implement enterprise resource planning software systems, which are intended to improve our business processes in certain business units. The costs associated with such systems can be 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.
Our financial statements are based on estimates required by Generally Accepted Accounting Principles in the United States (“GAAP”), and actual results may differ materially from those estimated under different assumptions or conditions.
Our financial statements are prepared in conformity with GAAP. 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 under “Critical Accounting Estimates.”

26


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 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 ten 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. In fiscal 2015, our stock price declined 15.2% and in fiscal 2016, our stock increased 38.7%, while in 2017 our stock price increased 47.3%. Additional information regarding our historical stock price is set forth in Part II, Item 5 of this Annual Report on Form 10-K.
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. We have in the past repurchased shares of our stock pursuant to board-approved stock repurchase programs. We cannot provide assurances that we will continue to repurchase shares under those programs, or that our board will authorize new repurchase programs.

27



Item 1B.    Unresolved Staff Comments
None.

Item 2.
Properties
The Company has 69 principal operating facilities in 16 states and six foreign countries. The Companys executive offices are located in Thousand Oaks, California. Its principal research and development center is also located in Thousand Oaks, California. We maintain our facilities in good operating condition and we believe they are 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 27, 2018:
 
 
 
 
 
 
 
Location of Facilities
Segment
 
Owned
 
Leased
 
States
  
Countries
 
 
 
 
 
 
 
Instrumentation
 
14

  
 
14

  
California, Colorado, Florida, Massachusetts, Nebraska, New Hampshire, New York, Ohio, Texas and Virginia
  
United States,
Canada, Denmark and United Kingdom
 
 
 
 
 
Digital Imaging
 
10

  
 
5

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

  
 
12

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

  
 
6

  
Alabama, Colorado,
Maryland, Ohio and
Tennessee
  
United States and
United Kingdom
Total
 
32

  
 
37

  
 
  
 

Item 3.
Legal Proceedings
From time to time, we become involved in various lawsuits, claims and proceedings arising out of, or incident to, our ordinary course of business including lawsuits, claims or proceedings pertaining to product liability, patent infringement, commercial contracts, 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 business, financial condition or liquidity.
Item 4.
Mine Safety Disclosures
No information is required in response to this item.

28




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 and low stock price:
 
High
 
Low
2016
 
 
 
 
1st Quarter
 
$
90.85

  
$
73.66

2nd Quarter
 
$
101.66

  
$
85.29

3rd Quarter
 
$
110.61

  
$
94.68

4th Quarter
 
$
129.36

  
$
101.90

2017
 
 
 
 
1st Quarter
 
$
135.89

  
$
119.67

2nd Quarter
 
$
137.00

  
$
121.58

3rd Quarter
 
$
161.58

  
$
127.75

4th Quarter
 
$
186.54

  
$
159.73

2018
 
 
 
 
1st Quarter (through February 26, 2018)
 
$
201.40

  
$
172.80

On February 26, 2018, the closing sale price of our Common Stock as reported by the New York Stock Exchange was $191.19 per share. As of February 23, 2018, there were 3,184 holders of record of the Common Stock. Because many of our shares of common stock are held by brokers and institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners of our stock represented by these stockholders of record.
We intend to use future earnings to fund the development and growth of our businesses, including through potential acquisitions. We may also deploy cash to fund share repurchases. Therefore, we do not anticipate paying any cash dividends in the foreseeable future.
We have a stock repurchase program authorized by our Board of Directors. We repurchased 2,561,815 shares in 2015 under the program. No repurchases were made since 2015. See Note 8 to our Consolidated Financial Statements for additional information about our stock repurchase program.
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.




29


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 for fiscal year 2015 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” and the Notes to Consolidated Financial Statements.
Five-Year Summary of Selected Financial Data 
 
  
2017
 
2016
 
2015
 
2014
 
2013
 
  
(In millions, except per-share amounts)
Net sales
  
$
2,603.8

  
$
2,149.9

  
$
2,298.1

  
$
2,394.0

  
$
2,338.6

Net income
  
$
227.2

  
$
190.9

  
$
195.5

  
$
217.7

  
$
185.0

Net income attributable to Teledyne
  
$
227.2

  
$
190.9

  
$
195.8

  
$
217.7

  
$
185.0

Basic earnings per common share
  
$
6.45

  
$
5.52

  
$
5.55

  
$
5.87

  
$
4.96

Diluted earnings per common share
  
$
6.26

  
$
5.37

  
$
5.44

  
$
5.75

  
$
4.87

Weighted average diluted common shares outstanding
 
36.3

 
35.5

 
36.0

 
37.9

 
38.0

Total assets
  
$
3,846.4

  
$
2,774.4

  
$
2,717.1

  
$
2,862.2

  
$
2,751.1

Long-term debt and capital leases, less current portion
  
$
1,069.3

  
$
515.8

  
$
761.5

  
$
618.9

  
$
549.0

Total stockholders’ equity
  
$
1,947.3

  
$
1,554.4

  
$
1,344.1

  
$
1,468.5

  
$
1,518.7

Fiscal year 2017 includes the impact of the acquisition of e2v in March 2017, See Note 3 to our Consolidated Financial Statements for additional information about the e2v acquisition.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Teledyne Technologies Incorporated provides enabling technologies for industrial growth markets that require advanced technology and high reliability. These markets include aerospace and defense, factory automation, air and water quality environmental monitoring, oceanographic research, deepwater oil and gas exploration and production, medical imaging and pharmaceutical research. Our products include digital imaging sensors, cameras and systems within the visible, infrared and X-ray spectra, monitoring instrumentation for marine and environmental applications, harsh environment interconnects, electronic test and measurement equipment, aircraft information management systems, and defense electronics 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 continue to focus on balanced and disciplined capital deployment among capital expenditures, acquisitions and share repurchases. 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, in March 2017, we made our largest acquisition to date, e2v technologies plc (“e2v”). e2v provides high performance image sensors and custom camera solutions and application specific standard products for the machine vision market. In addition, e2v provides high performance space qualified imaging sensors and arrays for space science and astronomy. e2v also produces components and subsystems that deliver high reliability radio frequency power generation for healthcare, industrial and defense applications. Finally, the company provides high reliability semiconductors and board-level solutions for use in aerospace, space and communications applications. We made one other acquisition in 2017, five acquisitions in 2016 and three acquisitions in 2015.

