Delaware 25-1843385
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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Title of each class Name of each exchange on which registered
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Common Stock, par value $.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
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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 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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
At February 23, 2001, the number of outstanding shares of Common Stock of the registrant was 31,647,053. At February 23, 2001, the aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant was approximately $439.2 million, based on the closing price of $14.30 per share as reported on the New York Stock Exchange on that date. Shares of Common Stock known by the registrant to be beneficially owned by directors and executive officers subject to Section 16 of the Securities Exchange Act of 1934 are not included in the computation. The registrant, however, has made no determination that such persons are "affiliates" within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934.
Selected portions of the registrant's proxy statement for its 2001 Annual
Meeting of Stockholders (the "2001 Proxy Statement") are incorporated
by reference in Part III of this Report. Information required by paragraphs
(a) and
(b) of Item 306 of Regulations S-K and by paragraphs (k) and (l) of Item 402
of Regulation S-K is not incorporated by reference in this Form 10-K or in any
other filing of the registrant. Such information shall not be deemed "soliciting
material" or to be filed with the Commission as permitted by paragraph
(c) of Item 306 and Instruction (9) to Item 402 of Regulation S-K.
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 20
Item 3. Legal Proceedings........................................... 21
Item 4. Submission of Matters to a Vote of Security Holders......... 21
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 22
Item 6. Selected Financial Data..................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 24
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 33
Item 8. Financial Statements and Supplementary Data................. 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 33
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 34
Item 11. Executive Compensation...................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 34
Item 13. Certain Relationships and Related Transactions.............. 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 34
INDEX TO FINANCIAL STATEMENTS AND RELATED INFORMATION................. F-1
SIGNATURES
EXHIBIT INDEX
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In this Annual Report on Form 10-K, Teledyne Technologies Incorporated is sometimes referred to as the "Company", "Teledyne Technologies" or "TDY". References to ATI mean Allegheny Technologies Incorporated, formerly known as Allegheny Teledyne Incorporated, the company from which we were spun-off on November 29, 1999.
ITEM 1. BUSINESS.
WHO WE ARE
Teledyne Technologies Incorporated is a leading provider of sophisticated electronic and communications products, including components and subsystems for wireless and satellite systems, and data acquisition and communications equipment for airlines and business aircraft. We also provide systems engineering solutions and information technology services for space, defense and industrial applications, and manufacture general aviation and missile engines and components, as well as on-site power generation systems.
We serve niche market segments where performance, precision and reliability are critical. Our customers include major communications and other commercial companies, government agencies, aerospace prime contractors and general aviation companies. We have developed strong core competencies in engineering, software development and manufacturing that we can leverage both to sustain and grow our current niche businesses, and to become an innovator in related higher-growth markets.
We plan to capitalize on our existing technology and experience to increase participation in commercial communications markets. For example, we are leveraging our experience in manufacturing fiber optic transmitters and receivers for aerospace customers to enable us to manufacture similar products for commercial customers in wireless and fiber optic communications markets.
Total sales in 2000 were $795.1 million, compared to $761.4 million and $733.0 million in 1999 and 1998, respectively. Our segment operating profits were $72.4 million, $87.6 million and $85.3 million in 2000, 1999 and 1998, respectively. Approximately 56% of our total sales in 2000 were to commercial customers and the balance was to the U.S. Government. Approximately 56% of these U.S. Government sales were attributable to fixed price-type contracts and the balance to cost plus fee-type contracts. International sales accounted for approximately 17% of total sales in 2000.
Our three business segments, their respective operating companies, and their contribution to our sales in 2000, 1999 and 1998 are summarized in the following table:
PERCENTAGE OF SALES
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SEGMENT OPERATING BUSINESSES 2000 1999 1998
------------------------------------ ------------------------------------- ---- ---- ----
Electronics and Communications Teledyne Electronic Technologies 45% 45% 47%
Systems Engineering Solutions Teledyne Brown Engineering, Inc. 30% 30% 30%
Aerospace Engines and Components Teledyne Continental Motors 25% 25% 23%
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In the fourth quarter of 2000, Teledyne Technologies completed the sale of its sand and investment castings businesses, which had been part of the Aerospace Engines and Components segment. Financial information in this report has been restated to reflect Teledyne Cast Parts as a discontinued operation.
Teledyne Technologies was organized as a Delaware corporation on August 23, 1999. Teledyne Technologies is comprised of certain businesses of the former Aerospace and Electronics segment of Allegheny Teledyne Incorporated, now known as Allegheny Technologies Incorporated. On November 29, 1999, we were spun-off from ATI after a strategic review concluded that our businesses would be able to grow faster and be a stronger competitor as a separate company. Our origin dates back to Teledyne, Inc. founded in 1960 by Dr. Henry Singleton.
Our principal executive offices are located at 2049 Century Park East, Suite 1500, Los Angeles, California 90067-3101. Our telephone number is (310) 277-3311.
STRATEGY
Our strategy is to focus on markets for communication products, while we continue to expand our profitable niche market businesses. We plan to continually evaluate our product lines to ensure that they are aligned with our strategy. These actions will help us to redirect capital and management focus to opportunities that will best utilize our engineering resources and technical expertise. Specific elements of our strategy include:
Capitalize on Our Existing Technology and Experience to Penetrate Communications Markets. We believe that certain broadband communications markets, especially wireless and satellite communications equipment and fiber optic communications components, offer a number of attractive opportunities to leverage our current technologies and capabilities. Our experience in manufacturing fiber optic modules for aerospace applications and high frequency microwave products places us in a strong position to manufacture similar components for the commercial communications market. We have formed the Teledyne OptoElectronics business unit to pursue these opportunities. We have also increased our focus on wireless and satellite communication applications and are expanding our product lines with new power amplifiers, integrated microwave modules and high frequency relays.
Enhance High Volume Manufacturing Capability. We intend to increase our automated manufacturing capability to both lower the manufacturing cost of our existing products and enable us to meet the high volume needs of commercial customers in the expanding communications markets. For example, we have been adding state-of-the-art-automated equipment for high volume manufacturing of components for fiber optic systems at our microelectronics facility. We have expanded our foreign manufacturing operations in Mexico and may expand further our foreign manufacturing operations in Mexico and Scotland, when appropriate, in order to lower our costs or to access an available workforce. In addition, we now offer manufacturing services to fiber optic component and equipment OEMs who need high volume manufacturing of their own products either because of capacity constraints or lack of manufacturing and design expertise.
Expand Strategic Alliances. We intend to establish relationships with companies where our combined technological, operational, marketing and financial resources can accelerate the introduction of new technologies and the penetration of new markets. Examples of alliances include a strategic license agreement with Humboldt State University to produce fuel cell systems based on proton membrane technology developed at the University, a joint venture that is developing alternative technologies to incineration for the destruction of chemical weapons, an alliance with Pratt and Whitney to pursue marketing programs to lead to the development of new applications for small turbine engines, and an alliance with Microcosm Technologies for the manufacturing of Microelectromechanical Systems (MEMS).
Leverage Niche Market Leadership. We have developed strong, proprietary technical capabilities that have enabled us to achieve leading market positions in many of our niche markets, including those for high frequency electromechanical relays, high frequency microwave power amplifiers, data acquisition avionics, piston engines for general aviation, small turbine engines and medical microelectronics. We intend to leverage our leadership position in several niche markets to accelerate the introduction of new products and to increase our value-added service offerings. For example, we are extending our position in data acquisition avionics by introducing new data acquisition products specifically designed for the business and commuter aircraft market.
OUR BUSINESS SEGMENTS
Our Electronics and Communications segment, through Teledyne Electronic Technologies, provides a wide range of electronic systems, components and services that are focused primarily on advanced communications and data acquisition applications, but also encompass precision electronic components and subsystems that are used in medical, commercial, military and industrial instrumentation applications.
Our innovative communications technologies include data acquisition and communication systems for commercial aviation, microwave power amplifiers for wireless and satellite systems, lightweight microwave filters and high-frequency relays. We are seeking to leverage our experience building sophisticated fiber optic transmitters and receivers for military and space applications to support the growing market for commercial fiber optic communication products.
We have enhanced our leading position in air-to-ground telephony for business aircraft with new data transmission capabilities and are extending our airline data management technology by developing a system that automates the transfer of information from aircraft to the airline via the Internet.
Data Acquisition and Communication Products. Our aircraft information management solutions are designed to increase the safety and efficiency of airline transportation. With over 200 commercial airline customers, we are a leading supplier of digital flight data acquisition systems for the commercial airline industry. We have provided these systems for our airline customers for over one-half of Boeing aircraft currently in production. We also provide our systems to certain aircraft customers of Airbus Industries' partner, Daimler-Chrysler Aerospace-Airbus. These systems acquire both data for use by the aircraft's flight data recorder, and record additional data for the airline's use, such as performance and engine condition monitoring.
Our newest digital flight data acquisition units have some of the most advanced features in the industry. These systems conform to the required expansion of data recording capabilities, which were mandated by the FAA in 1997. At that time, the FAA increased the number of mandatory parameters to be monitored from the 17 then required to 88 by the year 2002.
Our new Wireless Ground Link product automates the transfer of in-flight data recorded by our data acquisition systems to an airline's operations center. Transmission of the data can occur anytime an aircraft is on the ground utilizing existing digital wireless infrastructure. The raw data is then forwarded to the airline through the Internet, where our Flight Data Replay and Analysis System can process them into useful formats. Such data can then be used by the airline to schedule maintenance services and implement safety procedures.
The market for data acquisition systems aboard business and commuter aircraft is growing rapidly as these aircraft have begun to mirror air transport aircraft in data gathering and aircraft monitoring. We are one of the largest suppliers of air-to-ground telephony, facsimile and data transmission products to the business and commuter aircraft market.
Wireless and Satellite Communication Components. Our communication components and subsystems are used in satellite earth terminals, communication satellites, and base stations for Personal Communication Services (PCS) and wireless loops.
We supply power amplifiers used in the L, C and Ku band satellite uplink transmitters. These products encompass both solid state monolithic microwave integrated circuits (MMICs) and high power helix traveling wave tubes. Applications include Very Small Aperture Terminals (VSATs) used for credit card verification, corporate networking and mobile news gathering.
