e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 28, 2008
OR
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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)
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| Delaware
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25-1843385 |
| (State or other jurisdiction of
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(I.R.S. Employer |
| incorporation or organization)
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Identification Number) |
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1049 Camino Dos Rios
Thousand Oaks, California
(Address of principal executive offices)
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91360-2362
(Zip
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(805) 373-4545
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
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):
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| Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date.
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Outstanding at October 30, 2008 |
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| Common Stock, $.01 par value per share
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35,869,284 shares |
TELEDYNE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
1
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
TELEDYNE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 28, 2008
AND SEPTEMBER 30, 2007
(Unaudited — Amounts in millions, except per-share amounts)
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Third Quarter |
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Nine Months |
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2008 |
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2007 |
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2008 |
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2007 |
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Net Sales |
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$ |
497.6 |
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$ |
408.9 |
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$ |
1,428.2 |
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$ |
1,194.8 |
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Costs and expenses |
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Cost of sales |
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348.5 |
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284.9 |
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994.7 |
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831.8 |
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Selling, general and administrative expenses |
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97.2 |
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84.0 |
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278.1 |
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242.5 |
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Total costs and expenses |
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445.7 |
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368.9 |
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1,272.8 |
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1,074.3 |
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Income before other income and expense and income taxes |
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51.9 |
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40.0 |
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155.4 |
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120.5 |
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Other income (expense), net |
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(0.1 |
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0.9 |
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0.4 |
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1.4 |
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Interest and debt expense, net |
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(2.5 |
) |
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(3.0 |
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(8.0 |
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(10.1 |
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Minority interest |
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(0.2 |
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(0.9 |
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(1.9 |
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(2.5 |
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Income before income taxes |
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49.1 |
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37.0 |
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145.9 |
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109.3 |
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Provision for income taxes |
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18.2 |
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9.9 |
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54.5 |
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37.4 |
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Net income |
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$ |
30.9 |
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$ |
27.1 |
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$ |
91.4 |
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$ |
71.9 |
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Basic earnings per common share |
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$ |
0.87 |
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$ |
0.77 |
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$ |
2.58 |
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$ |
2.06 |
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Weighted average common shares outstanding |
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35.6 |
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35.0 |
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35.4 |
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34.9 |
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Diluted earnings per common share |
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$ |
0.84 |
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$ |
0.75 |
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$ |
2.50 |
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$ |
1.99 |
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Weighted average diluted common shares outstanding |
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36.7 |
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36.2 |
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36.5 |
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36.1 |
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The accompanying notes are an integral part of these financial statements.
2
TELEDYNE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except share amounts)
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September 28, |
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December 30, |
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2008 |
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2007 |
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(Unaudited) |
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Assets |
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Current Assets |
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Cash and cash equivalents |
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$ |
14.8 |
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$ |
13.4 |
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Accounts receivable, net |
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293.1 |
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241.1 |
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Inventories, net |
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216.9 |
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174.6 |
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Deferred income taxes, net |
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41.7 |
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34.5 |
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Prepaid expenses and other current assets |
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29.4 |
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13.1 |
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Total current assets |
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595.9 |
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476.7 |
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Property, plant and equipment, at cost, net of accumulated
depreciation and amortization of $240.2
at September 28, 2008 and $218.3 at December 30, 2007 |
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196.3 |
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177.2 |
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Deferred income taxes, net |
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31.2 |
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56.9 |
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Goodwill, net |
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484.3 |
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351.6 |
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Acquired intangibles, net |
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115.9 |
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61.7 |
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Other long-term assets |
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35.5 |
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35.3 |
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Total Assets |
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$ |
1,459.1 |
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$ |
1,159.4 |
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Liabilities and Stockholders’ Equity |
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Current Liabilities |
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Accounts payable |
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$ |
128.8 |
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$ |
105.1 |
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Accrued liabilities |
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206.7 |
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157.1 |
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Current portion of long-term debt and capital lease obligation |
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0.8 |
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0.8 |
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Total current liabilities |
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336.3 |
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263.0 |
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Long-term debt and capital lease obligation |
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287.5 |
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142.4 |
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Accrued pension obligation |
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52.0 |
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74.3 |
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Accrued postretirement benefits |
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21.4 |
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22.9 |
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Minority interest |
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4.8 |
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8.9 |
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Other long-term liabilities |
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113.6 |
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117.7 |
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Total Liabilities |
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815.6 |
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629.2 |
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Stockholders’ Equity |
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Common stock, $0.01 par value; outstanding shares 35,869,024
at September 28, 2008 and 35,150,117 at December 30, 2007 |
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0.4 |
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0.4 |
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Additional paid-in capital |
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236.9 |
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206.9 |
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Retained earnings |
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475.5 |
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384.1 |
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Accumulated other comprehensive loss |
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(69.3 |
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(61.2 |
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Total Stockholders’ Equity |
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643.5 |
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530.2 |
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Total Liabilities and Stockholders’ Equity |
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$ |
1,459.1 |
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$ |
1,159.4 |
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The accompanying notes are an integral part of these financial statements.
3
TELEDYNE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2008 AND SEPTEMBER 30, 2007
(Unaudited — Amounts in millions)
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Nine Months |
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2008 |
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2007 |
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Cash flow from operating activities |
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Net income |
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$ |
91.4 |
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$ |
71.9 |
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Adjustments to reconcile net income to net cash from operating activities: |
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Depreciation and amortization |
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36.4 |
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25.6 |
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Gain on disposal of fixed assets |
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— |
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(0.1 |
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Deferred income taxes |
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22.8 |
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(7.6 |
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Stock option compensation expense |
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5.6 |
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5.1 |
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Excess income tax benefits from stock options |
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(9.9 |
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(2.4 |
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Minority interest in net income of consolidated subsidiaries |
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1.9 |
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2.5 |
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Changes in operating assets and liabilities, excluding the effect of acquisitions: |
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Increase in accounts receivable |
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(32.3 |
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(4.1 |
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Increase in inventories |
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(16.9 |
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(18.6 |
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Decrease in prepaid expenses and other assets |
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— |
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0.1 |
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Increase in accounts payable |
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15.8 |
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5.1 |
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Increase in accrued liabilities |
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32.1 |
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33.7 |
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Increase in income taxes payable, net |
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2.1 |
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5.5 |
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Increase in long-term assets |
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(0.2 |
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(1.2 |
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Increase (decrease) in other long-term liabilities |
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(10.9 |
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7.0 |
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Increase (decrease) in accrued pension obligation |
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(22.2 |
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1.9 |
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Decrease in accrued postretirement benefits |
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(1.5 |
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(1.1 |
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Other operating, net |
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(1.3 |
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0.1 |
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Net cash provided by operating activities |
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112.9 |
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123.4 |
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Cash flow from investing activities |
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Purchases of property, plant and equipment |
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(28.4 |
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(30.7 |
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Purchase of businesses, net of cash acquired |
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(250.1 |
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(47.5 |
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Proceeds from sale of assets |
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— |
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1.3 |
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Net cash used by investing activities |
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(278.5 |
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(76.9 |
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Cash flow from financing activities |
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Net proceeds from (repayments of) debt |
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145.0 |
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(50.8 |
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Proceeds from exercise of stock options |
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12.1 |
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5.0 |
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Excess income tax benefits from stock options |
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9.9 |
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2.4 |
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Net cash provided by (used by) financing activities |
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167.0 |
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(43.4 |
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Increase in cash and cash equivalents |
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1.4 |
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3.1 |
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Cash and cash equivalents—beginning of period |
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13.4 |
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13.0 |
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Cash and cash equivalents—end of period |
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$ |
14.8 |
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$ |
16.1 |
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The accompanying notes are an integral part of these financial statements.
4
TELEDYNE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 28, 2008
Note 1. General
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by
Teledyne Technologies Incorporated (Teledyne Technologies or the Company) pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information and disclosures
normally included in notes to consolidated financial statements have been condensed or omitted
pursuant to such rules and regulations, but resultant disclosures are in accordance with
accounting principles generally accepted in the United States as they apply to interim
reporting. The condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto in Teledyne Technologies’ Annual
Report on Form 10-K for the fiscal year ended December 30, 2007 (2007 Form 10-K).
In the opinion of Teledyne Technologies’ management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal recurring
adjustments) necessary to present fairly, in all material respects, Teledyne Technologies’
consolidated financial position as of September 28, 2008, and the consolidated results of
operations for the three and nine months then ended and cash flows for the nine months then
ended. The results of operations and cash flows for the periods ended September 28, 2008 are
not necessarily indicative of the results of operations or cash flows to be expected for any
subsequent quarter or the full fiscal year.
Certain reclassifications have been made to the financial statements and notes for the prior
year to conform to the 2008 presentation. In the fourth quarter of 2007, the Company realigned
Teledyne Energy Systems, Inc., Teledyne Turbine Engines and Teledyne Battery Products in a new
segment called Energy and Power Systems. Both the turbine engine business and the battery
products business were previously part of the Aerospace Engines and Components segment. In
addition, the Systems Engineering Solutions segment was renamed Engineered Systems. Previously
reported segment financial data for the third quarter and nine months of 2007 reflects the new
segment presentation to provide comparability between periods. This segment realignment had no
effect on the Company’s consolidated financial position, results of operations or cash flows
for the periods presented and also did not affect the results of the Electronics and
Communications or Engineered Systems segments.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 141R, “Business Combinations” (“SFAS No. 141R”).
This statement replaces FASB Statement No. 141, “Business Combinations”. SFAS No. 141R
establishes principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree. The statement also provides guidance for
recognizing and measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statement to evaluate the nature and
financial effects of the business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008, with an exception related to the
accounting for valuation allowances on deferred taxes and acquired tax contingencies related to
acquisitions completed before the effective date. SFAS No. 141(R) amends SFAS No. 109 to
require adjustments, made after the effective date of this statement, to valuation allowances
for acquired deferred tax assets and income tax positions to be recognized as income tax
expense. Teledyne will adopt the provisions of SFAS No. 141R, effective December 29, 2008 and
does not expect a material effect on the Company’s consolidated results of operations or
financial position for the acquisitions made prior to its adoption. For any acquisitions
completed after our 2008 fiscal year, we expect SFAS No. 141R will have an impact on our
consolidated financial statements: however the nature and magnitude of the specific effects
will depend upon the nature, terms and size of the acquisitions, if any, we consummate.
5
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 changes the
way the consolidated income statement is presented and establishes a single method of
accounting for changes in a parent’s ownership interest in a subsidiary that does not result in
deconsolidation. It also requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. This Statement will be effective for Teledyne’s 2009 fiscal year
and interim periods within that fiscal year. SFAS No. 160 will be applied prospectively as of
the beginning of the fiscal year 2009, except for the presentation and disclosure requirements.
The presentation and disclosure requirements must be applied retrospectively for all periods
presented. The Company is currently evaluating the impact of adopting this Statement.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities – Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”).
SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified
election dates and report unrealized gains and losses on items for which the fair value option
has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 159 effective,
December 31, 2007 and did not elect the fair value measurement option for any of our financial
assets or liabilities.
In June 2007, the FASB ratified EITF No. 07-3, (“EITF 07-3”), “Accounting for Nonrefundable
Advance Payments for Goods or Services to Be Used in Future Research and Development
Activities”. EITF 07-3 requires non-refundable advance payments for goods and services to be
used in future research and development activities to be recorded as an asset and the payments
to be expensed when the research and development activities are performed. EITF 07-3 is
effective for fiscal years beginning after December 15, 2007. The Company adopted EITF 07-3
effective, December 31, 2007 and it did not have an effect on the Company’s consolidated
results of operations or financial position.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS No. 157”)
which defines fair value, establishes a framework in generally accepted accounting principles
for measuring fair value, and expands disclosures about fair value measurements. This standard
only applies when other standards require or permit the fair value measurement of assets and
liabilities. It does not increase the use of fair value measurement. SFAS No. 157 is
effective for financial assets and financial liabilities for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued FASB Staff Position 157-1 “Application of
FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13” (“FSP 157-1”) which removed leasing transactions accounted for under SFAS No. 13
and related guidance from the scope of SFAS No. 157. Also in February 2008, the FASB issued
FSP 157-2 “Partial Deferral of the Effective Date of Statement No. 157” (“FSP 157-2”), deferred
the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities to
fiscal years beginning after November 15, 2008. The implementation of SFAS No. 157 for
financial assets and financial liabilities, effective December 31, 2007, did not have a
material impact on our consolidated financial position and results of operations. The Company
is currently assessing the impact of SFAS No. 157 for nonfinancial assets and nonfinancial
liabilities on its consolidated financial position and results of operations.