30


In the third quarter of 2016, Teledyne completed the disposition of the net assets of its Printed Circuit Technology (“PCT”) business for $9.3 million in cash, resulting in no gain or loss. PCT was part of the Aerospace and Defense Electronics segment. In connection with the sale, we entered into a transition services agreement, effective July 8, 2016, to provide certain administrative services to facilitate the orderly transfer of the business operations to the buyer. The transition services agreement terminated in 2017. In addition, in 2016 we sold a former operating facility in California and recorded a pretax gain of $17.9 million.
As part of a continuing effort to reduce costs and improve operating performance, we may take actions to consolidate and relocate certain facilities and reduce headcount across various businesses, reducing our exposure to weak end markets and high cost locations. We continue to seek cost reductions in our businesses. The following pre-tax charges were incurred related to severance and facility consolidations (in millions):
 
 
2017
 
2016
 
2015
Instrumentation
 
$
2.1

 
$
10.6

 
$
3.9

Digital Imaging
 

 
2.0

 
3.2

Aerospace and Defense Electronics
 
2.1

 
4.6

 
1.2

Engineered Systems
 

 
0.1

 
0.1

Total
 
$
4.2

 
$
17.3

 
$
8.4

 
 
2017
 
2016
 
2015
Severance
 
$
3.8

 
$
9.5

 
$
8.4

Facility consolidations
 
0.4

 
7.8

 

Total
 
$
4.2

 
$
17.3

 
$
8.4

 
 
2017
 
2016
 
2015
Cost of sales
 
$
2.8

 
$
6.8

 
$
3.7

Selling, general and administrative expenses
 
1.4

 
10.5

 
4.7

Total
 
$
4.2

 
$
17.3

 
$
8.4

At December 31, 2017, $1.5 million remains to be paid related to these actions.
Recent Acquisitions
The Company spent $774.1 million, $93.4 million and $66.7 million on acquisitions and investments in 2017, 2016 and 2015, respectively, net of any cash acquired.
On March 28, 2017, Teledyne completed the acquisition of all of the outstanding common stock of e2v for $770.7 million, including stock options and assumed debt, net of $24.4 million of cash acquired. Most of e2v’s operations are included in the Digital Imaging and Aerospace and Defense Electronics segments. The Instrumentation segment includes a small portion of e2v’s operations. Principally located in Chelmsford, United Kingdom and Grenoble, France, e2v had sales of approximately £236 million for its fiscal year ended March 31, 2016. e2v’s results have been included since the date of the acquisition and include $273.7 million in net sales and operating income of $37.3 million, which included $8.3 million in acquisition-related costs and $11.2 million in additional intangible asset amortization expense.
Fiscal year 2017 includes pretax charges of $27.0 million related to the acquisition of e2v, which included $13.0 million in transaction costs, including stamp duty, advisory, legal and other consulting fees and other costs recorded to selling, general and administrative expenses, $5.7 million in inventory fair value step-up amortization expense recorded to cost of sales, $6.0 million related to a foreign currency option contract expense to hedge the e2v purchase price recorded as other expense and $2.3 million in bank bridge facility commitment expense recorded to interest expense. Of these amounts, $8.3 million impacted segment operating income.
On July 20, 2017 Teledyne Instruments, Inc. completed the acquisition of assets of Scientific Systems, Inc. (“SSI”) for $31.0 million in cash. A subsequent cash payment of $0.3 million related to a purchase price adjustment was made in 2017. Headquartered in State College, Pa., SSI is a manufacturer of precision components and specialized subassemblies used primarily in analytical and diagnostic instrumentation, such as high performance liquid chromatography (HPLC) systems and specific medical devices. SSI designs and manufactures high pressure positive-displacement piston pumps for a wide variety of analytical, clinical, sample prep and fluid-metering applications and is part of the Instrumentation segment.
On November 2, 2016, Teledyne Instruments, Inc. acquired assets of IN USA, Inc. (“IN USA”), headquartered in Norwood, Massachusetts, for $10.2 million in cash. IN USA is a manufacturer of a range of ozone generators, ozone analyzers and other gas monitoring instruments utilizing ultraviolet and infrared based technologies. Teledyne relocated and consolidated manufacturing into the new, owned facility of Teledyne Advanced Pollution Instrumentation in San Diego, California. On

31


December 6, 2016, Teledyne Instruments, Inc. acquired Hanson Research Corporation (“Hanson Research”), headquartered in Chatsworth, California, for $25.0 million, net of cash acquired. Hanson Research specializes in analytical instrumentation for the pharmaceutical industry. On May 3, 2016, Teledyne DALSA, Inc., a Canadian-based subsidiary, acquired the assets and business of CARIS, Inc. (“CARIS”), based in Fredericton, New Brunswick, Canada, for $26.2 million, net of cash acquired. CARIS is a leading developer of geospatial software designed for the hydrographic and marine community. On April 15, 2016, Teledyne LeCroy, Inc., a U.S.-based subsidiary, acquired assets of Quantum Data, Inc. (“Quantum Data”), based in Elgin, Illinois, for $17.3 million in cash. Quantum Data is a market leader in video protocol analysis test tools. On April 6, 2016, Teledyne LeCroy, Inc. also acquired Frontline Test Equipment, Inc. (“Frontline”), based in Charlottesville, Virginia, for $13.7 million in cash. Frontline is a market leader in wireless protocol analysis test tools.
Each of the 2016 acquisitions are part of the Instrumentation segment except for CARIS which is part of the Digital Imaging segment.
On June 5, 2015, Teledyne DALSA B.V., a Netherlands-based subsidiary, acquired Industrial Control Machines SA (“ICM”) for $21.8 million, net of cash acquired. In December 2016, an additional $2.5 million was paid by Teledyne related to an indemnification holdback. Based in Liège, Belgium, ICM is a leading supplier of portable X-ray generators for non-destructive testing applications, as well as complete X-ray imaging systems for on-site security screening and is part of the Digital Imaging segment.
On April 29, 2015, Teledyne DALSA, Inc. acquired the remaining 49% noncontrolling interest in the parent company of Optech Incorporated (“Optech”). As a result of the purchase of the remaining interest in Optech in 2015, the difference between the cash paid and the balance of noncontrolling interest was recorded to additional paid-in capital. The balance of the noncontrolling interest of $41.2 million at December 28, 2014 decreased by $0.3 million for the net loss and $1.3 million in translation adjustments prior to the purchase which eliminated the remaining balance.  Teledyne no longer has any noncontrolling interests. 
On February 2, 2015, Teledyne acquired Bowtech Products Limited (“Bowtech”) through a U.K.-based subsidiary for $18.9 million in cash, net of cash acquired and including an estimated working capital adjustment. Based in Aberdeen, Scotland, Bowtech designs and manufactures harsh underwater environment vision systems and is part of the Instrumentation segment.
See Note 3 to our Consolidated Financial Statements for additional information about our recent acquisitions.
Consolidated Operating Results
Our fiscal year is determined based on a 52- or 53-week convention ending on the Sunday nearest to December 31. Fiscal year 2017 contained 52 weeks, fiscal year 2016 contained 52 weeks and fiscal year 2015 contained 53 weeks. The following are selected financial highlights for 2017, 2016 and 2015 (in millions, except per-share amounts):
 
  
2017
 
2016
 
2015
Net sales
  
$
2,603.8

  
$
2,149.9

 
$
2,298.1

Costs and Expenses
  
 
 
 
 