A new and rapidly growing application for our MMIC transmitters is in the terminals for satellite-based Internet access systems that will be sold to consumers and businesses. Another new MMIC application is for broadband point-to-multipoint systems, operating in the Unlicensed National Information Infrastructure band, which are being deployed to provide wireless Internet access.
Our Teledyne Relays miniature electromechanical relays are used where maintenance of signal fidelity is essential. Wireless applications include cellular base stations and tower mounted amplifiers, and our relays are used in many satellites. Other communications applications include Internet switches and routers, and fiber optic systems.
Fiber Optic Communication Components. We have manufactured fiber optic transmitters and receivers for aerospace applications for over 10 years. In late 1999, Harris Corporation awarded us the contract to manufacture rugged fiber optic transmitters and receivers for the new F-22 fighter program. Approximately 50 transmit and receive modules are used on each aircraft to route data to and from avionics equipment and the aircraft's central processor. Our fiber optic transmitter and receiver modules are also used for video distribution on the International Space Station.
While these devices typically have sophisticated designs, the production volumes for aerospace applications are much lower than those required for commercial communications products. We have, therefore, been expanding our manufacturing capacity for fiber optic communication products by dedicating additional clean room facilities to optical component manufacturing and are continuing to add automatic and semiautomatic assembly equipment to the production line.
Our newly formed Teledyne OptoElectronics business unit offers innovative one-stop packaging solutions for high data rate, broadband fiber optic applications. Our services include high-volume turnkey manufacturing of optoelectronic components such as laser transmitters and receivers, as well as production of subassemblies such as connectorized fibers and thick/thin film substrates. We have recently added new precision alignment and laser weld equipment, and also automatic test equipment suitable for data rates of over 10 gigabits per second. We have increased our staff of skilled engineers to assist our customers with tooling and automation for high rate production, and are applying our experience with high-speed electronics to support our customers' next-generation designs.
Electronic Manufacturing Services. We serve the market for low volume, high mix manufacturing through facilities in Tennessee, Mexico and Scotland. Examples of the types of products that we manufacture include sophisticated military electronics equipment, key subsystems in medical equipment such as Magnetic Resonance Imaging (MRI) systems, and subsystems for wireless and high data rate communication equipment.
We also supply patented rigid-flex printed circuit boards that combine rigid circuit boards and flexible printed circuits in a single continuous unit, reducing the size of electronic equipment by permitting tighter packaging density and improving reliability by minimizing interconnections. We have added quick-turn manufacturing capability to provide our customers with prototypes in much less time than previously required.
Instruments and Capital Equipment. We produce gas analyzers and vacuum instrumentation for semiconductor manufacturing and other industrial processes. We have expanded our line of capital equipment for printed circuit board manufacturing with an innovative horizontal copper plating system designed to plate panels in less time than conventional systems.
Defense and Aerospace Electronics. We are a leading supplier of high power traveling wave tubes for electronic warfare systems, radar systems, and military satellite communications systems for both domestic and international applications. Our hybrid microcircuits are used in applications such as military (including F-18 and F-22 aircraft and the M1A2 tank), aerospace, medical and instrumentation systems. We also manufacture military and space-qualified relays, electronic sequencing devices for military ejection seats, and runway visual range detectors used in airport operations.
Medical Electronics. We have applied our micro-chip modules (MCM) technology to the manufacture of life sustaining and life enhancing implantable medical devices, including cardiac pacemakers and defibrillators, neural stimulators and cochlear implant hearing aids. Newer products include biological signal sensors and ambulatory digital recorders for the diagnosis and monitoring of epilepsy and sleep disorders.
High-Density Connectors. We supply custom, low profile, surface mount
connectors for applications in computer disk drives and consumer medical
electronic devices, and are targeting their use in high-volume applications such
as personal computers and workstations.
SYSTEMS ENGINEERING SOLUTIONS
Teledyne Brown Engineering, Inc. applies the skills of its extensive staff of engineers and scientists to solve the increasingly complex problems of our governmental defense, aerospace and commercial customers. We also manufacture small electrical power generators and hydrogen supply systems to support the emerging market for distributed electrical power.
We provide a broad range of highly sophisticated engineering solutions and services to U.S. space programs. As the payload integration contractor for NASA's Marshall Space Flight Center, we have had major responsibilities in the numerous scientific missions of the Space Shuttle. This work has ranged from experiment planning, through designing and fabricating interface hardware, to manning the mission control center during flight operations.
The centerpiece of our current space activities is the International Space Station. We are involved in both space-borne and ground-support hardware development and we participate in mission planning and operations.
For over 45 years, we have played a key role in the development of U.S. defense systems. In ballistic missile defense programs, we have provided solutions in systems engineering, integration, and testing; real-time distributed testing and training; radar and optical systems design; command center development; and intelligence studies and threat analysis. We provide battle simulation software as part of our role for the U.S. Ballistic Missile Defense Organization's National Missile Defense program.
We also provide an array of engineering solutions related to combat systems technologies, including research and development test support, operational test and evaluation, systems survivability analysis, and body armor development.
Our software products, most of which are certified to ISO 9001, are used for highly diverse applications, such as high-fidelity simulations, multi-media training, Internet website development, distributed real-time testing, and command and control centers.
We have developed hundreds of simulation programs, including the Extended Air Defense Simulation, which is used by friendly governments worldwide and was combat-proven during Operation Desert Storm and more recent operations. We have recently upgraded the U.S. Army's land-combat model to include amphibious and tactical air operations.
We are recognized as a leader in the development of real-time, vehicle- and weapons-integrated simulations for systems testing and training. Our Systems Exerciser is a simulation tool used to verify the inter-operational compatibility of geographically separated, complex defense systems. The Systems Exerciser "drives" actual weapons systems with a simulated environment including threats, weather, and terrain, creating a robust virtual world in which real systems can operate and interact.
We have been continuously involved in weapons signature management development efforts since 1989, with over 47 successful programs, of which 37 were sole source contracts. We are particularly well known for systems that limit the detection of soldiers on the battlefield by radar or infrared sensors, as to which we hold several issued and pending patents. The Optical Signatures Code, which we developed and maintain, is the recognized standard in missile defense. We also developed the world's largest on-line database for optical signatures.
In 2000, we formed the Embedded Learning Applications Solutions business unit to leverage our information technology and professional services experience to expand further into commercial markets. Through this unit, we expect to provide e-learning and other knowledge based applications in areas such as product training, maintenance and customer support initially to the finance, automotive and health-care industries.
We utilize our systems engineering solutions to assist the U.S. Government in complying with terms of the Chemical Weapons Convention Treaty. This Treaty requires the United States to destroy all chemical weapons and material by 2007. As a 50% participant in a joint venture, we are developing alternative technologies to incineration for the destruction of stockpile chemical munitions. As the prime contractor for the U.S. Army's Non-Stockpile Chemical Materiel Demilitarization program, we are designing, fabricating, integrating, and testing equipment to safely destroy small caches of chemical munitions and materiel located in over 30 states.
We also support the United States government's efforts to clean up nuclear weapon production complexes, and to safely store nuclear waste. A key need, both for temporary and permanent storage of these nuclear wastes, is the availability of a reliable containment method, or canisters for waste containment. We have targeted our efforts within this market on the production of containers and equipment to support the nation's efforts to clean up hazardous waste. In 2000, the Air Force selected us to establish and operate a highly specified analysis laboratory for performing nuclear forensic analysis of gas samples.
We currently provide on-site electrical power generators and services to the U.S. Government and several commercial customers. Current products include our 2.5kW Minotaur(TM) engine-generator system, which is powered by natural gas and designed for long-term, continuous, low-maintenance prime power generation and the Telan(R) thermoelectric generator series for prime power generation in the range of three to 500 watts. Product development efforts are also focused on designing fuel cells in the 10-watt to 5.0kW range. In 2000, we entered into a strategic license agreement with Humboldt State University to use this technology to produce fuel cell systems based on proton exchange membrane technology developed at the University.
We also manufacture and sell a broad line of hydrogen generation systems. Using electrolysis of water, our current line of generators meet a wide range of customer needs for on-site production of high-purity gas. Products include Altus(R) and Titan(TM) gas generation systems used for high purity hydrogen and oxygen supply in the range of 2,000 standard liters per minute. Our product development efforts in hydrogen generation are also focused on proton membrane technology systems which convert hydrocarbon fuels, such as natural gas, propane or methanol, into a hydrogen-rich stream for direct use in fuel cells.
Our Aerospace Engines and Components segment, through Teledyne Continental Motors, focuses on the design, development and manufacture of piston engines, turbine engines, electronic engine controls and batteries.
We design, develop and manufacture piston engines and ignition systems for major general aviation airframe manufacturers and provide spare parts and engine rebuilding services. We are one of two primary worldwide original equipment producers of piston engines and after-market service providers for the general aviation marketplace.
Our product lines include engines powering the Raytheon Beech Bonanza and Baron aircraft, the Mooney Aircraft line of advanced single engine aircraft, and the popular New Piper Seneca V twin-engine aircraft. In addition to these long-standing products, our engines will power four new high-speed composite aircraft currently entering production. These are the Cirrus SR-20, Lancair Columbia, Diamond Katana C1, and the Extra 400.
In addition to the sales of new aircraft engines to aircraft producers, we also actively support the aircraft engine aftermarket. Piston aircraft engines are produced with a finite utilization life generally expressed as time between overhaul. Our after-market support includes the building and rebuilding of nearly 3,000 of these units annually with our Gold Medallion(R)Rebuilt Engine. We provide a full complement of spare parts such as cylinders, crankcases, fuel systems, crankshafts, camshafts and ignition products. In addition, our Gill(R) line of lead acid batteries is widely recognized as the premier power source for general aviation.
We have developed the first full authority digital electronic controls for piston aircraft engines. These controls, known as PowerLink(TM) FADEC (Full Authority Digital Electronic Control), are designed to automate many functions that currently require manual control, such as fuel flow and power management. This system also saves fuel as a result of improved engine management. After a series of additional endurance tests on our Power-Link(TM) FADEC, on December 1, 2000, the FAA awarded a new type certificate for our four-cylinder Continental 10F240-B engine. We are also continuing the development of other FADEC-equipped engines targeted at the most popular models of four and six cylinder piston aircraft engines in use through the world. We believe that these control systems will become standard equipment on new aircraft and will be retrofitted on higher-end, piston engine general aviation aircraft.