6
Note 2. Business Combinations
On August 15, 2008, Teledyne Technologies through its subsidiary, Teledyne Limited, completed
the acquisition of the defense electronics business of Filtronic PLC for £13.0 million
(approximately $24.3 million) in cash. Total cash paid, net of cash acquired, was $23.7
million. The defense electronics business, principally based in Shipley, United Kingdom,
provides customized microwave subassemblies and integrated subsystems to the global defense
industry. The defense electronics business had sales of £14.5 million for its fiscal year
ended May 31, 2008. Teledyne operates this business under the name Teledyne Defence Limited.
On July 7, 2008, Teledyne Technologies through its subsidiary, Teledyne Instruments, Inc.,
completed the acquisition of assets of Webb Research Corp. (“Webb Research”) for $24.2 million
in cash or $24.3 million including certain expenses. Webb Research, located in E. Falmouth,
Massachusetts, is a manufacturer of autonomous underwater gliding vehicles, as well as
autonomous profiling drifters and floats. Webb Research had sales of $12.2 million for its
fiscal year ended December 31, 2007. Teledyne operates this business under the name Teledyne
Webb Research.
On February 1, 2008, Teledyne Technologies through its subsidiary, Teledyne Scientific &
Imaging, LLC, completed the acquisition of assets of Judson Technologies, LLC (“Judson”) for
$27.0 million in cash. Judson, headquartered in Montgomeryville, Pennsylvania, manufactures
high performance infrared detectors utilizing a wide variety of materials such as Mercury
Cadmium Telluride (“HgCdTe”), Indium Antimonide (“InSb”), and Indium Gallium Arsenide
(“InGaAs”), as well as tactical dewar and cooler assemblies and other specialized standard
products for military, space, industrial and scientific applications. Judson had sales of
$13.8 million for its fiscal year ended December 31, 2006. Teledyne operates this business
under the name Teledyne Judson Technologies.
On January 31, 2008, Teledyne Technologies through its subsidiary, Teledyne Limited, acquired
all of the outstanding stock of S G Brown Limited and its wholly-owned subsidiary TSS
(International) Limited (together “TSS International”) for £29.1 million (approximately $57.1
million) in cash. Total cash paid, net of cash acquired, was $54.8 million. TSS
International, headquartered in Watford, United Kingdom, designs and manufactures inertial
sensing, gyrocompass navigation and subsea pipe and cable detection systems for offshore
energy, oceanographic and military marine markets. TSS International had sales of £12.0
million for its fiscal year ended March 31, 2007. The acquired businesses operate under the
names Teledyne SG Brown Limited and Teledyne TSS Limited.
On December 31, 2007, Teledyne Technologies through its subsidiary, Teledyne Instruments, Inc.,
completed the acquisition of assets of Impulse Enterprise (“Impulse”) for $34.9 million in
cash, net of a $0.1 million purchase price adjustment. Impulse, headquartered in San Diego,
California, manufactures waterproof neoprene and glass reinforced epoxy connector products for
harsh environments. Impulse had sales of $16.8 million for its fiscal year ended December 31,
2006. Teledyne operates this business under the name Teledyne Impulse.
On December 31, 2007, Teledyne Technologies through its subsidiary, Teledyne Reynolds, Inc.,
acquired Storm Products Co. (“Storm”) for $47.5 million in cash. Storm, with principal
operations in Dallas, Texas and Woodridge, Illinois, manufactures specialty wire, cable and
interconnect products, as well as flexible and semi-rigid microwave cable assemblies for
defense, environmental monitoring, energy exploration and industrial customers. Storm had
sales of $45.7 million for its fiscal year ended March 31, 2007. Teledyne operates this
business under the name Teledyne Storm Products, Inc.
On June 20, 2007, Teledyne Technologies through its subsidiary, Teledyne Cougar, Inc.,
completed the acquisition of Tindall Technologies, Inc. (“Tindall”) a designer and supplier of
microwave subsystems for defense applications for consideration of $6.6 million. At September
30, 2007 total cash paid, net of cash acquired, was $5.6 million. Teledyne Technologies also
recorded $1.0 million in contingent payments, in connection with the acquisition, payable
through 2010 in three installments. The first installment of $0.3 million was paid in the
second quarter of 2008.
7
On March 30, 2007, Teledyne Technologies through its subsidiary, Teledyne Instruments, Inc.,
completed the acquisition of assets of D.G. O’Brien, Inc. (“DGO”) for consideration of $37.1
million, which includes a $1.0 million purchase price adjustment. The $1.0 million purchase
price adjustment was paid on July 13, 2007. DGO, headquartered in Seabrook, New Hampshire,
manufacturers highly reliable electrical and fiber-optic interconnect systems, primarily for
subsea military and offshore oil and gas applications.
Our net cash used by investing activities for 2007 also included a $0.8 million contingent
payment related to the Cougar Components Corporation acquisition made in 2005 and a payment of
$3.7 million related to the RD Instruments acquisition made in 2005.
On August 16, 2006, Teledyne Technologies through its subsidiary, Teledyne Instruments, Inc.,
acquired an initial majority interest in Ocean Design, Inc. (“ODI”) for approximately $30
million in cash. Pursuant to agreements in connection with our acquisition of a majority
interest in ODI, the ODI minority stockholders have the contractual option to sell their shares
to Teledyne Instruments following the end of each quarter through the quarter ended March 31,
2009, at a formula-determined price based principally on ODI’s earnings before interest, taxes,
depreciation and amortization (EBITDA) for the twelve months preceding each applicable quarter
end. In 2006, Teledyne Instruments acquired an additional 9.9% of ownership in ODI for $5.8
million. In 2007, Teledyne Instruments acquired an additional 0.9% of ownership in ODI for
$0.9 million, of which $0.2 million was paid in the first nine months of 2007. In the first
nine months of 2008, Teledyne Instruments acquired an additional 23.4% of ownership in ODI for
$37.4 million. At September 28, 2008, Teledyne Instruments owned 85.2% of ODI. All shares not
sold to Teledyne Instruments following the quarter ended March 31, 2009, are required to be
purchased by Teledyne Instruments following the quarter ended June 30, 2009, at a same
formula-determined price, at which time Teledyne Instruments will own all of the ODI shares
held by the stockholders. Based on the formula-determined purchase price as of the quarter
ended September 28, 2008, the aggregate amount of funds required to purchase all the shares
held by the remaining minority ODI stockholders would be approximately $22.3 million. However,
the actual aggregate amount of funds that we will spend to purchase the shares held by minority
stockholders through June 30, 2009, could be significantly higher or lower than this amount, as
that amount will depend on when individual stockholders elect to exercise their put options and
on the financial performance of ODI. Teledyne Technologies has guaranteed the payment
obligation of its subsidiary, Teledyne Instruments.
The primary reason for the above acquisitions was to strengthen and expand our core businesses
by adding complementary product and service offerings, allowing greater integration of products
and services, enhancing our technical capabilities and/or increasing our addressable markets.
The significant factors that resulted in recognition of goodwill were: (a) the purchase price
was based on cash flow and return on capital projections assuming integration with our
businesses; and (b) the calculation of the fair value of tangible and intangible assets
acquired that qualified for recognition.
Teledyne Technologies funded the acquisitions primarily from borrowings under its credit
facility and cash on hand.
The following is a summary at the acquisition date of the estimated fair values allocated to
the assets acquired and liabilities assumed for the six acquisitions made in during fiscal 2008
through September 28, 2008 (in millions):
| |
|
|
|
|
Current assets |
|
$ |
53.7 |
|
Property, plant and equipment |
|
|
15.4 |
|
Goodwill |
|
|
106.1 |
|
Acquired intangible assets |
|
|
68.2 |
|
Current liabilities |
|
|
(27.0 |
) |
Long-term liabilities |
|
|
(4.3 |
) |
|
|
|
|
Total net assets acquired |
|
$ |
212.1 |
|
|
|
|
|
8
Teledyne Technologies’ goodwill was $484.3 million at September 28, 2008 and $351.6 million at
December 30, 2007. Teledyne Technologies’ net acquired intangible assets were $115.9 million
at September 28, 2008 and $61.7 million at December 30, 2007. The increase in the balance of
goodwill in 2008 primarily resulted from the acquisitions made in fiscal 2008 and a $31.5
million increase related to the additional share purchases of ODI. The change in the balance
of acquired intangible assets in 2008 resulted from the acquisitions made in fiscal 2008 and
amortization of acquired intangible assets. The Company is in the process of specifically
identifying the amount to be assigned to intangible assets, as well as certain assets and
liabilities for the six acquisitions made in fiscal 2008 through September 28, 2008. The
Company made preliminary estimates as of September 28, 2008, since there was insufficient time
between the acquisition dates and the end of the period to finalize the valuations. The
preliminary amount of goodwill and acquired intangible assets recorded as of September 28, 2008
for the Judson acquisition was $15.8 million and $6.0 million, respectively. The preliminary
amount of goodwill and acquired intangible assets recorded as of September 28, 2008 for the TSS
acquisition was $28.4 million and $22.5 million, respectively. The preliminary amount of
goodwill and acquired intangible assets recorded as of September 28, 2008 for the Impulse
acquisition was $15.5 million and $16.2 million, respectively. The preliminary amount of
goodwill and acquired intangible assets recorded as of September 28, 2008 for the Storm
acquisition was $26.8 million and $10.0 million, respectively. The preliminary amount of
goodwill and acquired intangible assets recorded as of September 28, 2008 for the Webb Research
acquisition was $14.7 million and $7.0 million, respectively. The preliminary amount of
goodwill and acquired intangible assets recorded as of September 28, 2008 for the Filtronic
acquisition was $4.9 million and $6.5 million, respectively. These amounts were based on
estimates that are subject to change pending the receipt of certain valuation information and
the completion of the Company’s internal review. In all acquisitions, the results of
operations and cash flows are included in the Company’s consolidated financial statements from
the date of each respective acquisition. Each of the companies acquired is part of the
Electronics and Communications segment. Goodwill resulting from the Judson, TSS, Impulse, Webb
Research and Filtronic acquisitions will be deductible for tax purposes.
Note 3. Comprehensive Income
Teledyne Technologies’ comprehensive income is comprised of net income and foreign currency
translation adjustments. Teledyne Technologies’ total comprehensive income for the third
quarter and first nine months of 2008 and 2007 consists of the following (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Third Quarter |
|
|
Nine Months |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
30.9 |
|
|
$ |
27.1 |
|
|
$ |
91.4 |
|
|
$ |
71.9 |
|
Other comprehensive gain (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gains (losses) |
|
|
(7.0 |
) |
|
|
0.2 |
|
|
|
(8.1 |
) |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive gain (loss) |
|
|
(7.0 |
) |
|
|
0.2 |
|
|
|
(8.1 |
) |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
23.9 |
|
|
$ |
27.3 |
|
|
$ |
83.3 |
|
|
$ |
72.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Note 4. Earnings Per Share
Basic and diluted earnings per share were computed based on net earnings. The weighted average
number of common shares outstanding during the period was used in the calculation of basic
earnings per share. This number of shares was increased by contingent shares that could be
issued under various compensation plans as well as by the dilutive effect of stock options
based on the treasury stock method in the calculation of diluted earnings per share.