 
Cost of sales
  
1,612.2

  
1,318.0

 
1,427.8

Selling, general and administrative expenses
  
656.0

  
578.1

 
588.6

Total costs and expenses
  
2,268.2

  
1,896.1

 
2,016.4

 
 
 
 
 
 
 
Operating Income
  
335.6


253.8

 
281.7

Interest and debt expense, net
  
(33.1
)
 
(23.2
)
 
(23.9
)
Other income/(expense), net
  
(15.5
)
  
10.7

 
0.4

Income before income taxes
  
287.0

  
241.3

 
258.2

Provision for income taxes
  
59.8

  
50.4

 
62.7

Net income
  
227.2

  
190.9

 
195.5

Noncontrolling interest
  

  

 
0.3

Net income attributable to Teledyne
  
$
227.2

  
$
190.9

 
$
195.8

 
  
 
 
 
 
 
Basic earnings per common share
  
$
6.45

 
$
5.52

 
$
5.55

 
 
 
 
 
 
 
Diluted earnings per common share
  
$
6.26

 
$
5.37

 
$
5.44

 
 

32


Our businesses are aligned in 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 2017, 2016 and 2015 are summarized in the following table: 
 
 
Percentage of Total Sales
Segment contribution to total sales:
 
2017
 
2016
 
2015
Instrumentation
 
36
%
 
41
%
 
46
%
Digital Imaging
 
27
%
 
18
%
 
16
%
Aerospace and Defense Electronics
 
26
%
 
29
%
 
26
%
Engineered Systems
 
11
%
 
12
%
 
12
%
 
 
100
%
 
100
%
 
100
%

Results of Operations
2017 compared with 2016
Net sales (dollars in millions)
 
2017
 
2016
 
%
 Change
 
 
 
Instrumentation
 
$
953.9

  
$
876.7

  
8.8
%
Digital Imaging
 
693.5

  
398.7

  
73.9
%
Aerospace and Defense Electronics
 
670.2

  
615.9

  
8.8
%
Engineered Systems
 
286.2

  
258.6

  
10.7
%
Total net sales
 
$
2,603.8

  
$
2,149.9

  
21.1
%
 
 
 
 
 
 
 
Results of operations (dollars in millions)
 
2017
 
2016
 
%
 Change
 
(in millions)
 
Instrumentation
 
$
127.4

 
$
109.8

  
16.0
%
Digital Imaging
 
108.4

 
45.9

  
136.2
%
Aerospace and Defense Electronics
 
124.9

 
112.1

  
11.4
%
Engineered Systems
 
37.7

 
32.1

  
17.4
%
Corporate expense
 
(62.8
)
 
(46.1
)
 
36.2
%
Operating income
 
335.6

 
253.8

 
32.2
%
Interest and debt expense, net
 
(33.1
)
 
(23.2
)
 
42.7
%
Other income/(expense), net
 
(15.5
)
 
10.7

 
*
Income before income taxes
 
287.0

 
241.3

 
18.9
%
Provision for income taxes
 
59.8

 
50.4

 
18.7
%
Net income
 
$
227.2

 
$
190.9

 
19.0
%
 * not meaningful
 
 
 
 
 
 
 
 


33



Sales and cost of sales by segment and total company (dollars in millions):


2017
 
2016
 
Change
Instrumentation
 
Net sales
$
953.9

 
$
876.7

 
$
77.2

Cost of sales
$
546.0

 
$
494.6

 
$
51.4

Cost of sales % of net sales
57.2
%
 
56.4
%
 
 
 
 
 
 
 
 
Digital Imaging
 
 
 
 
 
Net sales
$
693.5

 
$
398.7

 
$
294.8

Cost of sales
$
431.1

 
$
239.4

 
$
191.7

Cost of sales % of net sales
62.2
%
 
60.0
%
 
 
 
 
 
 
 
 
Aerospace and Defense Electronics
 
 
 
 
 
Net sales
$
670.2

 
$
615.9

 
$
54.3

Cost of sales
$
410.1

 
$
377.5

 
$
32.6

Cost of sales % of net sales
61.2
%
 
61.3
%
 
 
 
 
 
 
 
 
Engineered Systems
 
 
 
 
 
Net sales
$
286.2

 
$
258.6

 
$
27.6

Cost of sales
$
225.0

 
$
206.5

 
$
18.5

Cost of sales % of net sales
78.6
%
 
79.9
%
 
 
 
 
 
 
 
 
Total Company
 
 
 
 
 
Net sales
$
2,603.8

 
$
2,149.9

 
$
453.9

Cost of sales
$
1,612.2

 
$
1,318.0

 
$
294.2

Cost of sales % of net sales
61.9
%
 
61.3
%
 
 

We reported net sales of $2,603.8 million in 2017, compared with net sales of $2,149.9 million for 2016, an increase of 21.1%. Net income was $227.2 million ($6.26 per diluted share) for 2017, compared with net income of $190.9 million ($5.37 per diluted share) for 2016, an increase of 19.0%.  
Total year 2017 and 2016 reflected pretax charges totaling $4.2 million and $17.3 million, respectively, for severance and facility consolidation charges. Net income for 2017 and 2016 also included net discrete tax benefits of $21.9 million and $10.9 million, respectively. Total year 2017 also includes provisional charges of $4.7 million for the estimated impact of the Tax Cuts and Jobs Act (“Tax Act”). Net income for 2017 and 2016 included pretax charges totaling $27.0 million and $7.9 million, respectively, related to e2v acquisition related expenses. We also recorded a gain in 2016 of $17.9 million on the sale of a former operating facility in California.
Net sales
The increase in net sales in 2017, compared with 2016, reflected higher sales in each segment. Sales in 2017 included revenue growth of $155.9 million plus $298.0 million in incremental net sales from recent acquisitions, primarily e2v, and the PCT divestiture. The incremental sales from the e2v acquisition in 2017 was $273.7 million.
Sales under contracts with the U.S. Government were approximately 24% of sales in 2017 and 27% of sales in 2016. Sales to international customers represented approximately 46% of sales in 2017 and 43% of sales in 2016.
Cost of Sales
Total company cost of sales increased by $294.2 million in 2017, compared with 2016, which primarily reflected the impact of higher net sales. The total company cost of sales as a percentage of sales for 2017 was 61.9%, compared with 61.3% for 2016.
Selling, general and administrative expenses
Selling, general and administrative expenses, including Company-funded research and development and bid and proposal expense, in total dollars were higher in 2017, compared with 2016. The increase reflected the impact of higher sales, partially offset by lower severance and facility consolidation expenses of $9.1 million. Corporate administrative expense in 2017 was $62.8 million, compared with $46.1 million in 2016. The increase in corporate administrative expense reflected