Through Teledyne Mattituck Services, Inc., located in Long Island, New York, we serve as an aftermarket supplier and piston engine overhauler to the general aviation marketplace. We continue to believe that these service capabilities will leverage our investments in manufacturing excellence and the development of digital electronic controls for piston aircraft engines.
We design, develop and manufacture small turbine engines for missiles and unmanned aerial vehicles. We also produce engines that power military trainer aircraft.
Our J402 engine powers the HARPOON missile system. Derivatives of this engine power the Standoff Land Attack Missile and the Standoff Land Attack Missile Expanded Response. A derivative of the J402 engine has been selected by Lockheed Martin Corporation to power the Joint Air-to-Surface Standoff Missile (JASSM) that is scheduled to start production in 2002. We are the sole source provider for engines for the JASSM system. The JASSM production requirement is currently estimated at 3,700 units.
Another of our engines provides the turbine power for the Improved Tactical Air Launched Decoy being built for the U.S. Navy. This system enhances combat aircraft survivability by both serving as a decoy and identifying enemy radar sources. This low-cost turbine engine is the first of a family of lower-thrust engines to enter production.
We are the sole source for major spare parts for the engine for the T-37 aircraft, the primary jet trainer for the U.S. Air Force. This engine has been in service for over 40 years and will continue to power the T-37 well into this decade.
In 2000, we signed a Memorandum of Agreement with Pratt & Whitney's Small Military Engines unit to pursue teaming in areas of development, manufacturing, and technical product support of small military engine products and services. This product line would include Unmanned Air Vehicle engines producing up to 16,000 pounds of thrust, which would be provided to the U.S. Government.
CUSTOMERS
We have hundreds of customers in the communications, electronics, aerospace and defense industries. No commercial customer accounted for more than 10% of our total sales during 2000, 1999 or 1998.
Approximately 44%, 44% and 40% of our total sales for 2000, 1999 and 1998 were derived from contracts with agencies of, and prime contractors to, the U.S. Government. Our principal U.S. Government customer is the U.S. Department of Defense. In 2000, our largest program with the U.S. Government, The Boeing Company -- Lead Systems Integrator contract, represented 6.6% of total sales. In both 1999 and 1998, our largest program with the U.S. Government was the Systems Engineering and Technical Assistance contract with the Space and Missiles Defense Command, which represented 6.2% and 7.7%, respectively, of total sales. Set forth below are sales by our segments to agencies and prime contractors to the U.S. Government for the periods presented:
2000 1999 1998
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(IN MILLIONS)
Electronics and Communications........................... $ 97.5 $101.1 $102.4
Systems Engineering Solutions............................ 198.4 185.4 159.2
Aerospace Engines and Components......................... 51.4 47.5 33.3
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Total.......................................... $347.3 $334.0 $294.9
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Our backlog of confirmed orders was approximately $339.2 million at December 31, 2000, $348.0 million at January 2, 2000 and $363.7 million at January 3, 1999.
SALES AND MARKETING
Our sales and marketing approach varies by segment and by products within our segments. A shared fundamental tenet is the commitment to work closely with our customers to understand their needs, with an aim to secure preferred supplier and longer-term relationships.
Our business segments use a combination of internal sales forces, distributors and commissioned sales representatives to market and sell our products and services. Products are also advertised in appropriate trade journals and by means of various Internet web sites. To promote our products and other capabilities, our personnel regularly participate in relevant trade shows and professional associations. Many of our government contracts are awarded after a competitive bidding process in which we seek to emphasize our ability to provide superior products and technical solutions in addition to competitive pricing.
COMPETITION
We believe that technological capabilities and innovation and the ability to invest in the development of a new and enhanced products are critical to obtaining and maintaining leadership in our markets and the industries in which we compete generally. Although we have certain advantages that we believe help us compete in our markets effectively, each of our markets is highly competitive. Our businesses vigorously compete on the basis of quality, product performance and reliability, technical expertise, price and service. Many of our competitors have, and potential competitors could have, greater name recognition, a larger installed base of products, more extensive engineering, manufacturing, marketing and distribution capabilities and greater financial, technological and personnel resources than we do.
RESEARCH AND DEVELOPMENT
Our research and development efforts primarily involve engineering and design relating to improving product lines and developing new products and technologies in the same or related fields. We spent a total of $247.4 million, $215.9 million and $175.0 million on research and development for 2000, 1999 and 1998, respectively. Customer-funded research and development, most of which was attributable to work under contracts with the U.S. Government, represented approximately 87%, 87% and 86% of total research and development costs for 2000, 1999 and 1998, respectively.
In 2000, approximately 60% of the $31.7 million in Company-funded research and development costs were incurred in our electronics and communications businesses. We expect the level of Company-funded research and development to be approximately $43 million in 2001 as we continue to increase our manufacturing capabilities and product development efforts in the fiber optic and wireless communications businesses.
INTELLECTUAL PROPERTY
While we own and control various intellectual property rights, including patents, trade secrets, confidential information, trademarks, trade names, and copyrights, which, in the aggregate, are of material importance to our business, our management believes that our business as a whole is not materially depending upon any one intellectual property or related group of such properties. We own several hundred active patents and are licensed to use certain patents, technology and other intellectual property rights owned and controlled by others. Similarly, other companies are licensed to use certain patents, technology and other intellectual property rights owned and controlled by us.
Patents, patent applications and license agreements will expire or terminate over time by operation of law, in accordance with their terms or otherwise. We do not expect the expiration or termination of these patents, patent applications and license agreements to have a material adverse effect on our business, results of operations or financial condition.
In connection with the spin-off, an affiliate of ATI granted us an exclusive license to use the "Teledyne" name and related logos, symbols and marks in connection with our operations. The annual fee is $100,000 for this license and on November 24, 2004, we have an option to purchase all rights and interests in the Teledyne marks for $412,000.
EMPLOYEES
Out of a total workforce of approximately 5,840, about 1,400 individuals have engineering, physics, mathematics or computer science degrees. The International Union of United Automobile, Aerospace and Agricultural Implement Workers of America represents approximately 73 of our employees under a collective bargaining agreement that expires on November 24, 2001 and another approximately 374 of our employees under a collective bargaining agreement that expires on December 16, 2003. We consider our relations with our employees to be good.
EXECUTIVE MANAGEMENT
TDY's executive management include:
NAME AND TITLE AGE PRINCIPAL OCCUPATIONS LAST 5 YEARS
-------------- --- ----------------------------------
EXECUTIVE OFFICERS*:
Robert Mehrabian................ 59 Dr. Mehrabian is the Chairman, President and Chief
Chairman, President and Chief Executive Officer of TDY. He has been the President
Executive Officer; Director and Chief Executive Officer of TDY since its
formation. Dr. Mehrabian became Chairman of the
Board of Directors on December 14, 2000. Prior to
the spin-off, he was the President and Chief
Executive Officer of ATI's Aerospace and
Electronics segment since July 1999 and had served
ATI at various senior executive capacities since
July 1997. Before joining ATI, Dr. Mehrabian served
as President of Carnegie Mellon University. He is a
director of TDY, Mellon Financial Corporation and
PPG Industries, Inc.
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NAME AND TITLE AGE PRINCIPAL OCCUPATIONS LAST 5 YEARS
-------------- --- ----------------------------------
Robert J. Naglieri.............. 52 Mr. Naglieri has been Senior Vice President and
Senior Vice President and Chief Financial Officer of TDY since October 3,
Chief Financial Officer 2000. Prior to joining TDY, Mr. Naglieri served as
divisional Chief Financial Officer for the
agricultural business for CNH Global NV, the
company formed by the merger of Case Corporation
and New Holland, NV. Prior to that merger, he was
the Controller for Case Corporation from 1994 until
1999.
John T. Kuelbs.................. 58 Mr. Kuelbs has been the Senior Vice President,
Senior Vice President, General General Counsel and Secretary of TDY since November
Counsel and Secretary 29, 1999, having joined ATI's Aerospace and
Electronics segment in October 1999. Mr. Kuelbs was
Senior Vice President -- Acquisition Policy for
Raytheon Company from November 1998 to September
1999 and Senior Vice President -- Legal of Raytheon
Systems Company from January 1998 to November 1998.
Before Raytheon's acquisition of Hughes Aircraft
Company, Mr. Kuelbs spent 17 years at Hughes
Aircraft Company where he served as Senior Vice
President, General Counsel and Secretary from 1994
to 1998.
Dale A. Schnittjer.............. 56 Mr. Schnittjer has been the Controller of TDY since
Controller November 29, 1999. Mr. Schnittjer also served as
Acting Chief Financial Officer and Treasurer of TDY
from June 1, 2000 to October 3, 2000. From 1998 to
the spin-off, Mr. Schnittjer served as a financial
executive to the Aerospace and Electronics and
Industrial Segments of ATI. Prior to that, he was
Vice President -- Finance of Teledyne Wah Chang
from 1997 to 1998 and Vice President -- Finance of
Teledyne Specialty Equipment from 1995 to 1997. Mr.
Schnittjer has held various financial positions
with several of Teledyne's aerospace and
electronics companies since 1971.
SEGMENT MANAGEMENT:
Marvin H. Fink.................. 64 Mr. Fink has been the President of Teledyne
President, Teledyne Electronic Electronic Technologies since 1993. Mr. Fink has
Technologies held various management positions with several of
Teledyne's aerospace and electronic companies for
over 38 years.
Richard A. Holloway............. 58 Mr. Holloway has been the President of Teledyne
President, Teledyne Brown Brown Engineering since February 1998. Prior
Engineering, Inc. thereto, since 1986, he was Senior Vice President,
Government Division of SCI Systems, Inc., a
provider of manufacturing and design services to
commercial companies, the U.S. military and foreign
governments. Mr. Holloway spent 23 years in various
managerial capacities with The Boeing Company prior
to joining SCI Systems, Inc.
Bryan L. Lewis.................. 51 Mr. Lewis has been the President of Teledyne
President, Teledyne Continental Motors since 1992. From 1990 to 1992,
Continental Motors he was President of the turbine engine operations
of Teledyne, Inc. Mr. Lewis has held various
technical and general management positions during
his 20 years with Teledyne Technologies and its
predecessors.