The following table sets forth the computations of basic and diluted earnings per share
(amounts in millions, except per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Third Quarter |
|
|
Nine Months |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
30.9 |
|
|
$ |
27.1 |
|
|
$ |
91.4 |
|
|
$ |
71.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
35.6 |
|
|
|
35.0 |
|
|
|
35.4 |
|
|
|
34.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.87 |
|
|
$ |
0.77 |
|
|
$ |
2.58 |
|
|
$ |
2.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
30.9 |
|
|
$ |
27.1 |
|
|
$ |
91.4 |
|
|
$ |
71.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
35.6 |
|
|
|
35.0 |
|
|
|
35.4 |
|
|
|
34.9 |
|
Dilutive effect of exercise of options outstanding |
|
|
1.1 |
|
|
|
1.2 |
|
|
|
1.1 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding |
|
|
36.7 |
|
|
|
36.2 |
|
|
|
36.5 |
|
|
|
36.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.84 |
|
|
$ |
0.75 |
|
|
$ |
2.50 |
|
|
$ |
1.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5. Stock-Based Compensation Plans
Teledyne Technologies has long-term incentive plans pursuant to which it has granted
non-qualified stock options, restricted stock and performance shares to certain employees. The
Company also has non-employee director stock compensation plans, pursuant to which
non-qualified stock options and common stock have been issued to its directors.
The following disclosures are based on stock options granted to Teledyne Technologies’
employees and directors. The Company recorded a total of $1.9 million and $5.6 million in
stock option compensation expense for the third quarter and first nine months of 2008,
respectively. For the third quarter and first nine months of 2007, the Company recorded a
total of $1.8 million and $5.1 million, respectively in stock option expense. In 2008, the
Company expects approximately $7.8 million in stock option compensation expense based on stock
options already granted and current assumptions regarding the estimated fair value of stock
option grants expected to be issued during the remainder of the year. However, our assessment
of the estimated compensation expense will be affected by our stock price and actual stock
option grants during the remainder of the year as well as assumptions regarding a number of
complex and subjective variables and the related tax impact. These variables include, but are
not limited to, the volatility of our stock price and employee stock option exercise behaviors.
The Company issues shares of common stock upon the exercise of stock options.
10
The Company used a combination of its historical stock price volatility and the volatility of
exchange traded options on the Company stock to compute the expected volatility for purposes of
valuing stock options issued. The period used for the historical stock price corresponded to
the expected term of the options and was between five and six years. The period used for the
exchange traded options included the longest-dated options publicly available, generally six to
nine months. The expected dividend yield is based on Teledyne’s practice of not paying
dividends. The risk-free rate of return is based on the yield of U. S. Treasury Strips with
terms equal to the expected life of the options as of the grant date. The expected life in
years is based on historical actual stock option exercise experience. The following
assumptions were used in the valuation of stock options granted in 2008 and 2007:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Expected dividend yield |
|
|
— |
|
|
|
— |
|
Expected volatility |
|
|
34.7 |
% |
|
|
33.0 |
% |
Risk-free interest rate |
|
|
3.3 |
% |
|
|
4.9 |
% |
Expected life in years |
|
|
5.6 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
Based on the assumptions in the table above, the grant date fair value of stock options granted
in 2008 and 2007 was $19.35 and $15.54, respectively.
Stock option transactions for Teledyne Technologies’ employee stock option plans for the third
quarter and nine months ended September 28, 2008 are summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
| |
|
Third Quarter |
|
|
Nine Months |
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
| |
|
Shares |
|
|
Exercise Price |
|
|
Shares |
|
|
Exercise Price |
|
Beginning balance |
|
|
2,753,081 |
|
|
$ |
28.59 |
|
|
|
2,702,157 |
|
|
$ |
24.71 |
|
Granted |
|
|
2,500 |
|
|
$ |
59.05 |
|
|
|
355,298 |
|
|
$ |
50.85 |
|
Exercised |
|
|
(352,011 |
) |
|
$ |
18.88 |
|
|
|
(636,185 |
) |
|
$ |
19.01 |
|
Cancelled or expired |
|
|
(4,513 |
) |
|
$ |
29.36 |
|
|
|
(22,213 |
) |
|
$ |
31.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
|
2,399,057 |
|
|
$ |
30.02 |
|
|
|
2,399,057 |
|
|
$ |
30.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
at end of period |
|
|
1,571,354 |
|
|
$ |
23.06 |
|
|
|
1,571,354 |
|
|
$ |
23.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option transactions for Teledyne Technologies’ non-employee director stock option plan
for the third quarter and nine months ended September 28, 2008 are summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
| |
|
Third Quarter |
|
|
Nine Months |
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
| |
|
Shares |
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
| |
|
|
|
|
|
Price |
|
|
Shares |
|
|
Price |
|
Beginning balance |
|
|
388,076 |
|
|
$ |
25.46 |
|
|
|
348,266 |
|
|
$ |
22.44 |
|
Granted |
|
|
2,801 |
|
|
$ |
34.02 |
|
|
|
42,611 |
|
|
$ |
50.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
|
390,877 |
|
|
$ |
25.52 |
|
|
|
390,877 |
|
|
$ |
25.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable
at end of period |
|
|
347,281 |
|
|
$ |
22.40 |
|
|
|
347,281 |
|
|
$ |
22.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Cash Equivalents
Cash equivalents consist of highly liquid money-market mutual funds and bank deposits with
maturities of three months or less when purchased. Cash equivalents totaled $3.7 million at
September 28, 2008 and $1.0 million at December 30, 2007.
11
Note 7. Inventories
Inventories are stated at the lower of cost or market, less progress payments. Inventories are
valued under the LIFO method, FIFO method and average cost method. Interim LIFO calculations
are based on the Company’s estimates of expected year-end inventory levels and costs since an
actual valuation of inventory under the LIFO method can be made only at the end of each year
based on the inventory levels and costs at that time. Because these are subject to many
factors beyond the Company’s control, interim results are subject to the final year-end LIFO
inventory valuation. Inventories consist of the following (in millions):
| |
|
|
|
|
|
|
|
|
| Balance at |
|
September 28, 2008 |
|
|
December 30, 2007 |
|
Raw materials and supplies |
|
$ |
87.7 |
|
|
$ |
64.7 |
|
Work in process |
|
|
139.4 |
|
|
|
122.6 |
|
Finished goods |
|
|
21.0 |
|
|
|
17.6 |
|
|
|
|
|
|
|
|
|
|
|
248.1 |
|
|
|
204.9 |
|
Progress payments |
|
|
(4.3 |
) |
|
|
(4.7 |
) |
LIFO reserve |
|
|
(26.9 |
) |
|
|
(25.6 |
) |
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
216.9 |
|
|
$ |
174.6 |
|
|
|
|
|
|
|
|
Note 8. Supplemental Balance Sheet Information
Other long-term assets included amounts related to deferred compensation of $24.3 million and
$24.2 million at September 28, 2008 and December 30, 2007, respectively. Accrued liabilities
included salaries and wages and other related compensation liabilities of $85.8 million and
$69.9 million at September 28, 2008 and December 30, 2007, respectively. Accrued liabilities
also included customer related deposits and credits of $34.9 million and $28.1 million at
September 28, 2008 and December 30, 2007, respectively. Accrued liabilities included the short
term portion of aircraft product liability reserves of $18.6 million at September 28, 2008 and
$3.2 million at December 30, 2007. Other long-term liabilities included aircraft product
liability reserves of $37.0 million and $50.6 million at September 28, 2008 and December 30,
2007, respectively. Other long-term liabilities also included deferred compensation
liabilities of $24.1 million and $23.8 million at September 28, 2008 and December 30, 2007,
respectively. Other long-term liabilities also included reserves for workers’ compensation,
environmental liabilities and the long-term portion of compensation liabilities.
Some of the Company’s products are subject to specified warranties and the Company provides for
the estimated cost of product warranties. The adequacy of the pre-existing warranty
liabilities is assessed regularly and the reserve is adjusted as necessary based on a review of
historic warranty experience with respect to the applicable business or products, as well as
the length and actual terms of the warranties, which are typically one year. The product
warranty reserve is included in current accrued liabilities on the balance sheet. Changes in
the Company’s product warranty reserve during the first nine months of 2008 and 2007 are as
follows (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
First Nine Months |
|
| |
|
2008 |
|
|
2007 |
|
Balance at beginning of year |
|
$ |
11.4 |
|
|
$ |
11.4 |
|
Accruals for product
warranties charged to expense |
|
|
6.9 |
|
|
|
5.6 |
|
Cost of product warranty claims |
|
|
(6.0 |
) |
|
|
(5.8 |
) |
Acquisitions |
|
|
2.2 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
14.5 |
|
|
$ |
11.3 |
|
|
|
|
|
|
|
|
Note 9. Income Taxes
The Company’s effective tax rate for the third quarter and first nine months of 2008 was 37.1%
and 37.4% compared with 26.8% and 34.2% for the third quarter and first nine months of 2007.
The effective tax rate for the first nine months of 2008 reflects a research and development
income tax credit of $1.3 million for the 2007 tax year which was recorded in the first quarter
of 2008 and also reflects the third quarter reversal of $0.8 million in income tax contingency
reserves which were determined to be no longer needed due to the
12
expiration of applicable statutes of limitations. Excluding these items, the Company’s
effective tax rate for the third quarter and first nine months of 2008 would have been 38.8%.
The effective tax rate for the third quarter and first nine months of 2007 reflects the impact
of research and development income tax credits of $4.0 million in the third quarter and the
reversal of $1.0 million in income tax contingency reserves which were determined to be no
longer needed due to the expiration of applicable statutes of limitations, of which $0.5
million was included in the third quarter. Excluding these items, the Company’s effective tax
rate for the third quarter and first nine months of 2007 would have been 39.1% and 38.8%,
respectively.
Except for claims for refunds related to credits for research activities, the Company has
concluded all U.S. federal and California income tax matters for all years through 2004.
Substantially all other material state, local and foreign income tax matters have been
concluded for years through 2003. The Company believes appropriate provisions for all
outstanding issues have been made for all jurisdictions and all open years.
During the first nine months of 2008, unrecognized tax benefits decreased $0.3 million for tax
positions taken during a prior period, and increased $5.0 million for tax positions taken
during the current period. The total amount of unrecognized tax benefits that would affect the
effective tax rate increased $5.0 million during the first nine months of 2008.
Note 10. Long-Term Debt and Capital Lease
At September 28, 2008, Teledyne Technologies had $284.0 million outstanding under its $590.0
million credit facility. Excluding interest and fees, no payments are due under the credit
facility until it matures in July 2011. Available borrowing capacity under the $590.0 million
credit facility, which is reduced by borrowings and outstanding letters of credit, was $297.4
million at September 28, 2008. The credit agreement requires 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 September 28, 2008, the Company was in compliance with these covenants. The Company also
has two $5.0 million uncommitted credit lines available. These credit lines are utilized, as
needed, for periodic cash needs. Total debt at September 28, 2008 includes $284.0 million
outstanding under the $590.0 million credit facility at a weighted average interest rate of
3.0% and $0.6 million in other debt, which is current. The Company also has $3.7 million in
capital leases, of which $0.2 million is current. At September 28, 2008, Teledyne Technologies
had $8.6 million in outstanding letters of credit.
Note 11. Lawsuits, Claims, Commitments, Contingencies and Related Matters
The Company is subject to federal, state and local environmental laws and regulations which
require that it investigate and remediate the effects of the release or disposal of materials
at sites associated with past and present operations, including sites at which the Company has
been identified as a potentially responsible party under the federal Superfund laws and
comparable state laws.
In accordance with the Company’s accounting policy disclosed in Note 2 to the consolidated
financial statements in the 2007 Form 10-K, environmental liabilities are recorded when the
Company’s liability is probable and the costs are reasonably estimable. In many cases,
however, investigations are not yet at a stage where the Company has been able to determine
whether it is liable or, if liability is probable, to reasonably estimate the loss or range of
loss, or certain components thereof. Estimates of the Company’s liability are subject to
uncertainties as described in Note 15 to the consolidated financial statements in the 2007 Form
10-K. As investigation and remediation of these sites proceeds, it is likely that adjustments
in the Company’s accruals will be necessary to reflect new information. The amounts of any
such adjustments could have a material adverse effect on the Company’s results of operations in
a given period, but the amounts, and the possible range of loss in excess of the amounts
accrued, are not reasonably estimable. Based on currently available information, management
does not believe that future environmental costs in excess of those accrued, with respect to
sites with which the Company has been identified, are likely to have a material adverse effect
on the Company’s financial condition. The Company cannot provide assurance that additional
13
future developments, administrative actions or liabilities relating to environmental matters
will not have a material adverse effect on the Company’s financial condition or results of
operations.