34


higher compensation expense and $10.4 million in acquisition transaction expense related to the e2v acquisition in 2017. Corporate administrative expense in 2016 reflected $1.9 million in acquisition transaction expense related to the e2v acquisition. For 2017, we recorded a total of $14.2 million in stock option expense, of which $4.5 million was recorded as corporate expense and $9.7 million was recorded in the operating segment results. For 2016, we recorded a total of $11.6 million in stock option expense, of which $3.2 million was recorded as corporate expense and $8.4 million was recorded in the operating segment results. Selling, general and administrative expenses as a percentage of sales was 25.2% for 2017, compared with 26.9% for 2016 and reflected the impact of the e2v acquisition which carried a lower selling, general and administrative expense percentage than the other Teledyne businesses and lower severance and facility consolidation expenses.
Pension Income/Expense
Included in operating income in 2017 was pension income of $2.7 million compared with pension income of $2.2 million in 2016. Pension expense allocated to contracts pursuant to U.S. Government Cost Accounting Standards (“CAS”) was $13.8 million for both 2017 and 2016. Pension expense determined under CAS can generally be recovered through the pricing of products and services sold to the U.S. Government.
Operating Income
Operating income for 2017 was $335.6 million, compared with $253.8 million for 2016, an increase of 32.2%. The increase in operating income primarily reflected higher operating income in each segment, partially offset by higher corporate expense. Operating income in 2017 and 2016 included $4.2 million and $17.3 million in severance and facility consolidation costs, respectively. The incremental operating income included in the results for 2017 from recent acquisitions was $43.8 million which included $13.0 million in additional intangible asset amortization expense.
Interest Expense and Other Income and Expense
Total interest expense, including credit facility fees and other bank charges, was $35.5 million in 2017 compared with $23.6 million in 2016 and reflected the impact of higher debt levels in 2017 due to the acquisition of e2v. Interest income was $2.4 million in 2017 and $0.3 million in 2016. Other expense in 2017 and 2016 reflected $6.0 million and $5.5 million, respectively, of expense for a foreign currency option contract related to the e2v acquisition. Other income for 2016 included a gain of $17.9 million on the sale of a former operating facility in California.
Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act was enacted. The Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering corporate income tax rates, implementing the territorial tax system and imposing a tax on deemed repatriation of non-U.S. earnings. As a result of the Tax Act, Teledyne incurred provisional charges of $4.7 million in the fourth quarter of 2017 primarily due to the repatriation tax and the remeasurement of U.S. deferred tax assets and liabilities. In accordance with the Tax Act, the Company will elect to pay the repatriation tax liability over a period of eight years, with the first installment of $3.1 million due in 2018. The remainder of the tax liability is recorded in non-current income tax payable. The repatriation tax resulted in a net tax expense of $26.2 million and the remeasurement of U.S. deferred tax assets and liabilities resulted in a net tax benefit of $21.5 million. The impacts of the Tax Act may differ from this estimate, possibly materially (and the amount of the provisional charge may accordingly be adjusted over the course of 2018), due to changes in interpretations and assumptions Teledyne has made, guidance that may be issued, and actions Teledyne may take as a result of the Tax Act. These adjustments to the provisional charge related to the Tax Act will be recorded quarterly until the computations are complete which is expected no later than the fourth quarter of 2018.
The Company’s effective tax rate for 2017 was 20.8%, compared with 20.9% for 2016. Total year 2017 reflected $21.9 million in net discrete income tax benefits, which included an $8.5 million income tax benefit related to the release of valuation allowance for which the deferred tax assets are now determined more-likely-than-not to be realizable and a $8.5 million income tax benefit as a result of the remeasurement of uncertain tax positions due to expiration of statute of limitation, partially offset by $4.6 million related to adjustments for uncertain tax positions. Total year 2017 also includes $8.8 million in net discrete tax benefits related to share-based accounting.
Total year 2016 reflected $10.9 million in net discrete income tax benefits. The net discrete income tax benefits of $10.9 million, includes $6.7 million in income tax expense related to the $17.9 million gain on the sale of the operating facility and a $8.5 million income tax benefit related to the adoption of ASU No. 2016-09, as well as $9.1 million income tax benefit for the remeasurement of uncertain tax positions due to the expiration of statute of limitations, the release of valuation allowances and a favorable tax ruling in the Netherlands.
Excluding the net discrete income tax benefits in both years, and the gain and related taxes on the operating facility sale in 2016, the effective tax rates would have been 26.8% for 2017 and 27.4% for 2016.

35


2016 Compared with 2015
Sales (dollars in millions)
 
2016
 
2015
 
%
 Change
 
 
 
 
 
Instrumentation
 
$
876.7

 
$
1,051.1

 
(16.6
)%
Digital Imaging
 
398.7

 
379.0

 
5.2
 %
Aerospace and Defense Electronics
 
615.9

 
593.4

 
3.8
 %
Engineered Systems
 
258.6

 
274.6

 
(5.8
)%
Total sales
 
$
2,149.9

 
$
2,298.1

 
(6.4
)%
 
 
 
 
 
 
 
Results of operations (dollars in millions)
 
2016
 
2015
 
%
 Change
 
 
 
 
 
Instrumentation
 
$
109.8

 
$
171.0

 
(35.8
)%
Digital Imaging
 
45.9

 
40.0

 
14.8
 %
Aerospace and Defense Electronics
 
112.1

 
84.8

 
32.2
 %
Engineered Systems
 
32.1

 
26.1

 
23.0
 %
Corporate expense
 
(46.1
)
 
(40.2
)
 
14.7
 %
Operating income
 
253.8

 
281.7

 
(9.9
)%
Interest and debt expense, net
 
(23.2
)
 
(23.9
)
 
(2.9
)%
Other income, net
 
10.7

 
0.4

 
*

Income before income taxes
 
241.3

 
258.2

 
(6.5
)%
Provision for income taxes
 
50.4

 
62.7

 
(19.6
)%
Net income
 
190.9

 
195.5

 
(2.4
)%
Noncontrolling interest
 

 
0.3

 
(100.0
)%
Net income attributable to Teledyne
 
$
190.9

 
$
195.8

 
(2.5
)%
* not meaningful
 
 
 
 
 
 

Sales and cost of sales by segment and total company (dollars in millions):

2016
 
2015
 
Change
Instrumentation
 
 
 
Net sales
$
876.7

 
$
1,051.1

 
$
(174.4
)
Cost of sales
$
494.6

 
$
589.8

 
$
(95.2
)
Cost of sales % of net sales
56.4
%
 
56.1
%
 
 
 
 
 
 
 
 
Digital Imaging
 
 
 
 
 
Net sales
$
398.7

 
$
379.0

 
$
19.7

Cost of sales
$
239.4

 
$
228.0

 
$
11.4

Cost of sales % of net sales
60.0
%
 
60.1
%
 
 
 
 
 
 
 
 
Aerospace and Defense Electronics
 
 
 
 
 
Net sales
$
615.9

 
$
593.4

 
$
22.5

Cost of sales
$
377.5

 
$
383.8

 
$
(6.3
)
Cost of sales % of net sales
61.3
%
 
64.7
%
 
 
 
