UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-K/A
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 28, 2003
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-15295
Teledyne Technologies Incorporated
| Delaware | 25-1843385 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification Number) |
12333 West Olympic Boulevard
Los Angeles, California 90064-1021
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (310) 893-1600
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | ||||
|
Common Stock, par value $.01 per share
|
New York Stock Exchange | ||||
|
Preferred Share Purchase Rights
|
New York Stock Exchange | ||||
Securities registered pursuant to Section 12(g) of the Act: None
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 þ No o
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. þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o
The aggregate market value of the registrant’s Common Stock held by non-affiliates was $413.9 million, based on the closing price of a share of Common Stock on June 27, 2003 ($13.69), which is the last business day of the registrant’s most recently completed fiscal second quarter. Shares of Common Stock known by the registrant to be beneficially owned by the registrant’s directors and the registrant’s executive officers subject to Section 16 of the Securities Exchange Act of 1934 are not included in the computation. The registrant, however, has made no determination that such persons are “affiliates” within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934.
At February 27, 2004, there were 32,450,566 shares of the registrant’s Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the registrant’s proxy statement for its 2004 Annual Meeting of Stockholders (the “2004 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.
EXPLANATORY NOTE:
The sole purpose of this Form 10-K/A, Amendment No. 2 to Annual Report on Form 10-K for the fiscal year ended December 28, 2003, is to re-file in its entirety the registrant’s Annual Report on Form 10-K for the fiscal year ended December 28, 2003 (2003 Form 10-K), together with the amended and restated certifications that had been attached as Exhibits 31.1 and 31.2 to the registrant’s Form 10-K/A, Amendment No. 1 to 2003 Form 10-K. The certifications were amended to conform to the language set forth in Regulation S-K, Item 601(b) (31), and as provided in the final rule adopted by the Securities and Exchange Commission as set forth in Release No. 33-8238, entitled “Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports.” Exhibits 31.3 and 31.4 are filed because an amendment to a Form 10-K is being filed. The entire 2003 Form 10-K is being re-filed as a technicality in accordance with the response to Question 17 in the “Division of Corporation Finance: Sarbanes-Oxley Act of 2002 Frequently Asked Questions” dated November 8, 2002 (revised November 14, 2003). Exhibits 32.3 and 32.4 are included because the originally filed financial statements are being re-filed in this amendment. No changes have been made to such financial statements. A new consent of Ernst & Young LLP is included as Exhibit 23.2.
Because additional exhibits are being filed, the registrant hereby amends and restates section (a)(3) of “Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K” of the 2003 Form 10-K as follows:
(3) Exhibits
A list of exhibits filed with this Form 10-K or incorporated by reference is found in the Amended and Restated Exhibit Index immediately following the Signature Page of the Form 10-K/A, Amendment No. 2 and incorporated herein by reference.
The original 2003 Form 10-K, as amended as described above, is as follows:
INDEX
| Page | ||||||
| Number | ||||||
|
|
||||||
| PART I | ||||||
|
Item 1.
|
Business | 1 | ||||
|
Item 2.
|
Properties | 23 | ||||
|
Item 3.
|
Legal Proceedings | 24 | ||||
|
Item 4.
|
Submission of Matters to a Vote of Security Holders | 24 | ||||
| PART II | ||||||
|
Item 5.
|
Market for Registrant’s Common Stock and Related Stockholder Matters | 25 | ||||
|
Item 6.
|
Selected Financial Data | 25 | ||||
|
Item 7.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26 | ||||
|
Item 7A.
|
Quantitative and Qualitative Disclosure About Market Risk | 49 | ||||
|
Item 8.
|
Financial Statements and Supplementary Data | 49 | ||||
|
Item 9.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 49 | ||||
|
Item 9A.
|
Controls and Procedures. | 49 | ||||
| PART III | ||||||
|
Item 10.
|
Directors and Executive Officers of the Registrant | 50 | ||||
|
Item 11.
|
Executive Compensation | 50 | ||||
|
Item 12.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 51 | ||||
|
Item 13.
|
Certain Relationships and Related Transactions | 51 | ||||
|
Item 14.
|
Principal Accountant Fees and Services | 51 | ||||
| PART IV | ||||||
|
Item 15.
|
Exhibits, Financial Statement Schedules and Reports on Form 8-K | 51 | ||||
| INDEX TO FINANCIAL STATEMENTS AND RELATED INFORMATION | 52 | |||||
| SIGNATURES | ||||||
| EXHIBIT INDEX | ||||||
Defined Terms
In this Annual Report on Form 10-K, Teledyne Technologies Incorporated is sometimes referred to as the “Company”, “Teledyne”, “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.