OTHER OFFICERS:
Robert W. Steenberge............ 53 Mr. Steenberge has been TDY's Chief Technology
Chief Technology Officer Officer since March 2000. Prior to that, he had
been Vice President of Advanced Development at
Teledyne Electronic Technologies since 1991. Since
joining Teledyne in 1976, Mr. Steenberge has held
various management positions with several of its
aerospace and electronics companies.
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NAME AND TITLE AGE PRINCIPAL OCCUPATIONS LAST 5 YEARS
-------------- --- ----------------------------------
Melanie S. Cibik................ 41 Miss Cibik has been a Vice President of the Company
Vice President, Associate since December 2000, Associate General Counsel
General Counsel and Assistant since the spin-off, and an Assistant Secretary
Secretary since October 1999. From April 1998 to the
spin-off, Miss Cibik was Counsel -- Corporate and
Securities at ATI. Prior to joining ATI, she was
Senior Counsel at PNC Bank Corp., now known as The
PNC Financial Services Group, Inc., and had
previously been associated with Kirkpatrick &
Lockhart LLP.
Robyn E. Choi................... 36 Ms. Choi has been Vice President of Administration
Vice President of of the Company since December 2000, and served as
Administration and Assistant Director of Administration and an Assistant
Secretary Secretary since the spin-off. Prior to joining
ATI's Aerospace and Electronics segment in August
1999, she was Director of the President's Office
and Secretary of the Corporation at Carnegie Mellon
University.
Shelley D. Green................ 42 Ms. Green has been the Treasurer of TDY since
Treasurer October 2000, and served as Assistant Treasurer
since the spin-off. Prior to joining ATI's
Aerospace and Electronics segment in October 1999,
she spent 16 years at Occidental Petroleum
Corporation serving its treasury operations and
debt administration, having last served as
Assistant Treasurer-Financial Operations.
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* Such officers are subject to the reporting and other requirements of Section
16 of the Securities Exchange Act of 1934, as amended.
Dr. Mehrabian has an Employment Agreement with Teledyne Technologies, which provides that we will employ him as the President and Chief Executive Officer. The agreement terminates on December 31, 2001, but will be extended annually unless either party gives the other written notice prior to October 31 of each year of such term that it will not be extended. Dr. Mehrabian has a base salary of $565,000 for 2001. The agreement provides that Dr. Mehrabian is entitled to participate in TDY's annual incentive bonus plan and other executive compensation and benefit programs. The agreement provides Dr. Mehrabian with a non-qualified pension arrangement, under which Teledyne Technologies will pay him following his retirement, as payments supplemental to any accrued pension under our qualified pension plan, an amount equal to 50% of his base compensation as in effect at retirement. The number of years for which such annual amount shall be paid will be equal to the number of years of his service to TDY (including service to ATI), but not more than 10 years.
Each of the above-listed executive officers and segment presidents and seven other current members of management have entered into Change in Control Severance Agreements with Teledyne Technologies. The agreements have a three-year, automatically renewing term. Under the agreements, the executive is entitled to severance benefits if (1) there is a change in control of TDY and (2) within three months before or 24 months after the change in control, either we terminate the executive's employment for reasons other than for cause or the executive terminates the employment for good reason. "Severance benefits" consist of:
- A cash payment equal to three times (in the case of Messrs. Mehrabian, Naglieri and Kuelbs and three other executives) or two times (in the case of Mr. Schnittjer and seven other executives) the sum of (i) the executive's highest annual base salary within the year preceding the change in control and (ii) the Annual Incentive Plan ("AIP") bonus target for the year in which the change in control occurs or the year immediately preceding the change in control, whichever is higher.
- A cash payment for the current Annual Incentive Plan bonus based on the fraction of the year worked times the Annual Incentive Plan target objectives at 120% (with payment of the prior year bonus if not yet paid).
- Payment in cash for unpaid Performance Share Plan awards, assuming applicable goals are met at 120% of performance.
- Continued equivalent health and welfare (e.g., medical, dental, vision, life insurance and disability) benefits at our expense for a period of 36 months after termination (with the executive bearing any portion of the cost the executive bore prior to the change in control); provided, however, such benefits would be discontinued to the extent the executive receives similar benefits from a subsequent employer.
- Immediate vesting of all stock options, with options being exercisable for the full remaining term.
- Removal of restrictions on restricted stock issued by us under any Stock Acquisition and Retention Program or any replacement plans (i.e. the Restricted Stock Award Program).
- Full vesting under our pension plans (within legal parameters).
- Up to $25,000 reimbursement for actual professional outplacement services.
RISK FACTORS; CAUTIONARY STATEMENT AS TO FORWARD-LOOKING STATEMENTS
The following text highlights various risks and uncertainties associated with Teledyne Technologies. These factors could materially affect "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) that we may from time to time make, including forward-looking statements contained in "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K and in TDY's 2000 Annual Report to Stockholders.
WE MAY BE UNSUCCESSFUL IN OUR EFFORTS TO INCREASE OUR PARTICIPATION IN COMMERCIAL COMMUNICATIONS MARKETS.
We plan to use our existing technology and manufacturing capabilities to increase our participation in commercial communications markets. We may be unable to execute this strategy successfully. For example, we are investing in equipment and otherwise expanding our electronic component manufacturing capacity to enable us to offer fiber optic component manufacturing services to telecommunications customers. We have limited experience with manufacturing these types of components, and have no experience manufacturing these types of components at the high production rates potential customers are likely to demand.
In addition, commercial telecommunications customers require manufacturers to meet stringent quality and production standards over a significant period of time. We may be unable to meet the required standards or otherwise gain acceptance as a qualified manufacturer of these or other communications components.
Further, we may be unable to obtain certain components in a timely manner to meet our customer delivery requirements. Recent shortages of subcomponent assemblies in optoelectronics have affected our ability to meet delivery needs of some customers. Alternative sources might be available, but would not necessarily prevent further delays since use of alternative suppliers would trigger recertification requirements because of customer specifications.
We may also be unable to manufacture these or other communications components profitably. In the future, we may face increasing competition for providing these manufacturing services from lower cost providers. In addition, customers for these services are seeking to build or acquire internal manufacturing capacity for communications components, and could in the future determine not to outsource the manufacture of these components.
Future developments such as any of the above factors could have a material adverse effect on our business, results of operations or financial condition.
OUR DEPENDENCE ON REVENUE FROM GOVERNMENT CONTRACTS SUBJECTS US TO THE RISK THAT WE MAY NOT BE SUCCESSFUL IN BIDDING FOR FUTURE CONTRACTS AND THAT GOVERNMENT FUNDING FOR THESE CONTRACTS MAY BE DELAYED OR CONTINUE TO DECREASE.
We perform work on a number of contracts with the Department of Defense and other agencies and departments of the U.S. Government. Sales under contracts with the U.S. Government as a whole, including sales under contracts with the Department of Defense, as prime or subcontractor, represented approximately 44% of our total revenue for 2000. Performance under government contracts has certain inherent risks that could have a material effect on our business, results of operations and financial condition.
Government contracts are conditioned upon the continuing availability of Congressional appropriations. Congress typically appropriates funds for a given program on a fiscal-year basis even though contract performance may take more than one year. As a result, at the beginning of a major program, a contract is typically only partially funded, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years.
The overall U.S. military budget declined in real dollars from the mid-1980's through the early 1990's. Although U.S. military budgets have stabilized during the last several years, future levels of defense spending cannot be predicted. Delays or further declines in U.S. military expenditures could adversely affect our business, results of operations and financial condition, depending upon the programs affected, the timing and size of the changes and our ability to offset the impact with new business or cost reductions.
Most of our U.S. Government contracts are subject to termination by the U.S. Government either at its convenience or upon the default of the contractor. Termination-for-convenience provisions provide only for the recovery of costs incurred or committed, settlement expenses, and profit on work completed prior to termination. Termination-for-default imposes liability on the contractor for excess costs incurred by the U.S. Government in reprocuring undelivered items from another source.
We obtain many U.S. Government prime and subcontracts through the process of competitive bidding. We may not be successful in having our bids accepted. In addition, contracts may not be profitable.
A number of our U.S. Government prime and subcontracts are fixed price-type contracts (56% in 2000). Under these types of contracts, we bear the inherent risk that actual performance cost may exceed the fixed contract price. This is particularly true where the contract was awarded and the price finalized in advance of final completion of design. We believe that the U.S. Government is increasingly requesting proposals for fixed price-type contracts.
We, like other government contractors, are subject to various audits, reviews and investigations (including private party "whistleblower" lawsuits) relating to our compliance with federal and state laws. In addition, we have a compliance program designed to surface issues that may lead to voluntary disclosures to the U.S. Government. Generally, claims arising out of these U.S. Government inquiries and voluntary disclosures can be resolved without resorting to litigation. However, should the business unit or division involved be charged with wrongdoing, or should the U.S. Government determine that the unit or division is not a "presently responsible contractor," that unit or division, and conceivably our company as a whole, could be temporarily suspended or, in the event of a conviction, could be debarred for up to three years from receiving new government contracts or government-approved subcontracts. In addition, we could expend substantial amounts in defending against such charges and in damages, fines and penalties if such charges are proven or result in negotiated settlements.
WE MAY BE UNABLE TO SUCCESSFULLY INTRODUCE NEW AND ENHANCED PRODUCTS IN A TIMELY AND COST-EFFECTIVE MANNER.
Our operating results will depend in part on our ability to introduce new and enhanced products on a timely basis. Successful product development and introduction depends on numerous factors, including our ability to anticipate customer and market requirements, changes in technology and industry standards, our ability to differentiate our offerings from offerings of our competitors, and market acceptance.
We may not be able to develop and introduce new or enhanced products in a timely and cost-effective manner or to develop and introduce products that satisfy customer requirements. Our new products also may not achieve market acceptance or correctly anticipate new industry standards and technological changes.
TECHNOLOGICAL CHANGE COULD CAUSE CERTAIN OF OUR PRODUCTS OR SERVICES TO BECOME OBSOLETE OR NON-COMPETITIVE.
The markets for a number of our products and services are generally characterized by rapid technological development, evolving industry standards, changes in customer requirements and new product introductions and enhancements. A faster than anticipated change in one or more of the technologies related to our products or services or in market demand for products or services based on a particular technology could result in faster than anticipated obsolescence of certain of our products or services and could have a material adverse effect on our business, results of operation and financial condition. Currently accepted industry standards are also subject to change, which may contribute to the obsolescence of our products or services.