 
 
 
 
 
Engineered Systems
 
 
 
 
 
Net sales
$
258.6

 
$
274.6

 
$
(16.0
)
Cost of sales
$
206.5

 
$
226.2

 
$
(19.7
)
Cost of sales % of net sales
79.9
%
 
82.4
%
 
 
 
 
 
 
 
 
Total Company
 
 
 
 
 
Net sales
$
2,149.9

 
$
2,298.1

 
$
(148.2
)
Cost of sales
$
1,318.0

 
$
1,427.8

 
$
(109.8
)
Cost of sales % of net sales
61.3
%
 
62.1
%
 
 

36



We reported 2016 net sales of $2,149.9 million, compared with net sales of $2,298.1 million for 2015, a decrease of 6.4%. Net income attributable to Teledyne was $190.9 million ($5.37 per diluted share) for 2016, compared with net income attributable to Teledyne of $195.8 million ($5.44 per diluted share) for 2015, a decrease of 2.5%. 
Total year 2016 and 2015 reflected pretax charges totaling $17.3 million and $8.4 million, respectively, for severance and facility consolidation charges. Net income for 2016 and 2015 also included net discrete tax benefits of $10.9 million and $9.8 million, respectively. We also recorded a gain in 2016 of $17.9 million on the sale of a former operating facility in California, and incurred pretax charges totaling $7.9 million related to the e2v acquisition.
Net Sales
The decrease in net sales in 2016, compared with 2015, reflected lower sales in the Instrumentation and Engineered Systems segments, partially offset by higher sales in the Aerospace and Defense and Electronics and Digital Imaging segments. Sales in the Instrumentation segment reflected $15.6 million of incremental sales from recent acquisitions while sales in the Digital Imaging segment reflected $9.6 million of incremental sales from recent acquisitions.
Sales under contracts with the U.S. Government were approximately 27% of sales in 2016 and 26% of sales in 2015. Sales to international customers represented approximately 43% of sales in 2016 and 44% of sales in 2015.
Cost of Sales
Total company cost of sales decreased by $109.8 million in 2016, compared with 2015, which primarily reflected the impact of lower sales. The total company cost of sales as a percentage of sales for 2016 was 61.3%, compared with 62.1% for 2015.
Selling, general and administrative expenses
Selling, general and administrative expenses, including Company-funded research and development and bid and proposal expense, in total dollars were lower in 2016, compared with 2015. The decrease reflected the impact of lower sales, partially offset by higher severance and facility consolidation expenses of $5.8 million. Corporate administrative expense in 2016 was $46.1 million, compared with $40.2 million in 2015, an increase of 14.7%. The increase in corporate administrative expense reflected higher professional fees expense, including $1.9 million related to the e2v acquisition. For 2016, we recorded a total of $11.6 million in stock option expense, of which $3.2 million was recorded as corporate expense and $8.4 million was recorded in the operating segment results. For 2015, we recorded a total of $12.2 million in stock option expense, of which $3.4 million was recorded as corporate expense and $8.8 million was recorded in the operating segment results. Selling, general and administrative expenses as a percentage of sales, was 26.9% for 2016, compared with 25.6% for 2015 and reflected the impact of higher research and development and bid and proposal expense, higher severance and facility consolidation expenses and professional fees expense related to the e2v acquisition.
Pension Income/Expense
Included in operating income in 2016 was pension income of $2.2 million compared with pension expense of $3.0 million in 2015. The change to pension income in 2016 from pension expense in 2015 primarily reflected the impact of using a 4.91 percent discount rate to determine the benefit obligation for the domestic plan in 2016 compared with a 4.50 percent discount rate used in 2015. Included in the $3.0 million of pension expense in 2015, in the first quarter of 2015, Teledyne froze its non-qualified pension plan for top executives which resulted in a one-time gain of $1.2 million. Pension expense allocated to contracts pursuant to CAS was $13.8 million for both 2016 and 2015. Pension expense determined under CAS can generally be recovered through the pricing of products and services sold to the U.S. Government.
Operating Income
Operating income for 2016 was $253.8 million, compared with $281.7 million for 2015, a decrease of 9.9%. The decrease in operating income primarily reflected the impact of lower sales. Operating income in 2016 and 2015 included $17.3 million and $8.4 million in severance and facility consolidation costs, respectively. The incremental operating loss included in the results for 2016 from recent acquisitions was $0.6 million which included $1.3 million in additional intangible asset amortization expense. Operating income in 2016 included pension income of $2.2 million compared to pension expense of $3.0 million in 2015.
Interest Expense and Other Income and Expense
Total interest expense, including credit facility fees and other bank charges, was $23.6 million in 2016 compared with $24.0 million in 2015. Interest income was $0.3 million in 2016 and $0.1 million in 2015. Other income for 2016 included the gain of $17.9 million on the sale of a former operating facility in California. Other income and expense in 2016 reflected $5.5 million of expense for a foreign currency hedge contract related to the e2v acquisition. Other income and expense in 2015 included net gains on legal settlements of $3.0 million.

37


Income Taxes
The Company’s effective tax rate for 2016 was 20.9%, compared with 24.3% for 2015. Total year 2016 reflected $10.9 million in net discrete income tax benefits. The net discrete income tax benefits of $10.9 million, includes $6.7 million in income tax expense related to the $17.9 million gain on the sale of the operating facility and an $8.5 million income tax benefit related to the adoption of ASU No. 2016-09, as well as $9.1 million income tax benefit for the remeasurement of uncertain tax positions due to the expiration of statute of limitations, the release of valuation allowances and a favorable tax ruling in the Netherlands. Total year 2015 included net discrete tax benefits of $9.8 million primarily related to the remeasurement of uncertain tax positions which were mainly due to the expiration of statute of limitations and the release of valuation allowances. Total year 2016 and 2015 also included $4.1 million and $5.9 million in federal research and development tax credits, respectively. Excluding the net discrete income tax benefits in both years, and the gain and related taxes on the operating facility sale in 2016, the effective tax rates would have been 27.4% for 2016 and 28.1% for 2015.
Segments
The following discussion of our four segments should be read in conjunction with Note 12 to the Notes to Consolidated Financial Statements.
Instrumentation
(Dollars in millions)
 