At September 28, 2008, the Company’s reserves for environmental remediation obligations totaled
$2.2 million, of which $0.2 million is included in current liabilities. The Company
periodically evaluates whether it may be able to recover a portion of future costs for
environmental liabilities from its insurance carriers and from third parties.
The timing of expenditures depends on a number of factors that vary by site, including the
nature and extent of contamination, the number of potentially responsible parties, the timing
of regulatory approvals, the complexity of the investigation and remediation, and the standards
for remediation. The Company expects that it will expend present accruals over many years, and
will complete remediation of all sites with which it has been identified in up to 30 years.
Various claims (whether based on U.S. Government or Company audits and investigations or
otherwise) may be asserted against the Company related to its U.S. Government contract work,
including claims based on business practices and cost classifications and actions under the
False Claims Act. Although such claims are generally resolved by detailed fact-finding and
negotiation, on those occasions when they are not so resolved, civil or criminal legal or
administrative proceedings may ensue. Depending on the circumstances and the outcome, such
proceedings could result in fines, penalties, compensatory and treble damages or the
cancellation or suspension of payments under one or more U.S. Government contracts. Under
government regulations, a company, or one or more of its operating divisions or units, can also
be suspended or debarred from government contracts based on the results of investigations.
Although the outcome of these matters cannot be predicted with certainty, management does not
believe there is any audit, review or investigation currently pending against the Company, of
which management is aware, that is likely to result in suspension or debarment of the Company,
or that is otherwise likely to have a material adverse effect on the Company’s financial
condition. The resolution in any reporting period of one or more of these matters could,
however, have a material adverse effect on the Company’s results of operations for that period.
A number of other lawsuits, claims and proceedings have been or may be asserted against the
Company, including those pertaining to product liability, patent infringement, commercial
contracts, employment and employee benefits. While the outcome of litigation cannot be
predicted with certainty, and some of these lawsuits, claims or proceedings may be determined
adversely to the Company, management does not believe that the disposition of any such pending
matters is likely to have a material adverse effect on the Company’s financial condition. The
resolution in any reporting period of one or more of these matters could have a material
adverse effect on the Company’s results of operations for that period. Teledyne Technologies
has aircraft and product liability insurance with an annual self-insured retention for general
aviation aircraft liabilities incurred in connection with products manufactured by Teledyne
Continental Motors of $20.1 million for its current aircraft product liability insurance
policies which expire on May 31, 2009. At September 28, 2008, the Company’s reserves for
aircraft product liabilities totaled $55.6 million, of which $18.6 million is included in
current liabilities. The reserve is developed based on several factors, including the number
and nature of claims, the level of annual self-insurance retentions, historic payments and
consultations with our insurers and outside counsel, all of which are used as a basis for
estimating future losses.
Note 12. Pension Plans and Postretirement Benefits
Teledyne Technologies has a defined benefit pension plan covering substantially all employees
hired before January 1, 2004. As of January 1, 2004, non-union new hires participate in an
enhanced defined contribution plan as opposed to the Company’s existing defined benefit pension
plan. The Company’s assumed discount rate on plan liabilities is 6.0% for 2008 and 2007. The
Company’s assumed long-term rate of return on plan assets is 8.5% for 2008 and 2007.
14
Teledyne Technologies’ net periodic pension expense was $2.4 million and $7.2 million for the
third quarter and first nine months of 2008, compared with net periodic pension expense of $3.0
million and $8.9 for the third quarter and first nine months of 2007 in accordance with the
pension accounting requirements of SFAS No. 87 and SFAS No. 158. Pension expense allocated to
contracts pursuant to U.S. Government Cost Accounting Standards (“CAS”) was $2.4 million and
$7.1 million for the third quarter and first nine months of 2008, compared with $2.5 million
and $7.6 million for the third quarter and first nine months of 2007. Pension expense
determined under CAS can generally be recovered through the pricing of products and services
sold to the U.S. Government. The Company made contributions to its pension plan totaling $28.7
million in the first nine months of 2008 compared with $6.3 million for the first nine months
of 2007. The higher amount contributed in 2008 included a discretionary contribution of $20.0
million in September 2008.
The Company sponsors several postretirement defined benefit plans that cover certain salaried
and hourly employees. The plans provide health care and life insurance benefits for certain
eligible retirees.
The following tables set forth the components of net periodic pension benefit expense for
Teledyne Technologies’ defined benefit pension plans and postretirement benefit plans for the
third quarter and first nine months of 2008 and 2007 (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Third Quarter |
|
|
Nine Months |
|
| Pension Benefits |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Service cost — benefits earned during the period |
|
$ |
4.3 |
|
|
$ |
4.1 |
|
|
$ |
12.9 |
|
|
$ |
12.4 |
|
Interest cost on benefit obligation |
|
|
9.6 |
|
|
|
9.2 |
|
|
|
28.8 |
|
|
|
27.6 |
|
Expected return on plan assets |
|
|
(12.4 |
) |
|
|
(11.7 |
) |
|
|
(37.3 |
) |
|
|
(35.2 |
) |
Amortization of prior service cost |
|
|
0.1 |
|
|
|
0.4 |
|
|
|
0.5 |
|
|
|
1.2 |
|
Recognized actuarial loss |
|
|
0.8 |
|
|
|
1.0 |
|
|
|
2.3 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense |
|
$ |
2.4 |
|
|
$ |
3.0 |
|
|
$ |
7.2 |
|
|
$ |
8.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Third Quarter |
|
|
Nine Months |
|
| Postretirement Benefits |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Service cost — benefits earned during the period |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Interest cost on benefit obligation |
|
|
0.4 |
|
|
|
0.3 |
|
|
|
1.1 |
|
|
|
0.8 |
|
Amortization of prior service cost |
|
|
(0.2 |
) |
|
|
— |
|
|
|
(0.4 |
) |
|
|
— |
|
Recognized actuarial gain |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(0.6 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense |
|
$ |
— |
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13. Industry Segments
Teledyne is a leading provider of sophisticated electronic components and subsystems,
instrumentation and communications products, engineered systems and information technology
services, general aviation engines and components, and energy generation, energy storage and
small propulsion products. Its customers include government agencies, aerospace prime
contractors, energy exploration and production companies, major industrial companies, and
airlines and general aviation companies.
Teledyne operates in four business segments: Electronics and Communications, Engineered
Systems, Aerospace Engines and Components and Energy and Power Systems. In the fourth quarter
of 2007, the Company realigned two business units. The turbine engine business and the battery
products business have been moved from the Aerospace Engines and Components segment to the
Energy and Power Systems segment. The former Energy Systems segment was renamed Energy and
Power Systems. In addition to these changes, the Systems Engineering Solutions segment has
been renamed Engineered Systems. As required by SFAS No. 131, the Company has restated its
historical segment information to be consistent with the current reportable segment structure.
This segment realignment had no effect on the Company’s consolidated results of operations or
cash flows for the periods presented and also did not affect the results of the Electronics and
Communications or Engineered Systems segments. The factors for determining the reportable
segments were based on the distinct nature of their operations. They are managed as separate
business units because each requires and is responsible for executing a unique business
strategy.
15
Segment operating profit includes other income and expense directly related to the segment, but
excludes minority interest, interest income and expense, gains and losses on the disposition of
assets, sublease rental income and non-revenue licensing and royalty income, domestic and
foreign income taxes and corporate office expenses.
The following table presents Teledyne Technologies’ interim industry segment disclosures for
net sales and operating profit including other segment income. The table also provides a
reconciliation of segment operating profit and other segment income to total net income
(amounts in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Third |
|
|
Third |
|
|
|
|
|
|
Nine |
|
|
Nine |
|
|
|
|
| |
|
Quarter |
|
|
Quarter |
|
|
% |
|
|
Months |
|
|
Months |
|
|
% |
|
| |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronics and Communications |
|
$ |
330.3 |
|
|
$ |
273.8 |
|
|
|
20.6 |
% |
|
$ |
947.9 |
|
|
$ |
788.1 |
|
|
|
20.3 |
% |
Engineered Systems |
|
|
97.9 |
|
|
|
75.8 |
|
|
|
29.2 |
% |
|
|
277.1 |
|
|
|
223.4 |
|
|
|
24.0 |
% |
Aerospace Engines and Components (a) |
|
|
46.3 |
|
|
|
46.2 |
|
|
|
0.2 |
% |
|
|
140.7 |
|
|
|
138.6 |
|
|
|
1.5 |
% |
Energy and Power Systems (a) |
|
|
23.1 |
|
|
|
13.1 |
|
|
|
76.3 |
% |
|
|
62.5 |
|
|
|
44.7 |
|
|
|
39.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
497.6 |
|
|
$ |
408.9 |
|
|
|
21.7 |
% |
|
$ |
1,428.2 |
|
|
$ |
1,194.8 |
|
|
|
19.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit and other segment income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronics and Communications |
|
$ |
46.0 |
|
|
$ |
37.0 |
|
|
|
24.3 |
% |
|
$ |
133.3 |
|
|
$ |
104.5 |
|
|
|
27.6 |
% |
Engineered Systems |
|
|
9.9 |
|
|
|
6.2 |
|
|
|
59.7 |
% |
|
|
27.4 |
|
|
|
19.1 |
|
|
|
43.5 |
% |
Aerospace Engines and Components (a) |
|
|
1.5 |
|
|
|
4.1 |
|
|
|
(63.4) |
% |
|
|
11.1 |
|
|
|
16.2 |
|
|
|
(31.5) |
% |
Energy and Power Systems (a) |
|
|
2.2 |
|
|
|
0.5 |
|
|
|
340.0 |
% |
|
|
7.2 |
|
|
|
3.3 |
|
|
|
118.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit and
other segment income |
|
$ |
59.6 |
|
|
$ |
47.8 |
|
|
|
24.7 |
% |
|
$ |
179.0 |
|
|
$ |
143.1 |
|
|
|
25.1 |
% |
Corporate expense |
|
|
(7.7 |
) |
|
|
(7.8 |
) |
|
|
(1.3) |
% |
|
|
(23.6 |
) |
|
|
(22.6 |
) |
|
|
4.4 |
% |
Other income (expense), net |
|
|
(0.1 |
) |
|
|
0.9 |
|
|
|
* |
|
|
|
0.4 |
|
|
|
1.4 |
|
|
|
(71.4) |
% |
Minority interest |
|
|
(0.2 |
) |
|
|
(0.9 |
) |
|
|
(77.8) |
% |
|
|
(1.9 |
) |
|
|
(2.5 |
) |
|
|
(24.0) |
% |
Interest expense, net |
|
|
(2.5 |
) |
|
|
(3.0 |
) |
|
|
(16.7) |
% |
|
|
(8.0 |
) |
|
|
(10.1 |
) |
|
|
(20.8) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
49.1 |
|
|
|
37.0 |
|
|
|
32.7 |
% |
|
|
145.9 |
|
|
|
109.3 |
|
|
|
33.5 |
% |
Provision for income taxes (b) |
|
|
18.2 |
|
|
|
9.9 |
|
|
|
83.8 |
% |
|
|
54.5 |
|
|
|
37.4 |
|
|
|
45.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
30.9 |
|
|
$ |
27.1 |
|
|
|
14.0 |
% |
|
$ |
91.4 |
|
|
$ |
71.9 |
|
|
|
27.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Previously reported information for the third quarter and first nine months of 2007 was
changed to reflect the current segment structure effective in the fourth quarter of 2007. |
| |
| (b) |
|
The first nine months of 2008 includes income tax credits of $1.3 million recorded in
the first quarter of 2008 and also reflects the reversal in the third quarter of 2008 of
$0.8 million in income tax contingency reserves which were determined to be no longer
needed due to the expiration of applicable statutes of limitations. The first nine
months of 2007 includes income tax credits of $4.0 million in the third quarter of 2007
and also reflects the reversal of $1.0 million in income tax contingency reserves which
were determined to be no longer needed due to the completion of state tax audits and the
expiration of applicable statutes of limitations, of which $0.5 million was included in
the third quarter of 2007. |
| |
| * |
|
percentage change not meaningful |
Note 14. Subsequent Event
On October 16, 2008, Teledyne Technologies through its subsidiary, Teledyne Limited, acquired
Cormon Limited and Cormon Technology Limited (together “Cormon”) for £12.0 million
(approximately $21.0 million) in cash. Cormon, headquartered in Lancing, United Kingdom,
designs and manufactures subsea and surface sand and corrosion sensors, as well as flow
integrity monitoring systems, used in oil and gas production systems. Cormon had sales of £6.8
million for its fiscal year ended March 31, 2008. The acquired business will operate under the
name Teledyne Cormon Limited.