WE MAY NOT HAVE SUFFICIENT RESOURCES TO FUND ALL FUTURE RESEARCH AND DEVELOPMENT AND CAPITAL EXPENDITURES OR POSSIBLE ACQUISITIONS.
In order to remain competitive, we must make substantial investments in research and development to develop new and enhanced products and continuously upgrade our process technology and manufacturing capabilities.
Although we believe that anticipated cash flows from operations and available borrowings under our $200 million credit facility will be sufficient to satisfy our anticipated working capital, research and development and capital investment needs, we may be unable to fund all of these needs or possible acquisitions. While we successfully completed our required public offering in the third quarter of 2000, raising net proceeds of approximately $84.0 million, which were temporarily used to pay down our debt, our ability to raise additional capital will depend on a variety of factors, some of which will not be within our control, including investor perceptions of us, our businesses and the industries in which we operate, and general economic and market conditions. We may be unable to successfully raise additional capital, if needed. Failure to successfully raise needed capital on a timely or cost-effective basis could have a material adverse effect on our business, results of operations and financial condition.
PRODUCT LIABILITY CLAIMS OR RECALLS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR REPUTATION, BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
As a manufacturer and distributor of various products, our results of operations are susceptible to adverse publicity regarding the quality or safety of our products. In part, product liability claims challenging the safety of our products may result in a decline in sales for a particular product, which could adversely affect our results of operations. This could be true even if the claims themselves are proven to not be truthful or settled for immaterial amounts.
While we have general liability and other insurance policies concerning product liabilities, we have self-insured retentions or deductibles under such policies with respect to a portion of these liabilities. For example, our annual self-insured retention for general aviation aircraft liabilities incurred in connection with products manufactured by Teledyne Continental Motors is $10 million.
Product recalls and field service actions could also have a material adverse effect on our business, results of operations and financial condition. For example, Teledyne Continental Motors has been engaged in a product recall of piston engine crankshafts whereby the Company took a $12 million pretax charge in the fiscal 2000 second quarter. In the second quarter of 1999, Teledyne Continental Motors had an unrelated recall of piston engines for which the Company took a $3 million pretax charge. Product recalls have the potential for tarnishing a company's reputation and could have a material adverse effect on the sales of our products.
We cannot assure that we will not have additional product liability claims or that we will not recall any additional products.
INCREASING COMPETITION COULD REDUCE THE DEMAND FOR OUR PRODUCTS AND SERVICES.
Although we have certain advantages that we believe help us compete in our markets, each of our markets is highly competitive. Many of our competitors have, and potential competitors could have, greater name recognition, a larger installed base of products, more extensive engineering, manufacturing, marketing and distribution capabilities and greater financial, technological and personnel resources than we do. New or existing competitors may also develop new technologies that could adversely affect the demand for our products and services. Industry consolidation trends, particularly among aerospace and defense contractors, could adversely affect demand for our products and services if prime contractors seek to control more aspects of vertically integrated projects.
WE SELL PRODUCTS AND SERVICES TO CUSTOMERS IN INDUSTRIES THAT ARE CYCLICAL AND SENSITIVE TO CHANGES IN GENERAL ECONOMIC ACTIVITY.
We derive significant revenues from the commercial aerospace industry. Domestic and international commercial aerospace markets are cyclical in nature. Historic demand for new commercial aircraft has been related to the stability and health of domestic and international economies. Delays or changes in aircraft and component orders could impact the future demand for our products and have a material adverse effect on our business, results of operations and financial condition.
In addition, we sell products and services to customers in industries that are sensitive to the level of general economic activity and in mature industries that are sensitive to capacity. Adverse economic conditions affecting these industries may reduce demand for our products and services, which may reduce our profits, or our production levels, or both.
WE ARE SUBJECT TO THE RISKS ASSOCIATED WITH INTERNATIONAL SALES.
During 2000, international sales accounted for approximately 17% of our total revenues. We anticipate that future international sales will continue to account for a significant percentage of our revenues. Risks associated with these sales include:
- political and economic instability;
- export controls;
- changes in legal and regulatory requirements;
- U.S. and foreign government policy changes affecting the markets for our products;
- changes in tax laws and tariffs;
- convertibility and transferability of international currencies; and
- exchange rate fluctuations (which may affect sales to international customers and the value of and profits earned on international sales when converted into dollars).
Any of these factors could have a material adverse effect on our business, results of operations and financial condition. In prior years, weak conditions in Asian economies have affected our results of operations adversely.
COMPLIANCE WITH INCREASING ENVIRONMENTAL REGULATIONS AND THE EFFECTS OF POTENTIAL ENVIRONMENTAL LIABILITIES COULD HAVE A MATERIAL ADVERSE FINANCIAL EFFECT ON US.
We, like other industry participants, are subject to various federal, state, local and international environmental laws and regulations. We may be subject to increasingly stringent environmental standards in the future. Future developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect on our business, results of operations or financial condition.
Some of our businesses work with highly dangerous substances that require heightened standards of care. For example, as the prime contractor for the U.S. Army's Non-Stockpile Chemical Materiel Demilitarization program, we are responsible for the destruction of small caches of chemical munitions and materiel located in over 30 states. The destruction of chemical weapons is an inherently dangerous activity. Except for a contained fire during a demonstration testing of a process designed to access rockets, we have not experienced any accidents or other adverse consequences as a result of our participation in weapon destruction programs. We cannot, however, assure that we will not experience any problems in the future. Although the federal government provides certain indemnities to contractors in these programs, these indemnities may be insufficient to offset liabilities that we may incur in connection with our participation in these programs.
For additional discussion of environmental matters, see the discussion under the caption "Other Matters -- Environmental" of "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition" and Notes 2 and 14 to Notes to Consolidated Financial Statements.
HAVING LIMITED OPERATING HISTORY AS AN INDEPENDENT COMPANY MAKES IT DIFFICULT TO PREDICT OUR PROFITABILITY AS A STAND-ALONE COMPANY.
We have a limited operating history as an independent company. Prior to the spin-off, our businesses relied on ATI for various financial, managerial and administrative services and benefited from the earnings, financial resources, assets and cash flows of ATI's other businesses.
We expect costs and expenses associated with the management of a public company to be greater than the amount reflected in our historical financial statements. We also will incur interest expense and be subject to the other requirements associated with our credit facility. While we had been profitable as part of ATI, there can be no assurance that, as a stand-alone company, our future profits will be comparable to historical operating results before the spin-off.
In 2000, we dedicated managerial and other resources at the corporate level to establish the infrastructure and systems necessary for us to operate as an independent public company. While we believe that we have sufficient management resources, we cannot assure you that this will be the case or that we will successfully implement our operating and growth initiatives. Failure to implement these initiatives successfully could have a material adverse effect on our business, results of operations and financial condition.
OUR INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FUTURE SUCCESS.
Our future success depends to a significant extent upon the continued service of our executive officers and other key management and technical personnel and on our ability to continue to attract, retain and motivate qualified personnel. Recruiting and retaining skilled technical personnel is highly competitive. The loss of the services of one or more of our key employees or our failure to attract, retain and motivate qualified personnel could have a material adverse effect on our business, financial condition and results of operations.
ACQUISITIONS INVOLVE INHERENT RISKS THAT MAY ADVERSELY AFFECT OUR OPERATING RESULTS AND FINANCIAL CONDITION.
Our growth strategy includes possible acquisitions. Acquisitions involve various inherent risks, such as:
- our ability to assess accurately the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition candidates;
- the potential loss of key personnel of an acquired business;
- our ability to integrate acquired businesses and to achieve identified financial and operating synergies anticipated to result from an acquisition; and
- unanticipated changes in business and economic conditions affecting an acquired business.
WE MAY NOT BE ABLE TO SELL, OR EXIT ON ACCEPTABLE TERMS, PRODUCT LINES THAT WE DETERMINE NO LONGER MEET WITH OUR GROWTH STRATEGY.
Consistent with our growth strategy to focus on markets for commercial communications products and expand our profitable niche businesses, we plan to continually evaluate our product lines to ensure that they are aligned with our strategy. As a result of this continual evaluation and as previously announced, we
plan to exit the marine products and process control software business of our Systems Engineering Solutions segment. Until these product lines are divested, the continued weakness in these unrelated product lines is expected to unfavorably impact the profitability of the Systems Engineering Solutions segment. Our ability to dispose of these product lines and any others that may no longer be aligned with our strategy will depend on many factors, including the terms and conditions of any asset purchase and sale agreement, as well as industry, business and economic conditions. We cannot provide any assurance as to when, if or on what terms any product lines will be sold. Also, we cannot provide any assurance as to the availability, timing, terms or conditions of alternative courses of action if any sale of any unrelated product line cannot be consummated.
FAILURE OF REPRESENTATIONS AND ASSUMPTIONS UNDERLYING THE IRS TAX RULING COULD CAUSE THE SPIN-OFF NOT TO BE TAX-FREE TO ATI OR TO ATI'S STOCKHOLDERS AND MAY REQUIRE US TO INDEMNIFY ATI.
While the tax ruling relating to the qualification of the spin-off as a tax-free distribution within the meaning of Section 355 of the Internal Revenue Code generally is binding on the IRS, the continuing validity of the tax ruling is subject to certain factual representations and assumptions. While we successfully and timely completed our required public offering in the third quarter of 2000 in accordance with the ruling, as revised, we must continue to satisfy other requirements, including using the approximately $84.0 million in net proceeds of our public offering for research and development and related capital projects, for the further development of our manufacturing capabilities and for acquisitions and/or joint ventures. See "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters -- Use of Proceeds from Completed Public Offering".
If the spin-off were not to qualify as a tax-free distribution within the meaning of Section 355 of the Code, ATI would recognize taxable gain generally equal to the amount by which the fair market value of the TDY Common Stock distributed to ATI's stockholders exceeded the tax basis in our assets. In addition, the distribution of our Common Stock to each ATI stockholder would generally be treated as taxable in an amount equal to the fair market value of the TDY Common Stock such stockholder receives.
If the spin-off qualified as a distribution under Section 355 of the Code but failed to be tax-free to ATI because of certain post-spin-off circumstances (such as an acquisition of Teledyne Technologies) ATI would recognize taxable gain as described above, but the distribution of our Common Stock in the spin-off would generally be tax-free to each ATI stockholder.