2017
 
2016
 
2015
Net sales
 
$
953.9

 
$
876.7

 
$
1,051.1

Cost of sales
 
$
546.0

 
$
494.6

 
$
589.8

Selling, general and administrative expenses
 
$
280.5

 
$
272.3

 
$
290.3

Operating income
 
$
127.4

 
$
109.8

 
$
171.0

Cost of sales % of net sales
 
57.2
%
 
56.4
%
 
56.1
%
Selling, general and administrative expenses % of net sales
 
29.4
%
 
31.1
%
 
27.6
%
Operating income % of net sales
 
13.4
%
 
12.5
%
 
16.3
%
International sales % of net sales
 
53.7
%
 
53.8
%
 
58.2
%
U.S. Government sales % of net sales
 
6.8
%
 
8.5
%
 
5.8
%
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.
2017 compared with 2016
Our Instrumentation segment net sales were $953.9 million in 2017 compared with net sales of $876.7 million in 2016, an increase of 8.8%. Operating income was $127.4 million in 2017, compared with $109.8 million in 2016, an increase of 16.0%.
The 2017 net sales increase primarily resulted from higher sales of environmental instrumentation, test and measurement instrumentation and marine instrumentation, as well as the contribution from recent acquisitions. Sales of environmental instrumentation increased $44.2 million and primarily reflected higher sales of air monitoring instruments and $23.4 million in incremental sales from recent acquisitions. Sales of test and measurement instrumentation increased $21.0 million and included $9.7 million in incremental sales from recent acquisitions. Sales of marine instrumentation increased by $12.0 million and primarily reflected higher sales of sensors for energy exploration and autonomous subsea vehicles, partially offset by reduced sales of interconnect systems. The increase in operating income was primarily due to greater sales and improved margins for environmental and test and measurement instrumentation and lower severance, facility consolidation expenses. Total year 2017 included $8.5 million in lower severance and facility consolidation costs. The incremental operating income from recent acquisitions was $3.7 million, which included $1.9 million in additional intangible asset amortization.
Cost of sales increased by $51.4 million in 2017, compared with 2016, and primarily reflected the impact of higher net sales, partially offset by lower severance and facility consolidation expenses. The cost of sales percentage increased to 57.2% in 2017 from 56.4% in 2016. Selling, general and administrative expenses, including research and development and bid and proposal expense, in 2017, increased by $8.2 million, compared with 2016, and primarily reflected the impact of higher net sales. Selling, general and administrative expenses for 2017, as a percentage of sales, decreased to 29.4%, compared with 31.1% for 2016 and reflected the impact of lower severance and facility consolidation expenses.

38


2016 compared with 2015
Our Instrumentation segment net sales were $876.7 million in 2016 compared with sales of $1,051.1 million in 2015, a decrease of 16.6%. Operating income was $109.8 million in 2016, compared with $171.0 million in 2015, a decrease of 35.8%.
The 2016 sales decrease primarily resulted from lower sales of marine instrumentation partially offset by increased sales of test and measurement instrumentation. Sales for marine instrumentation decreased $195.3 million and primarily reflected lower sales of interconnect systems and other marine sensors for energy exploration and production, as a result of weak energy markets, partially offset by higher sales of interconnects and marine systems for U.S. Government applications. Sales of test and measurement instrumentation increased $19.5 million and included $15.4 million in incremental sales from recent acquisitions. Sales of environmental instrumentation increased $1.4 million. The decrease in operating income primarily reflected the impact of lower sales and also reflected $6.8 million in higher severance and facility consolidation costs compared with 2015. The incremental operating income from recent acquisitions was $0.9 million, which included $0.8 million in additional intangible asset amortization.
Cost of sales decreased by $95.2 million in 2016, compared with 2015, and primarily reflected the impact of lower net sales, partially offset by higher severance and facility consolidation expenses. The cost of sales percentage increased slightly to 56.4% from 56.1%. Selling, general and administrative expenses, including research and development and bid and proposal expense, in 2016, decreased by $18.0 million, compared with 2015, and primarily reflected the impact of lower net sales. Selling, general and administrative expenses for 2016, as a percentage of net sales, increased to 31.1%, compared with 27.6% for 2015 and reflected the impact of lower sales while certain fixed costs decreased slightly.

Digital Imaging
(Dollars in millions)
 
2017
 
2016
 
2015
Net sales
 
$
693.5

 
$
398.7

 
$
379.0

Cost of sales
 
$
431.1

 
$
239.4

 
$
228.0

Selling, general and administrative expenses
 
$
154.0

 
$
113.4

 
$
111.0

Operating income
 
$
108.4

 
$
45.9

 
$
40.0

Cost of sales % of net sales
 
62.2
%
 
60.0
%
 
60.1
%
Selling, general and administrative expenses % of net sales
 
22.2
%
 
28.5
%
 
29.3
%
Operating income % of net sales
 
15.6
%
 
11.5
%
 
10.6
%
International sales % of net sales
 
63.7
%
 
54.7
%
 
51.0
%
U.S. Government sales % of net sales
 
12.4
%
 
18.3
%
 
20.8
%
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 micro electro-mechanical systems (“MEMS”) and high-performance, high-reliability semiconductors including analog-to-digital and digital-to-analog converters. It also includes our sponsored and centralized research laboratories which benefit government programs and commercial businesses.
2017 compared with 2016
Our Digital Imaging segment net sales were $693.5 million in 2017, compared with net sales of $398.7 million in 2016, an increase of 73.9%. Operating income was $108.4 million in 2017, compared with $45.9 million in 2016, an increase of 136.2%.
The 2017 net sales increase reflected $228.1 million in incremental sales from recent acquisitions, primarily e2v. Total year 2017 also reflected higher sales of machine vision cameras for industrial applications, MEMS, geospatial hardware and software and X-ray detectors for life sciences applications. The increase in operating income in 2017, compared with 2016, reflected the impact of higher net sales, favorable product mix and incremental operating profit from e2v, partially offset by acquisition-related charges of $8.0 million. The incremental operating income included in the results for 2017 from recent acquisitions was $32.1 million, which included $9.6 million in additional intangible asset amortization expense.
Cost of sales for 2017 increased by $191.7 million, compared with 2016, and reflected the impact of higher sales. The cost of sales percentage in 2017 increased to 62.2% compared with 60.0% in 2016 and reflected the impact of the e2v acquisition which carried a higher cost of sales percentage than the other digital imaging businesses collectively. Selling, general and administrative expenses for 2017 increased to $154.0 million, compared with $113.4 million in 2016 and reflected the impact of higher net sales. The selling, general and administrative expense percentage decreased to 22.2% in 2017 from 28.5% in 2016 and reflected the impact of the e2v acquisition which carried a lower selling, general and administrative expense percentage than the other digital imaging businesses collectively and lower research and development expense.

39


2016 compared with 2015
Our Digital Imaging segment net sales were $398.7 million in 2016, compared with net sales of $379.0 million in 2015, an increase of 5.2%. Operating income was $45.9 million in 2016, compared with $40.0 million in 2015, an increase of 14.8%.
The 2016 sales increase primarily reflected higher sales of sensors and systems for life sciences and industrial X-ray applications, MEMS and geospatial software. Sales in 2016 included $9.6 million in incremental sales from recent acquisitions. The increase in operating income in 2016, compared with 2015, reflected the impact of higher sales and favorable product mix. The incremental operating loss included in the results for 2016 from recent acquisitions was $1.5 million, which included $0.5 million in additional intangible asset amortization expense.
Cost of sales for 2016 increased by $11.4 million, compared with 2015, and primarily reflected the impact of higher net sales. The cost of sales percentage in 2016 decreased slightly. Selling, general and administrative expenses for 2016, increased slightly to $113.4 million, compared with $111.0 million in 2015 and primarily reflected higher research and development expense and the impact of higher sales, partially offset by lower general and administrative costs. The selling, general and administrative expense percentage decreased to 28.5% in 2016 from 29.3% in 2015.