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Strategy
Our strategy continues to emphasize growth in our core markets of instrumentation, defense
electronics and government engineered systems. We intend to strengthen and expand our core
businesses with targeted acquisitions. We intend to aggressively pursue operational excellence to
continually improve our margins and earnings. At Teledyne, operational excellence includes the
rapid integration of the businesses we acquire. Over time, our goal is to create a set of
businesses that are truly superior in their niches. We intend to continue to evaluate our product
lines to ensure that they are aligned with our strategy.
Results of Operations
Third quarter of 2008 compared with the third quarter of 2007
Teledyne Technologies’ third quarter 2008 sales were $497.6 million, compared with sales of $408.9
million for the same period of 2007, an increase of 21.7%. Net income for the third quarter of
2008 was $30.9 million ($0.84 per diluted share) compared with net income of $27.1 million ($0.75
per diluted share) for the third quarter of 2007, an increase of 14.0%. The increase in sales for
the 2008 period, compared with the same 2007 period, was driven by acquisitions and organic growth.
The third quarter of 2008, compared with the same period in 2007, reflected higher sales in each
business segment. The higher sales in the Electronics and Communications segment resulted from
organic sales growth and strategic acquisitions, including the acquisition of assets of Impulse
Enterprise (“Impulse”) on December 31, 2007, the acquisition of Storm Products Co. (“Storm”) on
December 31, 2007, the acquisition of S G Brown Limited and its wholly-owned subsidiary TSS
(International) Limited (together “TSS International”) on January 31, 2008, the acquisition of
assets of Judson Technologies, LLC (“Judson”) on February 1, 2008, the acquisition of Webb Research
(“Webb Research”) on July 7, 2008, and the acquisition of the Defense Electronics business of
Filtronic PLC on August 15, 2008. Incremental revenue in the third quarter of 2008 from businesses
acquired since the end of fiscal 2006 was $38.1 million.
The increase in earnings for the third quarter of 2008, compared with the same period of 2007,
reflects improved operating profit in each operating segment except the Aerospace Engines and
Components segment. Incremental operating profit in the third quarter of 2008 from businesses
acquired since the end of fiscal 2006, including synergies, was $3.8 million.
The third quarter of 2008 included pension expense, in accordance with the pension requirements of
Statement of Financial Accounting Standards (“SFAS”) No. 87 and No. 158 of $2.4 million, compared
with pension expense of $3.0 million in the third quarter of 2007. Pension expense allocated to
contracts pursuant to U.S. Government Cost Accounting Standards (“CAS”) was $2.4 million in the
third quarter of 2008, compared with pension expense of $2.5 million in the third quarter of 2007.
For the third quarter of 2008 and 2007, we recorded a total of $1.9 million and $1.8 million,
respectively, in stock option compensation expense.
Cost of sales in total dollars was higher in the third quarter of 2008, compared with the third
quarter of 2007, primarily due to higher sales, driven by acquisitions and organic growth. Cost of
sales as a percentage of sales for the third quarter of 2008 increased to 70.0% from 69.7% for the
third quarter of 2007 and reflected sales mix differences. Cost of sales for the third quarter of
2008 also reflected higher LIFO expense of $0.3 million.
Selling, general and administrative expenses, including research and development and bid and
proposal expense, in total dollars were higher in the third quarter of 2008, compared with the
third quarter of 2007. This increase was primarily due to higher sales, driven by acquisitions and
organic growth. Selling, general and administrative expenses for the third quarter of 2008, as a
percentage of sales, decreased to 19.5%, compared with 20.5% in the third quarter of 2007, and
primarily reflected lower general and administrative expenses.
Interest expense, net of interest income, was $2.5 million in the third quarter of 2008, compared
with $3.0 million for the third quarter of 2007. The decrease in net interest expense reflected
the impact of lower average interest rates, partially offset by higher outstanding debt levels.
Other income and expense included higher deferred compensation expenses. Minority interest
reflects the minority ownership interest in Ocean Design, Inc. (“ODI”) and Teledyne Energy Systems,
Inc.
17
The Company’s effective tax rate for the third quarter of 2008 was 37.1% compared with 26.8% for
the third quarter of 2007. The effective tax rate for the third quarter of 2008 reflects the
reversal of $0.8 million in income tax contingency reserves which were determined to be no longer
needed due to the expiration of applicable statutes of limitations. Excluding this item, the
Company’s effective tax rate for the third quarter of 2008 would have been 38.8%. The effective
tax rate for the third quarter of 2007 reflects the impact of expected research and development
income tax refunds of $4.0 million and also reflects the reversal of $0.5 million in income tax
contingency reserves during the third quarter of 2007 which were determined to be no longer needed
due to the completion of state tax audits and the expiration of applicable statutes of limitations.
Excluding these items the Company’s effective tax rate for the third quarter of 2007 would have
been 39.1%.
First nine months of 2008 compared with the first nine months of 2007
Teledyne Technologies’ sales for the first nine months of 2008 were $1,428.2 million, compared with
sales of $1,194.8 million for the same period of 2007, an increase of 19.5%. Net income for the
first nine months of 2008 was $91.4 million ($2.50 per diluted share) compared with net income of
$71.9 million ($1.99 per diluted share) for the first nine months of 2007, an increase of 27.1%.
The increase in sales for the 2008 period, compared with the same 2007 period, was driven by
acquisitions and organic sales growth.
The first nine months of 2008, compared with the same period in 2007, reflected higher sales in
each operating segment. The higher sales in the Electronics and Communications segment resulted
from organic sales growth and strategic acquisitions, including the acquisition of assets of D.G.
O’Brien, Inc. (“DGO”) on March 30, 2007, the acquisition of assets of Impulse on December 31, 2007,
the acquisition of Storm on December 31, 2007, the acquisition of TSS International on January 31,
2008, the acquisition of assets of Judson on February 1, 2008, the acquisition of Webb Research on
July 7, 2008, and the acquisition of the Defense Electronics business of Filtronic PLC on August
15, 2008. Incremental revenue in the first nine months of 2008 from businesses acquired since the
end of fiscal 2006 was $100.9 million.
The increase in earnings for the first nine months of 2008, compared with the same period of 2007,
reflected improved operating profit in each operating segment except the Aerospace Engines and
Components segment. Incremental operating profit in the first nine months of 2008 from businesses
acquired since the end of fiscal 2006, including synergies, was $11.1 million. The first nine
months of 2008 included pension expense in accordance with the pension requirements of SFAS No. 87
and SFAS No. 158 of $7.2 million, compared with pension expense of $8.9 million in the first nine
months of 2007. Pension expense allocated to contracts pursuant to CAS was $7.1 million in the
first nine months of 2008, compared with pension expense of $7.6 million in the first nine months
of 2007. For the first nine months of 2008 and 2007, we recorded a total of $5.6 million and $5.1
million respectively in stock option compensation expense.
Cost of sales in total dollars was higher in first nine months of 2008, compared with the first
nine months of 2007, primarily due to higher sales, driven by acquisitions and organic growth.
Cost of sales as a percentage of sales for the first nine months of 2008 and the first nine months
of 2007 was 69.6%. Cost of sales for the first nine months of 2008 also reflected lower LIFO
expense of $0.2 million.
Selling, general and administrative expenses, including research and development and bid and
proposal expense, in total dollars were higher in the first nine months of 2008, compared with the
first nine months of 2007. This increase is primarily due to higher sales, driven by acquisitions
and organic growth. The increase also reflected higher corporate expense which reflected higher
compensation expense and higher professional fees. Selling, general and administrative expenses
for the first nine months of 2008, as a percentage of sales, decreased to 19.5%, compared with
20.3% in the first nine months of 2007, and primarily reflected lower general and administrative
expenses.
Interest expense, net of interest income, was $8.0 million in the first nine months of 2008,
compared with $10.1 million for the first nine months of 2007. The decrease in net interest
expense reflected the impact of lower average interest rates, partially offset by higher
outstanding debt levels. Minority interest reflects the minority ownership interest in ODI and
Teledyne Energy Systems, Inc.
The Company’s effective tax rate for the first nine months of 2008 was 37.4% compared with 34.2%
for the first nine months of 2007. The effective tax rate for the first nine months of 2008
reflects a research and development income tax refund of $1.3 million for the 2007 tax year which
was recorded in the first quarter of 2008 and also reflects the third quarter reversal of $0.8
million in income tax contingency reserves which were determined to be
18
no longer needed due to the expiration of applicable statutes of limitations. Excluding this item,
the Company’s effective tax rate for the third quarter of 2008 would have been 38.8%. The
effective tax rate for the first nine months of 2007 reflects the impact of the research and
development income refunds of $4.0 million and also reflects the reversal of $1.0 million in income
tax contingency reserves which were determined to be no longer needed due to the expiration of
applicable statutes of limitations. Excluding this item, the Company’s effective tax rate for the
first nine months of 2007 would have been 38.8%.
Review of Operations:
In the fourth quarter of 2007, the Company realigned Teledyne Energy Systems, Inc., Teledyne
Turbine Engines and Teledyne Battery Products in a new segment called Energy and Power Systems.