The Tax Sharing and Indemnification Agreement between ATI and TDY provides that we will be responsible for any taxes imposed on, or other amounts paid by, ATI, its agents and representatives and its stockholders as a result of the failure of the spin-off to qualify as a tax-free distribution within the meaning of Section 355 of the Code if the failure or disqualification is caused by certain post-spin-off actions by or with respect to us (including our subsidiaries) or our stockholders. For example, the acquisition of Teledyne Technologies by a third party during the two-year period following the spin-off could cause such a failure or disqualification. If any of the taxes or other amounts described above were to become payable by us, the payment could have a material adverse effect on our financial condition, results of operations and cash flow and could exceed our net worth by a substantial amount.
PROVISIONS OF OUR GOVERNING DOCUMENTS, APPLICABLE LAW, THE TAX SHARING AND INDEMNIFICATION AGREEMENT WITH ATI AND OUR CHANGE IN CONTROL SEVERANCE AGREEMENTS COULD MAKE AN ACQUISITION OF TELEDYNE TECHNOLOGIES MORE DIFFICULT.
Our Restated Certificate of Incorporation, Amended and Restated Bylaws and Rights Agreement, and the General Corporation Law of the State of Delaware contain several provisions that could make the acquisition of control of Teledyne Technologies in a transaction not approved by our board of directors more difficult. Certain tax aspects of the spin-off could also discourage an acquisition of control of Teledyne Technologies for some period of time. For example, the acquisition of Teledyne Technologies by a third party during the two-year period following the spin-off could result in the spin-off not qualifying as
a tax-free distribution within the meaning of Section 355 of the Internal Revenue Code and trigger indemnification obligations of Teledyne Technologies under the Tax Sharing and Indemnification Agreement. We have entered into Change in Control Severance Agreements with 14 members of our management, which could have an anti-takeover effect.
THE MARKET PRICE OF OUR COMMON STOCK HAS FLUCTUATED SIGNIFICANTLY SINCE OUR SPIN-OFF FROM ATI, AND COULD CONTINUE TO DO SO.
Since the spin-off on November 29, 1999, the market price of our Common Stock has ranged from a low of $7 13/16 to a high of $30 9/16 per share. At February 23, 2001, our closing stock price was $14.30 per share. Fluctuations in our stock price could continue. Among the factors that could affect our stock price are:
- quarterly variations in our operating results;
- strategic actions by us or our competitors, such as acquisitions;
- adverse business developments, such as the engine recall by Teledyne Continental Motors in 2000;
- general market conditions; and
- general economic factors unrelated to our performance.
The stock markets in general, and the markets for high technology companies in particular, have experienced a high degree of volatility not necessarily related to the operating performance of particular companies. We cannot provide assurances as to our stock price.
ITEM 2. PROPERTIES.
Our principal facilities as of December 31, 2000 are listed below. Although the facilities vary in terms of age and condition, our management believes that these facilities have generally been well maintained and are adequate for current operations.
FACILITY LOCATION PRINCIPAL USE OWNED/LEASED
------------------------------ --------------------------------------------- ------------
ELECTRONICS AND COMMUNICATIONS SEGMENT
TELEDYNE ELECTRONIC
TECHNOLOGIES
Los Angeles, California..... Development and production of electronic Owned and
components and subsystems. Leased
Los Angeles, California..... Production of digital data acquisition Leased
systems for monitoring commercial aircraft
and engines.
Lewisburg, Tennessee........ Development and production of electronic Owned
components and subsystems.
Mountain View, California... Production of ferrite components, switching Owned
devices, filters and monolithic microwave
integrated circuits.
Hawthorne, California....... Production of electronic components. Owned
Rancho Cordova, Development of production of traveling wave Owned and
California............... tubes and power supplies for use in Leased
commercial markets.
SYSTEMS ENGINEERING SOLUTIONS SEGMENT
TELEDYNE BROWN ENGINEERING,
INC.
Huntsville, Alabama......... Provision of engineered services and Owned and
products, including systems engineering, Leased
optical engineering, software and hardware
engineering, and instrumentation technology.
Hunt Valley, Maryland....... Manufacturing, assembling and maintenance of Leased
power generating systems.
Knoxville, Tennessee........ Laboratories and offices in support of Leased
environmental services.
Washington, DC.............. Defense program offices supporting Leased
governmental customers.
AEROSPACE ENGINES AND COMPONENTS SEGMENT
TELEDYNE CONTINENTAL MOTORS
Mobile, Alabama............. Design, development and production of new and Leased
rebuilt piston engines, ignition systems and
spare parts for the general aviation market.
Redlands, California........ Manufacturing of batteries for the general Owned
aviation market.
Toledo, Ohio................ Design, development and production of small Leased
turbine engines for aerospace and military
markets.
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We also own or lease facilities elsewhere in the United States and in countries outside the United States, including Tijuana, Mexico, Gloucester, England and Cumbernauld, Scotland. Our executive offices are currently located at 2049 Century Park East, Suite 1500, Los Angeles, California 90067-3101 and are subleased from a subsidiary of ATI.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we become involved in various lawsuits, claims and proceedings related to the conduct of our business. While we cannot predict the outcome of any lawsuits, claims or proceedings, our management does not believe that the disposition of any pending matters is likely to have a material adverse effect on our financial condition or liquidity. The resolution in any reporting period of one or more of these matters, however, could have a material adverse effect on our results of operations for that period,
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of TDY's stockholders during the fourth quarter of 2000.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our Common Stock is listed on the New York Stock Exchange and traded under the symbol "TDY." The following table sets forth, for the periods indicated, the high and low sale prices for the Common Stock as reported by the New York Stock Exchange.
HIGH LOW
---- ---
1999
4th Quarter (from November 29, 1999)........................ $10 1/2 $ 7 13/16
2000
1st Quarter................................................. $28 1/2 $ 8 3/8
2nd Quarter................................................. $20 $10 3/4
3rd Quarter................................................. $30 9/16 $14 11/16
4th Quarter................................................. $29 1/16 $17
2001
1st Quarter (through February 23, 2001)..................... $20.85 $14.00
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On February 23, 2001, the closing sale price of our Common Stock as reported by the New York Stock Exchange was $14.30 per share. As of December 31, 2000, there were approximately 8,300 holders of record of the Common Stock.
We currently intend to retain any future earnings to fund the development and growth of our business. Therefore, we do not anticipate paying any cash dividends in the foreseeable future. Provisions of our credit agreement limit our ability to pay dividends to amounts exceeding 25% of cumulative net income subsequent to the effective date of the credit agreement. As of December 31, 2000, approximately $9.5 million was available for the payment of dividends under these provisions.
USE OF PROCEEDS FROM COMPLETED PUBLIC OFFERING
In the third quarter of 2000, Teledyne Technologies received net proceeds of approximately $84.0 million from an underwritten public offering of 4,605,000 shares of its Common Stock, par value $0.01 per share. On August 22, 2000, the Company sold 4,100,000 shares of Common Stock and on September 15, 2000, 505,000 additional shares were sold pursuant to the exercise by the underwriters of their over-allotment option. Gross proceeds totaled $89,797,500 (at $19.50 per share). The underwriting discount totaled $5,157,600. Offering expenses were $646,600 at December 31, 2000. No payments were made to directors or officers of the Company; however, payments were made to Kirkpatrick & Lockhart LLP, the Company's counsel in connection with the offering and to which Charles J. Queenan, Jr., a member of the Company's Board of Directors, is Senior Counsel.
The Company used the net proceeds from the offering to repay borrowings under its revolving credit facility pending their use in accordance with the modified IRS tax ruling received by ATI in connection the spin-off. Consistent with the IRS tax ruling, we have spent: $56.5 million for product development and enhancements and process improvements, $33.0 million for capital and facility improvements, $0.7 million for further development of manufacturing capabilities and $2.6 million for acquisitions and/or joint ventures. Approximately $18.7 million of these amounts have been directed toward our broadband communications initiatives relating to optoelectronic components and wireless subsystems. These spending levels have exceeded our average annual historical expenditures of $47.7 million for these types of uses. The increased spending of $45.1 million was funded from the net proceeds of the offering. Considering this, $38.9 million of the net proceeds remain to be used.
The effective date of the Registration Statement for the shares was August 16, 2000 and the Commission file number for the Registration Statement is 333-41892. A total of 4,715,000 shares had been registered under such Registration Statement. The underwriters were Goldman, Sachs & Co., Banc of America Securities LLC and A.G. Edwards & Sons, Inc.
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents our summary consolidated financial data. Effective November 29, 1999, Teledyne Technologies was spun off from ATI. Our fiscal year is determined based on a 53/52-week convention and ends on or about December 31. The historical financial information is not necessarily indicative of the results of operations or financial position that would have occurred if we had been a separate, independent company during the periods presented, nor is it indicative of future performance. This historical financial information does not include pro forma adjustments that reflect estimates of the expenses that we would have incurred had we been operated as an independent company and as capitalized at the time of its spin-off from ATI for each period presented. In December 2000, we sold the assets of Teledyne Cast Parts, our sand and investments casting business. Accordingly, our consolidated financial statements have been restated to reflect Teledyne Cast Parts as a discontinued operation. The historical financial information should be read in conjunction with the discussion under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
FOR THE FISCAL YEARS
----------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
Sales......................................... $795.1 $761.4 $733.0 $707.4 $686.1
Net income from continuing operations......... $ 31.9 $ 47.2 $ 46.4 $ 37.3 $ 38.9
Net income.................................... $ 32.3 $ 49.0 $ 48.7 $ 41.6 $ 40.7
Working capital............................... $107.6 $ 98.5 $ 72.6 $ 78.2 $ 95.6
Total assets.................................. $350.9 $313.4 $246.4 $250.6 $250.9
Long-term debt, net........................... $ -- $ 97.0 $ -- $ -- $ --
Stockholders' equity.......................... $163.1 $ 44.5 $106.4 $109.4 $128.0
Basic earnings per common share -- continuing
operations(a)............................... $ 1.12 $ 1.73 $ 1.65 $ 1.33 $ 1.42
Diluted earnings per common
share -- continuing operations(a)........... $ 1.08 $ 1.73 $ 1.65 $ 1.33 $ 1.42
Basic earnings per common share(a)............ $ 1.13 $ 1.79 $ 1.73 $ 1.48 $ 1.49
Diluted earnings per common share(a).......... $ 1.09 $ 1.79 $ 1.73 $ 1.48 $ 1.49
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(a) Prior to the spin-off, the average outstanding shares used to compute
earnings per share were based on a distribution ratio of one share of
Teledyne Technologies Common Stock for every seven shares of ATI Common
Stock. The treasury method is used to calculate diluted earnings per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
We are a leading provider of sophisticated electronic and communications products, including components and subsystems for wireless and satellite systems, and data acquisition and communication equipment for airlines and business aircraft. We also provide systems engineering solutions and information technology services for space, defense and industrial applications, and manufacture general aviation and missile engines and components, as well as on-site power generation equipment. Effective November 29, 1999, we were spun off from ATI.