Aerospace and Defense Electronics
(Dollars in millions)
 
2017
 
2016
 
2015
Net sales
 
$
670.2

 
$
615.9

 
$
593.4

Cost of sales
 
$
410.1

 
$
377.5

 
$
383.8

Selling, general and administrative expenses
 
$
135.2

 
$
126.3

 
$
124.8

Operating income
 
$
124.9

 
$
112.1

 
$
84.8

Cost of sales % of net sales
 
61.2
%
 
61.3
%
 
64.7
%
Selling, general and administrative expenses % of net sales
 
20.2
%
 
20.5
%
 
21.0
%
Operating income % of net sales
 
18.6
%
 
18.2
%
 
14.3
%
International sales % of net sales
 
33.7
%
 
32.6
%
 
31.8
%
U.S. Government sales % of net sales
 
33.6
%
 
34.2
%
 
37.7
%
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. In the third quarter of 2016, Teledyne completed the disposition of the net assets of its PCT business. Sales for this business totaled $10.1 million and $16.6 million for 2016 and 2015, respectively. For 2016, PCT reported a pretax loss of $3.1 million, compared with a pretax loss of $3.9 million in 2015.
2017 compared with 2016
Our Aerospace and Defense Electronics segment sales were $670.2 million in 2017, compared with sales of $615.9 million in 2016, an increase of 8.8%. Operating income was $124.9 million in 2017, compared with $112.1 million in 2016, an increase of 11.4%.
The 2017 sales increase reflected $52.3 million of higher sales of microwave and interconnect systems and higher sales of $14.3 million of avionics products and electronic relays, partially offset by $12.3 million of lower sales for electronic manufacturing services products. The higher sales of microwave and interconnect systems included $46.7 million in sales from e2v. The lower sales from electronic manufacturing services products reflected $10.1 million in lower sales from the PCT business sold in July 2016. Operating income in 2017 reflected the impact of higher sales, overall improved margins and favorable product mix. The incremental operating income included in the results for 2017 from e2v was $8.0 million, which included $1.5 million in additional intangible asset amortization expense.
Cost of sales for 2017 increased by $32.6 million, compared with 2016, and reflected the impact of higher net sales. Cost of sales as a percentage of sales for 2017 decreased slightly to 61.2% from 61.3% in 2016. Selling, general and administrative expenses, including research and development and bid and proposal expense, increased to $135.2 million in 2017, compared with $126.3 million in 2016 and reflected the impact of higher net sales. The selling, general and administrative expense percentage in 2017 decreased slightly to 20.2% from 20.5% for 2016.

40


2016 compared with 2015
Our Aerospace and Defense Electronics segment net sales were $615.9 million in 2016, compared with net sales of $593.4 million in 2015, an increase of 3.8%. Operating income was $112.1 million in 2016, compared with $84.8 million in 2015, an increase of 32.2%.
Sales for 2016, compared with 2015, increased by $22.5 million and reflected higher sales of $26.3 million from avionics products and electronic relays partially offset by lower sales of $3.7 million from electronic manufacturing services products. The lower sales from electronic manufacturing services products reflected $6.5 million in lower sales from the PCT business sold in July 2016. Operating income in 2016 increased by $27.3 million and reflected the impact of higher sales, as well as overall improved margins, partially offset by $3.4 million in higher severance and facility and consolidation costs. Operating income in 2016 reflected higher pension income of $2.4 million and 2015 included the reversal of facility and consolidation reserves of $1.7 million no longer needed.
Cost of sales for 2016 decreased by $6.3 million, compared with 2015, and reflected the impact of product mix changes and higher pension income and higher pension income. Cost of sales as a percentage of sales for 2016 decreased to 61.3% from 64.7% in 2015 and reflected product mix differences and the impact of higher pension income. Selling, general and administrative expenses, including research and development and bid and proposal expense, increased slightly to $126.3 million in 2016, compared with $124.8 million in 2015. The selling, general and administrative expense percentage in 2016 decreased to 20.5% from 21.0% for 2015.

Engineered Systems
(Dollars in millions)
 
2017
 
2016
 
2015
Net sales
 
$
286.2

 
$
258.6

 
$
274.6

Cost of sales
 
$
225.0

 
$
206.5

 
$
226.2

Selling, general and administrative expenses
 
$
23.5

 
$
20.0

 
$
22.3

Operating income
 
$
37.7

 
$
32.1

 
$
26.1

Cost of sales % of net sales
 
78.6
%
 
79.9
%
 
82.4
%
Selling, general and administrative expenses % of net sales
 
8.2
%
 
7.7
%
 
8.1
%
Operating income % of net sales
 
13.2
%
 
12.4
%
 
9.5
%
International sales % of net sales
 
10.0
%
 
11.2
%
 
9.9
%
U.S. Government sales % of net sales
 
85.2
%
 
85.0
%
 
85.4
%
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.
2017 compared with 2016
Our Engineered Systems segment net sales were $286.2 million in 2017, compared with net sales of $258.6 million in 2016, an increase of 10.7%. Operating income was $37.7 million in 2017, compared with $32.1 million in 2016, an increase of 17.4%.
The 2017 sales increase of $27.6 million reflected higher sales of $20.1 million of engineered products and services and $9.0 million of turbine engines, partially offset by lower sales of $1.5 million of energy systems products. The higher sales of engineered products and services primarily reflected greater sales from missile defense, space and marine manufacturing programs. The higher sales of turbine engines reflected greater sales for the JASSM missile program. Operating income in 2017 reflected the impact of higher net sales and a greater proportion of higher margin manufacturing programs.
Cost of sales for 2017 increased by $18.5 million, compared with 2016, and reflected the impact of higher net sales. Cost of sales as a percentage of sales for 2017 decreased to 78.6%, compared with 79.9% in 2016. Selling, general and administrative expenses, including research and development and bid and proposal expense, increased to $23.5 million in 2017, compared with $20.0 million in 2016, and reflected the impact of higher sales. The selling, general and administrative expense percentage increased to 8.2% for 2017, compared with 7.7% in 2016.