Both the turbine engine business and the battery products business were previously part of the
Aerospace Engines and Components segment. In addition, the Systems Engineering Solutions segment
was renamed Engineered Systems. Previously reported segment financial data for the third quarter
and first nine months of 2007 reflects the new segment presentation to provide comparability
between periods. The following table sets forth the sales and operating profit for each segment
(amounts in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Third |
|
|
Third |
|
|
|
|
|
|
Nine |
|
|
Nine |
|
|
|
|
| |
|
Quarter |
|
|
Quarter |
|
|
% |
|
|
Months |
|
|
Months |
|
|
% |
|
| |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronics and Communications |
|
$ |
330.3 |
|
|
$ |
273.8 |
|
|
|
20.6 |
% |
|
$ |
947.9 |
|
|
$ |
788.1 |
|
|
|
20.3 |
% |
Engineered Systems |
|
|
97.9 |
|
|
|
75.8 |
|
|
|
29.2 |
% |
|
|
277.1 |
|
|
|
223.4 |
|
|
|
24.0 |
% |
Aerospace Engines and Components (a) |
|
|
46.3 |
|
|
|
46.2 |
|
|
|
0.2 |
% |
|
|
140.7 |
|
|
|
138.6 |
|
|
|
1.5 |
% |
Energy and Power Systems (a) |
|
|
23.1 |
|
|
|
13.1 |
|
|
|
76.3 |
% |
|
|
62.5 |
|
|
|
44.7 |
|
|
|
39.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
497.6 |
|
|
$ |
408.9 |
|
|
|
21.7 |
% |
|
$ |
1,428.2 |
|
|
$ |
1,194.8 |
|
|
|
19.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit and other segment income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronics and Communications |
|
$ |
46.0 |
|
|
$ |
37.0 |
|
|
|
24.3 |
% |
|
$ |
133.3 |
|
|
$ |
104.5 |
|
|
|
27.6 |
% |
Engineered Systems |
|
|
9.9 |
|
|
|
6.2 |
|
|
|
59.7 |
% |
|
|
27.4 |
|
|
|
19.1 |
|
|
|
43.5 |
% |
Aerospace Engines and Components (a) |
|
|
1.5 |
|
|
|
4.1 |
|
|
|
(63.4) |
% |
|
|
11.1 |
|
|
|
16.2 |
|
|
|
(31.5) |
% |
Energy and Power Systems (a) |
|
|
2.2 |
|
|
|
0.5 |
|
|
|
340.0 |
% |
|
|
7.2 |
|
|
|
3.3 |
|
|
|
118.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating
profit and other segment income |
|
$ |
59.6 |
|
|
$ |
47.8 |
|
|
|
24.7 |
% |
|
$ |
179.0 |
|
|
$ |
143.1 |
|
|
|
25.1 |
% |
Corporate expense |
|
|
(7.7 |
) |
|
|
(7.8 |
) |
|
|
(1.3) |
% |
|
|
(23.6 |
) |
|
|
(22.6 |
) |
|
|
4.4 |
% |
Other income (expense), net |
|
|
(0.1 |
) |
|
|
0.9 |
|
|
|
* |
|
|
|
0.4 |
|
|
|
1.4 |
|
|
|
(71.4) |
% |
Minority interest |
|
|
(0.2 |
) |
|
|
(0.9 |
) |
|
|
(77.8) |
% |
|
|
(1.9 |
) |
|
|
(2.5 |
) |
|
|
(24.0) |
% |
Interest expense, net |
|
|
(2.5 |
) |
|
|
(3.0 |
) |
|
|
(16.7) |
% |
|
|
(8.0 |
) |
|
|
(10.1 |
) |
|
|
(20.8) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
49.1 |
|
|
|
37.0 |
|
|
|
32.7 |
% |
|
|
145.9 |
|
|
|
109.3 |
|
|
|
33.5 |
% |
Provision for income taxes (b) |
|
|
18.2 |
|
|
|
9.9 |
|
|
|
83.8 |
% |
|
|
54.5 |
|
|
|
37.4 |
|
|
|
45.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
30.9 |
|
|
$ |
27.1 |
|
|
|
14.0 |
% |
|
$ |
91.4 |
|
|
$ |
71.9 |
|
|
|
27.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Previously reported information for the third quarter and first nine months of 2007 was
changed to reflect the current segment structure effective in the fourth quarter of 2007. |
| |
| (b) |
|
The first nine months of 2008 includes income tax credits of $1.3 million recorded in
the first quarter of 2008 and also reflects the reversal in the third quarter of 2008 of
$0.8 million in income tax contingency reserves which were determined to be no longer
needed due to the expiration of applicable statutes of limitations. The first nine
months of 2007 includes income tax credits of $4.0 million in the third quarter of 2007
and also reflects the reversal of $1.0 million in income tax contingency reserves which
were determined to be no longer needed due to the completion of state tax audits and the
expiration of applicable statutes of limitations, of which $0.5 million was included in
the third quarter of 2007. |
| |
| * |
|
percentage change not meaningful |
19
Electronics and Communications
Third quarter of 2008 compared with the third quarter of 2007
Our Electronics and Communications segment’s third quarter 2008 sales were $330.3 million, compared
with third quarter 2007 sales of $273.8 million, an increase of 20.6%. Third quarter 2008
operating profit was $46.0 million, compared with operating profit of $37.0 million in the third
quarter of 2007, an increase of 24.3%.
The third quarter 2008 sales improvement resulted from revenue growth in electronic instruments and
defense electronics, partially offset by lower sales of other commercial electronics. The revenue
growth of $38.6 million in electronic instruments was driven by organic sales growth and the
acquisition of assets of Impulse on December 31, 2007, the acquisition of Storm on December 31,
2007, the acquisition of TSS International on January 31, 2008 and the acquisition of Webb Research
on July 7, 2008. Organic sales growth in electronic instruments reflected increased sales of
geophysical sensors for the energy exploration market, other marine instruments and environmental
instruments for the air and water monitoring. The revenue growth of $19.3 million in defense
electronics was driven by organic sales growth, the acquisition of Storm on December 31, 2007, the
acquisition of assets of Judson on February 1, 2008 and the acquisition of the Defense Electronics
business of Filtronic PLC on August 15, 2008. Lower sales of other commercial electronics
primarily reflected lower sales of medical electronic manufacturing services. Incremental revenue
in the third quarter of 2008 from acquisitions made since the end of fiscal 2006 was $38.1 million.
Segment operating profit was favorably impacted by revenue from acquisitions, organic sales growth
and sales mix. Incremental operating profit in the third quarter of 2008, from businesses acquired
since the end of fiscal 2006, including synergies, was $3.8 million. Segment operating profit was
negatively impacted by $0.9 million of stock option compensation expense in the third quarter of
2008, compared with $0.8 million in the third quarter of 2007. Segment operating profit for the
third quarter of 2008 reflected higher LIFO expense of $0.3 million. Pension expense, in
accordance with the pension accounting requirements of SFAS No. 87 and No. 158, was $0.8 million in
the third quarter of 2008, compared with $1.0 million in the third quarter of 2007. Pension
expense allocated to contracts pursuant to CAS was $0.4 million in both the third quarter of 2008
and the third quarter of 2007.
First nine months of 2008 compared with the first nine months of 2007
Our Electronics and Communications segment’s first nine months 2008 sales were $947.9 million,
compared with first nine months 2007 sales of $788.1 million, an increase of 20.3%. First nine
months 2008 operating profit was $133.3 million, compared with operating profit of $104.5 million
in the first nine months of 2007, an increase of 27.6%.
The first nine months 2008 sales improvement resulted from revenue growth in electronic
instruments and defense electronics, partially offset by lower sales of other commercial electronics.
The revenue growth of $111.2 million in electronic instruments was driven by organic sales growth
and the acquisition of assets of DGO on March 30, 2007, the acquisition of assets of Impulse on
December 31, 2007, the acquisition of Storm on December 31, 2007, the acquisition of TSS
International on January 31, 2008 and the acquisition of Webb Research on July 7, 2008. Organic
sales growth in electronic instruments reflected increased sales of geophysical sensors for the
energy exploration market, other marine instruments and environmental instruments for the air and
water monitoring. The revenue growth of $49.8 million in defense electronics was driven by organic
sales growth, the acquisition of Storm on December 31, 2007, the acquisition of assets of Judson on
February 1, 2008 and the acquisition of the Defense Electronics business of Filtronic PLC on August
15, 2008. Sales of other commercial electronics decreased slightly. Incremental revenue in the
first nine months of 2008, from acquisitions made since the end of the 2006 was $100.9 million.
Segment operating profit was favorably impacted by revenue from acquisitions, organic sales growth,
sales mix and a settlement of $2.0 million. Incremental operating profit in the in the first nine
months of 2008, from businesses acquired since the end of 2006, including synergies, was $11.1
million. Segment operating profit was negatively impacted by $2.7 million of stock option
compensation expense in the first nine months of 2008, compared with $2.3 million for the first
nine months of 2007. Segment operating profit for the first nine months of 2008 reflected lower
LIFO expense of $0.4 million. Pension expense, in accordance with the pension accounting
requirements of SFAS No. 87 and No. 158, was $2.6 million in the first nine months of 2008,
compared with $3.0 million in the first nine months of 2007. Pension expense allocated to
contracts pursuant to CAS was $1.2 million in the first nine months of 2008 and $1.3 million in the
first nine months of 2007.
20
Engineered Systems
Third quarter of 2008 compared with the third quarter of 2007
Our Engineered Systems segment’s third quarter 2008 sales were $97.9 million, compared with $75.8
million in the third quarter of 2007, an increase of 29.2%. Third quarter 2008 operating profit
was $9.9 million, compared with operating profit of $6.2 million in the third quarter of 2007, an
increase of 59.7%.
The third quarter 2008 sales reflected revenue growth in aerospace and defense programs of $18.2
million and higher environmental sales of $3.9 million. The third quarter 2008 sales improvement
primarily reflected revenue growth in certain manufacturing programs including gas centrifuge
service modules for nuclear power applications, as well as defense and environmental programs.
Operating profit in the third quarter of 2008 reflected the impact of higher revenue and higher
margins in certain environmental programs as well as improved overhead rates. Operating profit
also included pension expense under SFAS No. 87 and No. 158, of $1.3 million in the third quarter
of 2008, compared with $1.6 million for the third quarter of 2007. Pension expense allocated to
contracts pursuant to CAS was $2.0 million in both the third quarter of 2008 and the third quarter
of 2007. Segment operating profit was negatively impacted by $0.2 million of stock option
compensation expense in both the third quarter of 2008 and the third quarter of 2007.
First nine months of 2008 compared with the first nine months of 2007
Our Engineered Systems segment’s first nine months 2008 sales were $277.1 million, compared with
first nine months 2007 sales of $223.4 million, an increase of 24.0%. First nine months 2008
operating profit was $27.4 million, compared with operating profit of $19.1 million for the first
nine months of 2007, an increase of 43.5%.
The first nine months 2008 sales reflected revenue growth in aerospace and defense programs of
$44.6 million, and higher environmental sales of $9.1 million. The first nine months 2008 sales
improvement primarily reflected revenue growth in certain manufacturing programs including gas
centrifuge service modules for nuclear power applications, as well as defense and environmental
programs. Operating profit in the first nine months of 2008 reflected the impact of higher revenue
and higher margins in aerospace programs, favorable fee adjustments and improved overhead rates.
Segment operating profit was impacted by $0.6 million of stock option compensation expense for both
the first nine months of 2008 and the first nine months of 2007. Operating profit also included
pension expense under SFAS No. 87 and No. 158, of $3.8 million in the first nine months of 2008,
compared with $4.9 million in the first nine months of 2007. Pension expense allocated to
contracts pursuant to CAS was $5.7 million in the first nine months of 2008 and $6.0 million for
the first nine months of 2007.
Aerospace Engines and Components
Third quarter of 2008 compared with the Third quarter of 2007
Our Aerospace Engines and Components segment’s third quarter 2008 sales were $46.3 million,
compared with $46.2 million in the third quarter of 2007, an increase of 0.2%. Third quarter 2008
operating profit was $1.5 million, compared with $4.1 million in the third quarter of 2007, a
decrease of 63.4%. Operating profit for the third quarter of 2008 reflected higher manufacturing
costs and higher legal fees. Operating profit for the third quarter of 2007 included a $1.7
million writedown of accounts receivable related to a customer bankruptcy. Segment operating
profit included pension expense, under SFAS No. 87 and No. 158, of $0.2 million in both the third
quarter of 2008 and the third quarter of 2007.
First nine months of 2008 compared with the first nine months of 2007
Our Aerospace Engines and Components segment’s first nine months 2008 sales were $140.7 million,
compared with first nine months 2007 sales of $138.6 million, an increase of 1.5%. The first nine
months 2008 operating profit was $11.1 million, compared with operating profit of $16.2 million in
the first nine months of 2007, a decrease of 31.5%.
Operating profit for the first nine months of 2008 reflected higher manufacturing costs and higher
legal fees as well as increased LIFO expense of $0.2 million. Operating profit for the first nine
months of 2007 included a $1.7 million writedown of accounts receivable related to a customer
bankruptcy. Segment operating profit was impacted by $0.2 million of stock option compensation
expense for both the first nine months of 2008 and the first
21
nine months of 2007. Segment operating profit also included pension expense, under SFAS No. 87 and
No. 158, of $0.5 million in both the first nine months of 2008 and the first nine months of 2007.
Energy and Power Systems
Third quarter of 2008 compared with the third quarter of 2007
Our Energy and Power Systems segment’s third quarter 2008 sales were $23.1 million, compared with
$13.1 million in the third quarter of 2007, an increase of 76.3%. Third quarter 2008 operating
profit was $2.2 million, compared with $0.5 million in the third quarter of 2007, an increase of
340.0%.
Third quarter 2008 sales primarily reflected higher turbine engine and government power systems
sales partially offset by lower commercial hydrogen generators sales. Operating profit reflected
the impact of higher sales and also reflected higher margins in the turbine engine business.
First nine months of 2008 compared with the first nine months of 2007
Our Energy and Power Systems segment’s sales were $62.5 million, compared with $44.7 million for
the first nine months of 2007, an increase of 39.8%. Operating profit was $7.2 million for the
first nine months of 2008, compared with $3.3 million for the first nine months of 2007, an
increase of 118.2%.
The first nine months 2008 sales primarily reflected higher government power systems and turbine
engine sales. Commercial hydrogen generators and battery products sales increased slightly.
Operating profit improvement in the first nine months of 2008 was primarily due to higher sales,
sales mix and $1.3 million for environmental reserves no longer needed due to a final settlement.