Our strategy is to focus on markets for commercial communications products, while we continue to expand our profitable niche market businesses. For example, we are leveraging our experience in manufacturing sophisticated fiber optic transmitters and receivers for aerospace customers to enable us to manufacture similar products for commercial customers in wireless and fiber optic communications markets. We plan to continually evaluate our product lines to ensure that they are aligned with our strategy. These actions will help us to redirect capital and management focus to opportunities that will best utilize our engineering resources and technical expertise. Consistent with this strategy, we sold the assets of Teledyne Cast Parts, our sand and investments casting business, in December 2000. Accordingly, our consolidated financial statements have been restated to reflect Teledyne Cast Parts as a discontinued operation.
Our fiscal year is determined based on a 53/52-week convention and ends on or about December 31. The following is our financial information for 2000 and pro forma financial information for 1999 and 1998 (in millions, except per-share amounts):
2000 1999 1998
------- ------- -------
SALES....................................................... $ 795.1 $ 761.4 $ 733.0
COSTS AND EXPENSES
Cost of sales............................................. 579.6 552.1 532.1
Selling, general and administrative expenses.............. 158.4 136.8 130.6
------- ------- -------
738.0 688.9 662.7
------- ------- -------
OPERATING PROFIT............................................ 57.1 72.5 70.3
Interest and debt expense, net............................ 5.3 8.1 8.0
Other income.............................................. 1.1 1.0 1.6
------- ------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX......... 52.9 65.4 63.9
Provision for income taxes................................ 21.0 26.3 26.4
------- ------- -------
INCOME FROM CONTINUING OPERATIONS........................... 31.9 39.1 37.5
Discontinued operations..................................... 0.4 1.8 2.3
------- ------- -------
NET INCOME.................................................. $ 32.3 $ 40.9 $ 39.8
======= ======= =======
BASIC EARNINGS PER COMMON SHARE:
Continuing operations....................................... $ 1.12 $ 1.44 $ 1.33
Discontinued operations..................................... 0.01 0.06 0.08
------- ------- -------
BASIC EARNINGS PER COMMON SHARE............................. $ 1.13 $ 1.50 $ 1.41
======= ======= =======
DILUTED EARNINGS PER COMMON SHARE:
Continuing operations....................................... $ 1.08 $ 1.44 $ 1.33
Discontinued operations..................................... 0.01 0.06 0.08
------- ------- -------
DILUTED EARNINGS PER COMMON SHARE........................... $ 1.09 $ 1.50 $ 1.41
======= ======= =======
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The pro forma financial information for 1999 and 1998 has been presented for informational purposes only and may not reflect the results of operations that would have occurred had we operated as a separate, independent company for the periods presented. The pro forma financial information should not be relied upon as being indicative of future results. Pro forma adjustments reflect the estimated expense impacts (primarily interest expense and corporate expenses) that would have been incurred had we been operated as a separate company as of the beginning of each year and as capitalized at the time of the spin-off for
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We operate in three business segments: Electronics and Communications; Systems Engineering Solutions; and Aerospace Engines and Components. The segments' respective contributions to total sales from continuing operations for 2000, 1999 and 1998 are summarized in the following table:
2000 1999 1998
---- ---- ----
Electronics and Communications.............................. 45% 45% 47%
Systems Engineering Solutions............................... 30 30 30
Aerospace Engines and Components............................ 25 25 23
--- --- ---
100% 100% 100%
=== === ===
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RESULTS OF OPERATIONS
Teledyne Technologies reported 2000 sales from continuing operations of $795.1 million, compared with net sales from continuing operations of $761.4 million for 1999 and $733.0 million for 1998. Net income from continuing operations was $31.9 million ($1.08 per diluted share) for 2000, compared with pro forma net income from continuing operations of $39.1 million ($1.44 per diluted share) for 1999 and pro forma net income from continuing operations of $37.5 million ($1.33 per diluted share) for 1998. Net income including discontinued operations was $32.3 million ($1.09 per diluted share) for 2000, compared with pro forma net income including discontinued operations of $40.9 million ($1.50 per diluted share) for 1999 and pro forma net income including discontinued operations of $39.8 million ($1.41 per diluted share) for 1998.
The 2000 and 1999 results include pretax charges of $12.0 million and $3.0 million, respectively, for product recall reserves in the Aerospace Engines and Components segment. The 2000 results also include $2.2 million of pretax charges for receivables and cost adjustments in selected product lines in the Systems Engineering Solutions segment.
International sales represented approximately 17%, 18% and 22% of total sales for 2000, 1999 and 1998, respectively. Sales under contracts with the U.S. Government, which included contracts with the Department of Defense, were approximately 44%, 44% and 40% of total sales for 2000, 1999 and 1998, respectively.
In 2000, segment operating profit was $72.4 million, compared with $87.6 million in 1999 and $85.3 million in 1998 and reflect the pretax charges noted above. Included in operating profit was pension income of $9.0 million in 2000, $6.6 million in 1999 and $1.7 million in 1998. Pension income is expected to remain relatively constant in 2001 but is expected to be lower in subsequent years primarily due to the completion of income amortization associated with the transition assets recorded pursuant to Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 87 -- "Employers' Accounting for Pensions".
Net income, before pro forma adjustments, was $49.0 million ($1.79 per diluted share) in 1999 and $48.7 million ($1.73 per diluted share) in 1998. The historical financial statements reflect allocations representing corporate expense from ATI of $7.3 million and $7.8 million for 1999 and 1998, respectively. These allocations were based on sales. The historical financial statements for 1999 also include one month of actual corporate expenses incurred by the Company after the spin-off and one month of interest costs on long-term debt.
Cost of sales as a percentage of sales reflected increased depreciation and the $2.2 million of pretax charges in 2000, as well as optoelectronics development costs, partially offset by higher pension income compared with 1999. Cost of sales increased from 1998 to 1999 in line with sales. Selling, general and administrative expenses increased in 2000, compared with 1999, reflecting higher corporate administrative
expenses, compared with the historical allocation from ATI, and higher research and development costs for the Electronics and Communications segment as well as the impact of the product recall charges described above. Selling, general and administrative expenses increased from 1998 to 1999 due to higher research and development costs. Interest expense on debt was $5.4 million in 2000, compared with less than $1 million in 1999 and zero in 1998. The 2000 and 1999 amounts reflected interest on the debt assumed as part of the spin-off on November 29, 1999.
SEGMENTS
The following discussion of our three segments should be read in conjunction with Note 13 to Notes to Consolidated Financial Statements.
2000 1999 1998
--------- --------- ---------
(IN MILLIONS, EXCEPT AS INDICATED)
Sales.................................................... $360.5 $340.7 $342.1
Operating profit......................................... $ 38.7 $ 42.6 $ 42.6
Operating profit % of sales.............................. 10.7% 12.5% 12.5%
International sales % of sales........................... 19.7% 17.3% 22.2%
Governmental sales % of sales............................ 27.0% 29.6% 29.9%
Capital expenditures..................................... $ 21.4 $ 13.5 $ 10.3
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Our Electronics and Communications segment, through Teledyne Electronic Technologies, applies proprietary technology, advanced software and hardware design skills and manufacturing capabilities in data acquisition and communications, precision electronic devices and electronic manufacturing.
2000 Compared with 1999
Our Electronics and Communications segment sales were $360.5 million in 2000, an increase of 5.8% from 1999 sales of $340.7 million. Operating profit was $38.7 million in 2000, compared with $42.6 million in 1999.
Sales in 2000, compared with 1999, grew in electronic manufacturing services, relay products, business and commuter aircraft communications equipment and wireless products. Sales from electronic manufacturing services and wireless products grew as a result of new orders from military and commercial customers. Relay products reported improved sales based on demand from the communications and semiconductor test equipment markets. Sales of medical and military microelectronics were down from the same period last year. Segment operating profit decreased due to increased spending in optoelectronics and broadband wireless initiatives and reduced margins on electronic manufacturing services. Approximately 9.3 million was spent on optoelectronics and broadband wireless initiatives beginning in the second quarter of 2000. Sales and operating profit in 1999 reflected non-recurring licensing revenue of $3.3 million.
1999 Compared with 1998
Our Electronics and Communications segment sales were $340.7 million in 1999, down slightly from 1998 sales of $342.1 million. Operating profit was $42.6 million, the same as 1998.
Improved revenue growth and operating profit margins in the second half of 1999 allowed the segment to recover from a weak first half. For the year, sales of data acquisition and communications products increased by 3%, led by strong sales growth in communications equipment for business and commuter aircraft. Precision electronic device sales declined by 6% as strong sales increases in medical devices were offset by declines in other lines, particularly military microelectronics. Electronic manufacturing sales grew modestly. Operating profit, which was unchanged from 1998, reflected the sales impacts and included the licensing of certain intellectual property.
2000 1999 1998
--------- --------- ---------
(IN MILLIONS, EXCEPT AS INDICATED)
Sales.................................................... $234.8 $226.5 $223.2
Operating profit......................................... $ 17.9 $ 20.2 $ 20.5
Operating profit % of sales.............................. 7.6% 8.9% 9.2%
International sales % of sales........................... 5.8% 13.3% 21.8%
Governmental sales % of sales............................ 86.8% 81.9% 71.3%
Capital expenditures..................................... $ 3.7 $ 2.0 $ 2.6
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Our Systems Engineering Solutions segment, through Teledyne Brown Engineering, offers a wide range of engineering solutions and information services to government defense, aerospace and commercial customers.
2000 Compared with 1999
Sales for our Systems Engineering Solutions segment in 2000 were $234.8 million, up 4% from 1999 sales of $226.5 million. For 2000, operating profit was $17.9 million, down from $20.2 million for 1999.