41


2016 compared with 2015
Our Engineered Systems segment net sales were $258.6 million in 2016, compared with net sales of $274.6 million in 2015, a decrease of 5.8%. Operating income was $32.1 million in 2016, compared with $26.1 million in 2015, an increase of 23.0%.
The 2016 sales decrease of $16.0 million reflected lower sales of engineered products and services of $12.7 million and lower energy system products of $4.8 million, partially offset by higher sales of turbine engine sales of $1.5 million. The lower sales of engineered products and services primarily resulted from decreased sales of space and missile defense programs. The lower energy systems sales reflected lower sales of commercial hydrogen generators, as well as government energy systems. Operating income in 2016 reflected improved margins for engineered products and services and higher pension income of $2.5 million, partially offset by the impact of lower net sales.
Cost of sales for 2016 decreased by $19.7 million, compared with 2015, and reflected the impact of lower sales and higher pension income. Cost of sales as a percentage of sales for 2016 decreased to 79.9%, compared with 82.4% in 2015 reflected the lower margin space and marine manufacturing programs ending in 2015 and also reflected the impact of higher pension income. Selling, general and administrative expenses, including research and development and bid and proposal expense, decreased to $20.0 million in 2016, compared with $22.3 million in 2015, and reflected the impact of lower sales. The selling, general and administrative expense percentage decreased to 7.7% for 2016, compared with 8.1% in 2015.
Financial Condition, Liquidity and Capital Resources
Principal Capital Requirements
Our principal cash and capital requirements are to fund working capital needs, capital expenditures, income tax payments and debt service requirements, as well as acquisitions. We may also deploy cash for the stock repurchase program. 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 2018. 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.
Credit Facility, Senior Notes and Term Loans
In March 2017, Teledyne entered into a $100.0 million term loan with a maturity date of October 30, 2019. Subsequently, in March 2017, Teledyne entered into a cross currency swap to effectively convert the $100.0 million term loan to a €93.0 million denominated instrument with a fixed euro interest rate of 0.7055%. The proceeds from the term loan were used in connection with the acquisition of e2v. On April 18, 2017, Teledyne entered into a note purchase agreement for a private placement of €250.0 million of senior unsecured notes due through April 2024. Teledyne used the proceeds of this private placement note issuance, among other things, to repay indebtedness and for general corporate purposes. In September 2017, Teledyne repaid the $100.0 million 4.74% fixed rate senior notes at their maturity.
In December 2016, the Company entered into an amendment relating to unsecured term loans of $182.5 million in aggregate principal amount (the “Term Loans”) to extend the maturity date of the Term Loans from March 2019 to January 2022 and extending the date on which amortization of principal begins; and generally lowering the applicable rate for base rate and Eurocurrency loans. The other material terms of the Term Loans, including covenants, remain unchanged. In November 2015, the Company issued $125.0 million in aggregate principal amount of senior unsecured notes (“senior unsecured notes”). The notes consisted of $25.0 million of 2.81% senior unsecured notes due in November 2020, and $100.0 million of 3.28% senior unsecured notes due in November 2022. Also in December 2015, the Company amended the $750.0 million unsecured credit facility (“credit facility”) to extend the maturity from March 2018 to December 2020. Excluding interest and fees, no payments are due under the credit facility until it matures. 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 0.12% and 0.25% of the credit line, depending on our consolidated leverage ratio as calculated from time to time.


42


Long-term debt (in millions):
 
December 31, 2017
 
January 1, 2017
$750.0 million credit facility, due December 2020, weighted average rate of 2.72% at December 31, 2017
 
$
165.0

 
$

Term Loans due through January 2022, weighted average rate of 2.94% at December 31, 2017, and 1.90% at January 1, 2017
 
175.5

 
182.5

Term loan due October 2019, variable rate of 2.80% swapped to a Euro fixed rate of 0.7055% at December 31, 2017
 
100.0

 

4.74% Fixed Rate Senior Notes due and repaid September 2017
 

 
100.0

2.61% Fixed Rate Senior Notes due December 2019
 
30.0

 
30.0

5.30% Fixed Rate Senior Notes due September 2020
 
75.0

 
75.0

2.81% Fixed Rate Senior Notes due November 2020
 
25.0

 
25.0

3.09% Fixed Rate Senior Notes due December 2021
 
95.0

 
95.0

3.28% Fixed Rate Senior Notes due November 2022
 
100.0

 
100.0

0.70% €50 Million Fixed Rate Senior Notes due April 2022
 
60.0

 

0.92% €100 Million Fixed Rate Senior Notes due April 2023
 
120.0

 

1.09% €100 Million Fixed Rate Senior Notes due April 2024
 
120.0

 

Other debt
 
2.7

 
4.2

Total long-term debt
 
1,068.2

 
611.7

Current portion of long-term debt and debt issue costs
 
(4.3
)
 
(102.0
)
Total long-term debt, net of current portion
 
$
1,063.9

 
$
509.7

At December 31, 2017, we had $6.7 million in capital leases, of which $1.3 million is current and had $29.6 million in outstanding letters of credit.
Our credit facility, senior notes and term loans 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 31, 2017, 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.
Financial covenant ratios and the actual ratios at December 31, 2017: 
$750.0 million Credit Facility expires December 2020 and $175.5 million term loans due through January 2022 (issued in October 2012) and $100.0 million term loan due October 2019 (issued March 2017)
 
 
 
 
Financial Covenant
Requirement
 
Actual Measure
Consolidated Leverage Ratio (Net Debt/EBITDA) (a)
No more than 3.25 to 1
 
2.3 to 1
Consolidated Interest Coverage Ratio (EBITDA/Interest) (b)
No less than 3.0 to 1
 
12.0 to 1
 
 
 
$625.0 million Private Placement Senior Notes due from 2019 to 2024
 
 
 
 
Financial Covenant
Requirement
 
Actual Measure
Consolidated Leverage Ratio (Net Debt/EBITDA) (a)
No more than 3.25 to 1
 
2.3 to 1
Consolidated Interest Coverage Ratio (EBITDA/Interest) (b)
No less than 3.0 to 1
 
12.0 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.

43


In the event of an acquisition, our debt instruments permit us, at our option, to exceed the Consolidated Leverage Ratio of 3.25 to 1 for up to four quarters following the fiscal quarter in which the acquisition event occurs, provided that the Consolidated Leverage Ratio does not exceed 3.5 to 1. 
Available borrowing capacity under the $750.0 million credit facility, which is reduced by borrowings and outstanding letters of credit, was $558.7 million at December 31, 2017.
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. At December 31, 2017, no amounts were outstanding under this credit line. At January 1, 2017, $3.5 million was outstanding under the credit line.
Contractual Obligations
The following table summarizes our expected cash outflows resulting from financial contracts and commitments at December 31, 2017. We have not included information on our normal recurring purchases of materials for use in our operations.
The amounts in the following table are generally consistent from year to year, closely reflect our levels of production and are not long-term in nature:
Contractual obligations (in millions):
 
2018
 
2019
 
2020
 
2021
 
2022
 
After 2022
 
Total
Debt obligations
 
$
2.3

 
$
136.0

 
$
105.1

 
$
102.4

 
$
482.0

 
$
240.4

 
$
1,068.2

Interest expense(a)
 
29.9