Segment operating profit also included pension expense, under SFAS No. 87 and No. 158, of $0.2
million for the first nine months of 2008, compared with $0.3 million for the first nine months of
2007. Pension expense allocated to contracts pursuant to CAS was $0.2 million in the first nine
months of 2008 compared with $0.4 million for the first nine months of 2007.
Financial Condition, Liquidity and Capital Resources
Our net cash provided by operating activities was $112.9 million for the first nine months of 2008,
compared with $123.4 million for the same period of 2007. The lower net cash provided in the first
nine months of 2008, compared with the first nine months of 2007, was primarily due to higher
pension contributions of $22.4 million and higher aircraft product defense and settlement payments
of $7.3 million, partially offset by higher net income, the contribution from recent acquisitions
and lower income tax payments of $9.0 million.
Our net cash used by investing activities was $278.5 million for the first nine months of 2008,
compared with cash used by investing activities of $76.9 million for the first nine months of 2007.
The 2008 and 2007 amount included $250.1 million and $47.5 million, respectively, for the purchase
of businesses, net of cash acquired.
On August 15, 2008, Teledyne Technologies through its subsidiary, Teledyne Limited, completed the
acquisition of the defense electronics business of Filtronic PLC for £13.0 million (approximately
$24.3 million) in cash. Total cash paid, net of cash acquired, was $23.7 million. The defense
electronics business, principally based in Shipley, United Kingdom, provides customized microwave
subassemblies and integrated subsystems to the global defense industry. The defense electronics
business had sales of £14.5 million for its fiscal year ended May 31, 2008. Teledyne operates this
business under the name Teledyne Defence Limited
On July 7, 2008, Teledyne Technologies through its subsidiary, Teledyne Instruments, Inc.,
completed the acquisition of assets of Webb Research for $24.2 million in cash or $24.3 including
certain expenses. Webb Research, located in E. Falmouth, Massachusetts, is a manufacturer of
autonomous underwater gliding vehicles, as well as autonomous profiling drifters and floats. Webb
Research had sales of $12.2 million for its fiscal year ended December 31, 2007. Teledyne operates
this business under the name Teledyne Webb Research.
On February 1, 2008, Teledyne Technologies through its subsidiary, Teledyne Scientific & Imaging,
LLC, completed the acquisition of assets of Judson for $27.0 million in cash. Judson,
headquartered in Montgomeryville, Pennsylvania, manufactures high performance infrared detectors
utilizing a wide variety of materials such as Mercury Cadmium Telluride (“HgCdTe”), Indium
Antimonide (“InSb”), and Indium Gallium Arsenide (“InGaAs”), as well as tactical dewar and cooler
assemblies and other specialized standard products for
22
military, space, industrial and scientific applications. Judson had sales of $13.8 million for its
fiscal year ended December 31, 2006. Teledyne operates this business under the name Teledyne
Judson Technologies.
On January 31, 2008, Teledyne Technologies through its subsidiary, Teledyne Limited, acquired TSS
International for £29.1 million (approximately $57.1 million) in cash. Total cash paid, net of
cash acquired, was $54.8 million. TSS International, headquartered in Watford, United Kingdom,
designs and manufactures inertial sensing, gyrocompass navigation and subsea pipe and cable
detection systems for offshore energy, oceanographic and military marine markets. TSS
International had revenue of £12.0 million for its fiscal year ended March 31, 2007. The acquired
businesses operate under the names Teledyne SG Brown Limited and Teledyne TSS Limited.
On December 31, 2007, Teledyne Technologies through its subsidiary, Teledyne Instruments, Inc.,
completed the acquisition of assets of Impulse for $34.9 million in cash, net of a $0.1 million
purchase price adjustment. Impulse, headquartered in San Diego, California, manufactures
waterproof neoprene and glass reinforced epoxy connector products for harsh environments. Impulse
had sales of $16.8 million for its fiscal year ended December 31, 2006. Teledyne operates this
business under the name Teledyne Impulse.
On December 31, 2007, Teledyne Technologies through its subsidiary, Teledyne Reynolds, Inc.,
acquired Storm for $47.5 million in cash. Storm, with principal operations in Dallas, Texas and
Woodridge, Illinois, manufactures specialty wire, cable and interconnect products, as well as
flexible and semi-rigid microwave cable assemblies for defense, environmental monitoring, energy
exploration and industrial customers. Storm had revenue of $45.7 million for its fiscal year ended
March 31, 2007. Teledyne operates this business under the name Teledyne Storm Products, Inc.
On June 20, 2007, Teledyne Technologies through its subsidiary, Teledyne Cougar, Inc., completed
the acquisition of Tindall Technologies, Inc. (“Tindall”) a designer and supplier of microwave
subsystems for defense applications for consideration of $6.6 million. At September 30, 2007 total
cash paid, net of cash acquired, was $5.6 million. Teledyne Technologies also recorded $1.0
million in contingent payments, in connection with the acquisition, payable through 2010 in three
installments. The first installment of $0.3 million was paid in the second quarter of 2008.
On March 30, 2007, Teledyne Technologies through its subsidiary, Teledyne Instruments, Inc.,
completed the acquisition of assets of DGO for consideration of $37.1 million, which includes a
$1.0 million purchase price adjustment paid in July 2007. DGO, headquartered in Seabrook, New
Hampshire, manufacturers highly reliable electrical and fiber-optic interconnect systems, primarily
for subsea military and offshore oil and gas applications.
Our net cash used by investing activities for the first nine months of 2007 also included a $0.8
million contingent payment related to the Cougar Components Corporation acquisition made in 2005
and a payment of $3.7 million related to the RD Instruments acquisition made in 2005.
On August 16, 2006, Teledyne Technologies through its subsidiary, Teledyne Instruments, Inc.,
acquired an initial majority interest in ODI for approximately $30 million in cash. Pursuant to
agreements in connection with our acquisition of a majority interest in ODI, the ODI minority
stockholders have the contractual option to sell their shares to Teledyne Instruments following the
end of each quarter through the quarter ended March 31, 2009, at a formula-determined price based
principally on ODI’s earnings before interest, taxes, depreciation and amortization (EBITDA) for
the twelve months preceding each applicable quarter end. In 2006, Teledyne Instruments acquired an
additional 9.9% of ownership in ODI for $5.8 million. In 2007, Teledyne Instruments acquired an
additional 0.9% of ownership in ODI for $0.9 million, of which $0.2 million was paid in the first
nine months of 2007. In the first nine months of 2008, Teledyne Instruments acquired an additional
23.4% of ownership in ODI for $37.4 million. At September 28, 2008, Teledyne Instruments owned
85.2% of ODI. All shares not sold to Teledyne Instruments following the quarter ended March 31,
2009, are required to be purchased by Teledyne Instruments following the quarter ended June 30,
2009, at a same formula-determined price, at which time Teledyne Instruments will own all of the
ODI shares held by the stockholders. Based on the formula-determined purchase price as of the
quarter ended September 28, 2008, the aggregate amount of funds required to purchase all the shares
held by the remaining minority ODI stockholders would be approximately $22.3 million. However, the
actual aggregate amount of funds that we will spend to purchase the shares held by minority
stockholders through June 30, 2009, could be significantly higher or lower than this amount, as
that amount will depend on when individual stockholders elect to exercise their put options and on
the financial performance of ODI. Teledyne Technologies has guaranteed the payment obligation of
its subsidiary, Teledyne Instruments.
23
On October 16, 2008, Teledyne Technologies through its subsidiary, Teledyne Limited, acquired
Cormon Limited and Cormon Technology Limited (together “Cormon”) for £12.0 million (approximately
$21.0 million) in cash. Cormon, headquartered in Lancing, United Kingdom, designs and manufactures
subsea and surface sand and corrosion sensors, as well as flow integrity monitoring systems, used
in oil and gas production systems. Cormon had sales of £6.8 million for its fiscal year ended March
31, 2008. The acquired business will operate under the name Teledyne Cormon Limited.
Teledyne Technologies funded the acquisitions primarily from borrowings under its credit facility
and cash on hand.
Capital expenditures for the first nine months of 2008 and 2007 were $28.4 million and $30.7
million, respectively.
Teledyne Technologies’ goodwill was $484.3 million at September 28, 2008 and $351.6 million at
December 30, 2007. Teledyne Technologies’ net acquired intangible assets were $115.9 million at
September 28, 2008 and $61.7 million at December 30, 2007. The increase in the balance of goodwill
in 2008 primarily resulted from the acquisitions made in fiscal 2008 and a $31.5 million increase
related to the additional share purchases of ODI. The change in the balance of acquired intangible
assets in 2008 resulted from the acquisitions made in fiscal 2008 and amortization of acquired
intangible assets. The Company is in the process of specifically identifying the amount to be
assigned to intangible assets, as well as certain assets and liabilities for the six acquisitions
made in fiscal 2008 through September 28, 2008. The Company made preliminary estimates as of
September 28, 2008, since there was insufficient time between the acquisition dates and the end of
the period to finalize the valuations. The preliminary amount of goodwill and acquired intangible
assets recorded as of September 28, 2008 for the Judson acquisition was $15.8 million and $6.0
million, respectively. The preliminary amount of goodwill and acquired intangible assets recorded
as of September 28, 2008 for the TSS acquisition was $28.4 million and $22.5 million, respectively.
The preliminary amount of goodwill and acquired intangible assets recorded as of September 28,
2008 for the Impulse acquisition was $15.5 million and $16.2 million, respectively. The
preliminary amount of goodwill and acquired intangible assets recorded as of September 28, 2008 for
the Storm acquisition was $26.8 million and $10.0 million, respectively. The preliminary amount of
goodwill and acquired intangible assets recorded as of September 28, 2008 for the Webb Research
acquisition was $14.7 million and $7.0 million, respectively. The preliminary amount of goodwill
and acquired intangible assets recorded as of September 28, 2008 for the Filtronic acquisition was
$4.9 million and $6.5 million, respectively. These amounts were based on estimates that are
subject to change pending the receipt of certain valuation information and the completion of the
Company’s internal review. In all acquisitions, the results of operations and cash flows are
included in the Company’s consolidated financial statements from the date of each respective
acquisition. Each of the companies acquired is part of the Electronics and Communications segment.
Goodwill resulting from the Judson, TSS, Impulse, Webb Research and Filtronic acquisitions will be
deductible for tax purposes.
Cash used by financing activities for the first nine months of 2008 included net borrowings of
$145.0 million compared with net repayments of borrowings of $50.8 million for the first nine
months of 2007. The first nine months of 2008 and 2007 included $9.9 million and $2.4 million,
respectively, in excess tax benefits related to stock-based compensation. Proceeds from the
exercise stock options were $12.1 million and $5.0 million for the first nine months of 2008 and
2007, respectively.
Working capital was $259.6 million at September 28, 2008, compared with $213.7 million at December
30, 2007. The increase from December 30, 2007 reflects higher working capital requirements due to
increased sales and working capital from acquisitions.
Our principal capital requirements are to fund working capital needs, capital expenditures, pension
contributions and debt service requirements, as well as acquisitions. It is anticipated that
operating cash flow, together with available borrowings under the credit facility described below,
will be sufficient to meet these requirements over the next twelve months. To support
acquisitions, we may need to raise additional capital. We currently expect capital expenditures to
be approximately $45.0 million in 2008, of which $28.4 million has been spent in the first nine
months of 2008.
Our credit facility has lender commitments totaling $590.0 million and expires on July 14, 2011.
Excluding interest and fees, no payments are due under the credit facility until it matures. The
credit agreement requires the Company to comply with various financial and operating covenants,
including maintaining certain consolidated
24
leverage and interest coverage ratios, as well as minimum net worth levels and limits on acquired
debt. At September 28, 2008, the Company was in compliance with these covenants. Available
borrowing capacity under the $590.0 million credit facility, which is reduced by borrowings and
outstanding letters of credit, was $297.4 million at September 28, 2008.
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 entities or
unconsolidated entities.
Critical Accounting Policies
Our critical accounting policies are those that are reflective of significant judgments and
uncertainties, and may potentially result in materially different results under different
assumptions and conditions. Our critical accounting policies are the following: revenue
recognition; aircraft product liability reserve; accounting for pension plans; accounting for
business combinations, goodwill and other long-lived assets; and accounting for income taxes. For
additional discussion of the application of these and other accounting policies, see Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting
Policies and Note 2 of the Notes to Consolidated Financial Statements included in Teledyne
Technologies’ Annual Report on Form 10-K for the fiscal year ended December 30, 2007 (2007 Form
10-K).