The 2000 results, compared with 1999, reflect strong sales growth in systems engineering and integration as well as environmental programs. Sales for 2000 were negatively impacted by the significant decline in orders for our marine products for the petroleum exploration market, which has been very weak since the second quarter of 1999. Operating results for 2000, compared with 1999, were negatively impacted by a $2.2 million receivables and cost adjustment, mix, award fee differences in systems engineering and integration and lower marine product results due to reduced sales. These negative impacts were partially offset by increased revenue and a gain of approximately $1.4 million in the Company's chemical weapons demilitarization business related to additional program funding, offset by a write down of approximately $0.9 million in the our process control software business.
1999 Compared with 1998
Sales for our Systems Engineering Solutions segment in 1999 were $226.5 million, up slightly from 1998 sales of $223.2 million. For 1999, operating income was $20.2 million, down from $20.5 million for 1998.
The aerospace, defense and environmental businesses all reported sales increases in double digits, with environmental growing by 24% relative to 1998. This strong performance was offset by a decline of $20.9 million in marine products sales due to industry conditions affecting petroleum exploration activity. While operating profit was down slightly overall, significant increases in the rest of the business unit nearly offset a decline of approximately $4 million in marine products.
2000 1999 1998
--------- --------- ---------
(IN MILLIONS, EXCEPT AS INDICATED)
Sales.................................................... $199.8 $194.2 $167.7
Operating profit ........................................ $ 15.8 $ 24.8 $ 22.2
Operating profit % of sales.............................. 7.9% 12.8% 13.2%
International sales % of sales........................... 25.3% 24.6% 23.6%
Governmental sales % of sales............................ 25.7% 24.5% 19.9%
Capital expenditures..................................... $ 5.6 $ 12.8 $ 3.8
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Our Aerospace Engines and Components segment, through Teledyne Continental Motors, focuses on the design, development and manufacture of piston engines, turbine engines, electronic engine controls and batteries.
The results of our Aerospace Engines and Components segment have been restated to reflect Teledyne Cast Parts as a discontinued operation.
2000 Compared with 1999
Our Aerospace Engines and Components segment's sales were $199.8 million in 2000, compared with sales of $194.2 million in 1999. For 2000, operating profit was $15.8 million compared with $24.8 million for 1999. Excluding piston engine product recall reserves taken in the second quarters of 2000 and 1999, operating profit was $27.8 million in both 2000 and 1999.
Increased sales for piston engines for 2000, compared with 1999, reflected aftermarket new engine sales and overhaul services. Sales for piston engines were negatively impacted from the operational disruption associated with the piston engine recall program and lower sales of spare parts. Teledyne Technologies recorded pretax charges of $12 million and $3 million, in the second quarters of 2000 and 1999, respectively, for estimated costs associated with piston engine recall programs. Sales and operating profit in 2000, compared with 1999, in the turbine engine business were lower due to reduced sales from development phase work on new turbine engine programs and lower sales of new J69 turbine engines, which were $558 thousand for 2000, compared with $5.9 million in 1999. These reduced sales and operating profit were partially offset by increased sales of J69 spare parts.
1999 Compared with 1998
Our Aerospace Engines and Components segment's 1999 sales were $194.2 million, which represented an increase of 15.8% from 1998 sales of $167.7 million. For the year, 1999 operating profit rose 11.7% to $24.8 million compared with $22.2 million for 1998.
Engine related sales grew by over 15% in 1999, led by revenue increases of over 50% in turbine engines relative to 1998. Strong profit improvement in turbines was partially offset by a $3 million charge taken in the second quarter for a piston engine product recall.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are to fund working capital needs, capital expenditures and any debt service requirements. It is anticipated that operating cash flow, together with available borrowings under the credit facility described below, will be sufficient to meet these requirements in the year 2001.
In 2000, cash provided from continuing operations was $36.5 million, compared with $45.9 million in 1999 and $60.7 million in 1998. The decrease in cash provided from operations in 2000, compared with 1999, primarily reflected lower net income from continuing operations in 2000. The lower net income from continuing operations, and resulting lower cash from operations, reflected the costs associated with the product recall as well as development spending on optoelectronics and broadband wireless initiatives. The impact of the change in deferred taxes offset the impact of changes in operating assets and liabilities. The decrease in cash provided from operations in 1999, compared with 1998, reflected an increase in accounts receivables in 1999, compared with 1998, while in 1998 accounts receivable decreased from the prior year. The impact of the increase in accounts receivable in 1999 was partially offset by higher accounts payable and income taxes payable compared with the prior year.
Working capital increased to $107.6 million at year end 2000, compared with $98.5 million at year end 1999. The increase in working capital was primarily due to the increase in accounts receivable and inventories, partially offset by higher accounts payable and accrued liabilities.
Net cash used in investing activities was primarily for capital expenditures as presented below:
2000 1999 1998
----- ----- -----
(IN MILLIONS)
Electronics and Communications.............................. $21.4 $13.5 $10.3
Systems Engineering Solutions............................... 3.7 2.0 2.6
Aerospace Engines and Components............................ 5.6 12.8 3.8
----- ----- -----
$30.7 $28.3 $16.7
===== ===== =====
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During 2001, we plan to invest approximately $40 million in capital spending, of which the majority will be spent in the Electronics and Communications segment. Commitments at December 31, 2000 for capital expenditures were approximately $7.4 million. The increase in property plant and equipment primarily reflected capital spending offset in part by depreciation and amortization. Investing activity in 2000 also reflected the proceeds from the sale of the assets of our sand and investment castings business and payments for licensing fees and certain investments.
Cash used in financing activities for 2000 reflected the payment of long-term debt and the net proceeds from the public offering of 4,605,000 shares of our Common Stock as well as proceeds from the exercise of stock options. Cash used in financing activities for 1999 primarily reflected net transactions with ATI as well as net payments on long-term debt. Cash used in financing activities for 1998 only reflected net transactions with ATI.
A $200 million five-year revolving credit agreement that terminates in November 2004 was arranged with a syndicate of banks in connection with the spin-off. ATI drew $100 million under the facility prior to our assumption of the facility. Teledyne Technologies assumed the repayment obligation for the amount drawn by ATI. At December 31, 2000 we had no long-term debt outstanding. At January 2, 2000 we had $97 million outstanding under the facility at an interest rate of 7.63%. Excluding interest and fees, no payments are due under the credit facility until the facility terminates. The estimated fair value of our long-term debt at year end 1999 was $97 million.
At year end 2000, Teledyne Technologies had $200 million of committed credit under the credit facility which is utilized, as needed, for daily operating and other purposes. Borrowings under the credit facility bear interest at variable rates based on the prevailing prime or Eurodollar rates (or, in certain circumstances, the prevailing federal funds rate) and these rates will depend, in part, on the ratio of
consolidated total indebtedness to consolidated total capitalization from time to time. The credit facility requires the Company to comply with various financial covenants and restrictions, including covenants and restrictions relating to indebtedness, liens, investments, dividend payments, consolidated net worth, interest coverage and the relationship of total consolidated indebtedness to earnings before interest, taxes and depreciation and amortization. The credit agreement prohibits the declaration of dividends or making other specified distributions in amounts exceeding 25% of cumulative net income after the effective date of the credit agreement ($9.5 million at December 31, 2000). As a result of the completion of the underwritten public offering, the lenders under the credit agreement released the stock of the Company's wholly-owned subsidiary, Teledyne Brown Engineering, Inc., which had been pledged as collateral to secure the obligations under the credit agreement.
In connection with the spin-off, a new defined benefit pension plan was established and Teledyne Technologies assumed the existing pension obligations for all of the employees, both active and inactive, at the operations which perform government contract work and for active employees at operations which do not perform government contract work. ATI transferred pension assets to fund the new defined benefit pension plan, which at the time of the transfer had assets in excess of liabilities.
In connection with the spin-off, ATI received a tax ruling from the Internal Revenue Service stating in principle that the spin-off will be tax free to ATI and ATI's stockholders. In July 2000, the Internal Revenue Service agreed to a modification of the tax ruling issued in connection with the spin-off of Teledyne Technologies from ATI. The revised ruling required Teledyne Technologies to complete a smaller public offering of its outstanding Common Stock. In the third quarter of 2000, Teledyne Technologies issued 4,605,000 shares of its Common Stock in an underwritten public offering for net proceeds of approximately $84.0 million to fulfill a material requirement of the ruling. The continuing validity of the IRS tax ruling is subject to the use of the proceeds from the public offering for research and development and related capital projects, for the further development of manufacturing capabilities and for acquisitions and/or joint ventures. The Tax Sharing and Indemnification Agreement between ATI and Teledyne Technologies provides that Teledyne Technologies will indemnify ATI and its agents or representatives for taxes imposed on, and other amounts paid by, them or ATI's stockholders if Teledyne Technologies takes actions or fails to take actions that result in the spin-off not qualifying as a tax-free distribution. If any of the taxes or other amounts described above were to become payable by Teledyne Technologies, the payment could have a material adverse effect on our financial condition, results of operations and cash flow and could exceed Teledyne Technologies' net worth by a substantial amount.
OTHER MATTERS
Taxes. The effective income tax rate was 39.7%, 40.2% and 41.3% in 2000, 1999 and 1998, respectively. Based on our history of operating earnings, expectations of future operating earnings and potential tax planning strategies, it is more likely than not that the deferred income tax assets at December 31, 2000 will be realized.
Costs and Pricing. Inflationary trends in recent years have been moderate. We primarily use the last-in, first-out method of inventory accounting that reflects current costs in the costs of products sold. These costs, the increasing costs of equipment and other costs are considered in establishing sales pricing polices. The Company emphasizes cost containment in all aspects of its business.
Hedging Activities; Market Risk Disclosures. Teledyne Technologies generally does not actively engage in derivative financial instruments such as futures contracts, options and swaps, forward exchange contracts or interest rate swaps and futures. While we believe that adequate controls are in place to monitor any hedging activities in which we may engage, many factors, including those beyond our control such as changes in domestic and foreign political and economic conditions, could adversely affect these activities. At December 31, 2000 and January 2, 2000, there were no hedging contracts outstanding.
Our primary exposure to market risk relates to changes in interest rates and foreign currency exchange rates. We periodically evaluate these risks and have taken measures to mitigate these risks. We own assets