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) No. 141R, “Business Combinations” (“SFAS No. 141R”). This statement
replaces FASB Statement No. 141, “Business Combinations”. SFAS No. 141R establishes principles and
requirements for how the acquirer of a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired
in the business combination and determines what information to disclose to enable users of the
financial statement to evaluate the nature and financial effects of the business combination. SFAS
No. 141R applies prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2008,
with an exception related to the accounting for valuation allowances on deferred taxes and acquired
tax contingencies related to acquisitions completed before the effective date. SFAS No. 141(R)
amends SFAS No. 109 to require adjustments to valuation allowances for acquired deferred tax assets
and income tax positions, made after the effective date of this statement, to be recognized as
income tax expense. Teledyne will adopt the provisions of SFAS No. 141R, effective December 29,
2008 and does not expect a material effect on the Company’s consolidated results of operations or
financial position for the acquisitions made prior to its adoption. For any acquisitions completed
after our 2008 fiscal year, we expect SFAS No. 141R will have an impact on our consolidated
financial statements, however the nature and magnitude of the specific effects will depend upon the
nature, terms and size of the acquisitions we consummate.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements—an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 changes the way the
consolidated income statement is presented and establishes a single method of accounting for
changes in a parent’s ownership interest in a subsidiary that does not result in deconsolidation.
It also requires that a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. This Statement will be effective for Teledyne’s 2009 fiscal year and interim
periods within that fiscal year. SFAS No. 160 will be applied prospectively as of the beginning of
the fiscal year 2009, except for the presentation and disclosure requirements. The presentation
and disclosure requirements must be applied retrospectively
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities – Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits
entities to choose to measure eligible items at fair value at specified election dates and report
unrealized gains and losses on items for which the fair value option has been elected in earnings
at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. The Company adopted SFAS No. 159 effective, December 31, 2007 and did not elect
the fair value measurement option for any of our financial assets or liabilities.
25
In June 2007, the FASB ratified EITF No. 07-3, (“EITF 07-3”), “Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development Activities”. EITF
07-3 requires non-refundable advance payments for goods and services to be used in future research
and development activities to be recorded as an asset and the payments to be expensed when the
research and development activities are performed. EITF 07-3 is effective for fiscal years
beginning after December 15, 2007. The Company adopted EITF 07-3 effective, December 31, 2007 and
it did not have an effect on the Company’s consolidated results of operations or financial
position.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair
value, establishes a framework in generally accepted accounting principles for measuring fair
value, and expands disclosures about fair value measurements. This standard only applies when
other standards require or permit the fair value measurement of assets and liabilities. It does
not increase the use of fair value measurement. SFAS No. 157 is effective for financial assets and
financial liabilities for fiscal years beginning after November 15, 2007. In February 2008, the
FASB issued FASB Staff Position 157-1 “Application of FASB Statement No. 157 to FASB Statement No.
13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13” (“FSP 157-1”) which removed leasing transactions
accounted for under SFAS No. 13 and related guidance from the scope of SFAS No. 157. Also in
February 2008, the FASB issued FSP 157-2 “Partial Deferral of the Effective Date of Statement No.
157” (“FSP 157-2”), deferred the effective date of SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities to fiscal years beginning after November 15, 2008. The implementation of
SFAS No. 157 for financial assets and financial liabilities, effective December 31, 2007, did not
have a material impact on our consolidated financial position and results of operations. The
Company is currently assessing the impact of SFAS No. 157 for nonfinancial assets and nonfinancial
liabilities on its consolidated financial position and results of operations.
Outlook
Based on its current outlook, the Company’s management believes that fourth quarter 2008 earnings
per share will be in the range of approximately $0.74 to $0.77. The full year 2008 earnings per
share outlook is expected to be in the range of approximately $3.24 to $3.27. The Company’s 2008
outlook reflects anticipated sales growth in its defense electronics and instrumentation
businesses, due to organic growth and acquisitions. The Company’s fourth quarter and full year
2008 earnings per diluted share outlook also reflects an anticipated increase in expenses,
including intangible asset amortization, as a result of these acquisitions. In addition, the
fourth quarter 2008 outlook reflects reduced demand for aerospace piston engines and parts, as well
as increased interest expense. The Company’s estimated effective tax rate for 2008 is expected to
be 39.0%, excluding research and development income tax refunds and the reversal of income tax
contingency reserves which were determined to be no longer needed due to the expiration of
applicable statutes of limitations.
The full year 2008 earnings outlook includes approximately $9.6 million in pension expense under
SFAS No. 87 and No. 158, or $0.1 million in net pension expense after recovery of allowable pension
costs from our CAS covered government contracts. Full year 2007 earnings included $11.9 million in
pension expense under SFAS No. 87 and No. 158, or $1.7 million in net pension expense after
recovery of allowable pension costs from our CAS covered government contracts. The decrease in
full year 2008 pension expense reflects the return on pension assets, as well as pension
contributions made in 2007.
The Company’s 2008 earnings outlook also reflects $7.8 million in stock option compensation
expense. The Company’s 2007 earnings included $6.8 million in stock option compensation expense.
Safe Harbor Cautionary Statement Regarding Outlook and Forward-Looking Information
From time to time we make, and this report contains forward looking statements, as defined in the
Private Securities Litigation Reform Act of 1995, relating to earnings, growth opportunities,
product sales, pension matters, stock option compensation expense, tax credits and strategic plans.
All statements made in this Management’s Discussion and Analysis of Financial Condition and
Results of Operations that are not historical in nature should be considered forward-looking.
Actual results could differ materially from these forward-looking statements. Many factors,
including changes in demand for products sold to the defense electronics, instrumentation and
energy exploration and production, commercial aviation, semiconductor and communications markets,
funding, continuation and award of government programs, continued liquidity of our customers
(including
26
commercial aviation customers), availability of credit to our customers and economic and political
conditions, could change the anticipated results. Increasing fuel costs could negatively affect
the markets of our commercial aviation businesses. In addition, financial market fluctuations
affect the value of our pension assets.
Global responses to terrorism and other perceived threats increase uncertainties associated with
forward-looking statements about our businesses. Various responses to terrorism and perceived
threats could realign government programs, and affect the composition, funding or timing of our
programs. Flight restrictions would negatively impact the market for general aviation aircraft
piston engines and components. Changes in the leadership of the U.S. Government could result, over
time, in reductions in defense spending and further changes in programs in which the company
participates.
We continue to take action to assure compliance with the internal controls, disclosure controls and
other requirements of the Sarbanes-Oxley Act of 2002. While we believe our control systems are
effective, there are inherent limitations in all control systems, and misstatements due to error or
fraud may occur and not be detected.
While our growth strategy includes possible acquisitions, we cannot provide any assurance as to
when, if or on what terms any acquisitions will be made. Acquisitions involve various inherent
risks, such as, among others, our ability to integrate acquired businesses and to achieve
identified financial and operating synergies. There are additional risks associated with
acquiring, owning and operating businesses outside of the United States, including those arising
from U.S. and foreign government policy changes or actions and exchange rate fluctuations.
Additional information concerning factors that could cause actual results to differ materially from
those projected in the forward-looking statements is contained in Teledyne Technologies’ periodic
filings with the Securities and Exchange Commission, including its 2007 Form 10-K and this Form
10-Q. We assume no duty to update forward-looking statements.
27
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes to the information provided under “Item 7A, Quantitative and
Qualitative Disclosure About Market Risk” included in our 2007 Annual Report on Form 10-K. At
September 28, 2008, Teledyne had one currency forward contract outstanding for a total notional
amount of $0.5 million and expires in equal amounts during the months of October through December
2008, which we consider immaterial. The contract was entered into in April 2008 and involves
British Pounds and US Dollars. There were no other hedging contracts outstanding at September 28,
2008.
Interest Rate Exposure
We are exposed to market risk through the interest rate on our borrowings under our amended and
restated credit facility. Borrowings under our credit facility are at variable rates which are at
our option tied to a eurodollar base rate equal to LIBOR (London Interbank Offered Rate) plus an
applicable rate or a base rate as defined in our credit agreement. 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. 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 debt to earnings before interest, taxes,
depreciation and amortization (EBITDA) ratio. As of September 28, 2008, we had $284.0 million in
outstanding indebtedness under our amended and restated credit facility. A 100 basis point
increase in interest rates would result in an increase in annual interest expense of approximately
$2.8 million, assuming the $284.0 million in debt was outstanding for the full year.
Item 4. Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information required to be
disclosed in reports that we file or submit, under the Securities Exchange Act of 1934, are
recorded, processed, summarized and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission and to provide reasonable assurance that
information required to be disclosed by us in such reports is accumulated and communicated to the
Company’s management, including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure. Our Chairman, President and
Chief Executive Officer and our Senior Vice President and Chief Financial Officer, with the
participation and assistance of other members of management, have reviewed the effectiveness of our
disclosure controls and procedures and have concluded that the disclosure controls and procedures,
as of September 28, 2008, are effective.
In connection with our evaluation during the quarterly period ended September 28, 2008, we have
made no change in our internal controls over financial reporting that have materially affected or
are reasonably likely to materially affect our internal controls over financial reporting. There
also were no significant deficiencies or material weaknesses identified for which corrective action
needed to be taken.
28
PART II OTHER INFORMATION
Item 1A. Risk Factors
Other than as set forth below, there are no material changes to the risk factors previously
disclosed in our 2007 Annual Report on Form 10-K in response to Item 1A to Part 1 of Form 10-K.
See also our “Outlook” discussion beginning at page 26 for some factors reflected in our 2008
earnings per share outlook.
Recent disruptions in the global economy, the financial markets, currency markets and energy
markets, as well as government responses to these disruptions, may adversely impact our business
and results of operations.
Recent distress in the financial markets has had an adverse impact on the availability of credit
and liquidity resources, although we do not believe that any lender commitments under our current
$590 million credit facility, which expires in July 2011, have been adversely affected. Continued
market deterioration, however, could jeopardize certain counterparty obligations, including those
of the insurers and financial institutions with which we do business. Some of our customers may
face issues gaining access to sufficient credit, which could result in an impairment of their
ability to make timely payments to us. Lack of availability of consumer credit and the general
economic downturn could adversely impact the market for general aviation aircraft, which would
result in lower sales of piston engines by us. As a result of recent fluctuations in currency
markets and the stronger dollar relative to many other major currencies, our products priced in
dollars may be more expensive relative to products of our foreign competitors, which could result
in lower sales. In addition, the non-dollar denominated earnings of our foreign operations may be
lower when reported by us in dollars. A slowdown in economic activity caused by a recession would
likely reduce worldwide demand for energy and result in lower oil and natural gas prices, which
could result in lower sales at our business units that supply the oil and gas industry. Government
responses to these market disruptions, including recently approved emergency economic stabilization
legislation, could result in reductions in spending for defense programs and other government
programs in which we participate.
Item 6. Exhibits
(a) Exhibits
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Exhibit 31.1 |
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302 Certification – Robert Mehrabian |
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Exhibit 31.2 |
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302 Certification – Dale A. Schnittjer |
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Exhibit 32.1 |
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906 Certification – Robert Mehrabian |
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Exhibit 32.2 |
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906 Certification – Dale A. Schnittjer |
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
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TELEDYNE TECHNOLOGIES INCORPORATED |
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DATE: October 31, 2008
|
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By: /s/ Dale A. Schnittjer
Dale A. Schnittjer, Senior Vice President and
|
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Chief Financial Officer |
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(Principal Financial Officer and Authorized Officer) |
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30
Teledyne Technologies Incorporated
Index to Exhibits
| |
|
|
| Exhibit Number |
|
Description |
|
|
|
Exhibit 31.1
|
|
302 Certification – Robert Mehrabian |
|
|
|
Exhibit 31.2
|
|
302 Certification – Dale A. Schnittjer |
|
|
|
Exhibit 32.1
|
|
906 Certification – Robert Mehrabian |
|
|
|
Exhibit 32.2
|
|
906 Certification – Dale A. Schnittjer |
31