PART I
Item 1. Business.
Who We Are
Teledyne Technologies Incorporated is a leading provider of sophisticated electronic components, instruments and communications products, including defense electronics, data acquisition and communications equipment for airlines and business aircraft, monitoring and control instruments for industrial and environmental applications and components, and subsystems for wireless and satellite communications. 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 gas and power generation systems.
We serve niche market segments where performance, precision and reliability are critical. Our customers include major industrial and communications companies, government agencies, aerospace prime contractors and general aviation companies.
Total sales in 2003 were $840.7 million, compared with $772.7 million and $744.3 million in 2002 and 2001, respectively. Our aggregate segment operating profits were $61.9 million, $57.3 million and $24.2 million in 2003, 2002 and 2001, respectively. Approximately 54% of our total sales in 2003 was to commercial customers and the balance was to the U.S. Government, as a prime contractor or subcontractor. Approximately 44% of these U.S. Government sales was attributable to fixed price-type contracts and the balance to cost plus fee-type contracts. International sales accounted for approximately 16% of total sales in 2003.
Our four business segments and their respective contributions to our total sales in 2003, 2002 and 2001 are summarized in the following table:
Our principal executive offices are located at 12333 West Olympic Boulevard, Los Angeles, California 90064-1021. Our telephone number is (310) 893-1600.
Strategy
Principally through focused acquisitions of complementary product lines and businesses, we seek to build growth platforms around three core markets: aerospace and defense electronics; electronic instrumentation; and government systems engineering. We also intend to continue to focus on managing costs and operational excellence in every aspect of our business, from finance to manufacturing, as well as with the integration of our acquisitions. We continually evaluate our product lines to ensure that they are aligned with our strategy.
Recent Acquisitions
After completing one acquisition in each of 2001 and 2002, we completed three acquisitions in calendar year 2003 and one in 2004.
| On May 16, 2003, to expand further into the environmental instrumentation market, we acquired Mason, Ohio-based Tekmar Company from Emerson Electric Co. Tekmar Company, now known as |
| Teledyne Tekmar Company, is a premier manufacturer of gas chromatography introduction systems and automated total organic carbon analyzers. | |
| On June 27, 2003, to enhance our aircraft data acquisition and communications product lines, we acquired from Spirent plc its aviation information solution businesses, which included Spirent Systems Wichita, Inc., Spirent Systems (Ottawa) Limited and assets of United Kingdom-based The Flight Data Company Limited. These businesses design and manufacture aerospace data acquisition devices, networking products and flight deck and cabin displays. By year-end 2003, we consolidated the Wichita, Kansas manufacturing operations with those of our existing Los Angeles, California facility. | |
| On December 31, 2003, to broaden our microwave product lines to our customers, we acquired certain assets of the Filtronic Solid State business located in Santa Clara, California. Solid State designs and manufactures customized microwave assemblies for electronic warfare, radar and other military applications. The business, which now operates as “Teledyne Microwave”, is being relocated and consolidated with our existing microwave subsystems operations in Mountain View, California. | |
| On February 27, 2004, we acquired assets of Leeman Labs, Inc., located in Hudson, New Hampshire. Leeman Lab’s inductively coupled plasma laboratory spectrometers are used by environmental and quality control laboratories to detect low levels of inorganic contaminants in water and other environmental samples, and complement Teledyne Tekmar Company’s organic analysis instrumentation. |
Our acquisitions of Monitor Labs Incorporated and Advanced Pollution Instrumentation, Inc., completed in 2002 and 2001, respectively, greatly expanded our presence in the air-quality monitoring segment of the environmental instrumentation market.
Each of the acquired businesses is part of our Electronics and Communications segment. Their results are included in our consolidated financial statements since their respective dates of acquisition. The Solid State and Leeman Lab’s asset acquisitions occurred in our 2004 fiscal year.
Available Information
Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K, and any amendments to these reports, are available on our Internet website as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. In addition, our Corporate Governance Guidelines, our Corporate Objectives and Guidelines for Employee Conduct and the charters of the standing committees of our Board of Directors are available on our website. Our website address is www.teledyne.com .
You will be responsible for any costs normally associated with electronic access, such as usage and telephone charges. Alternatively, if you would like a paper copy of any such SEC report (without exhibits) or document, please write to John T. Kuelbs, Senior Vice President, General Counsel and Secretary, Teledyne Technologies Incorporated, 12333 West Olympic Blvd., Los Angeles, California 90064-1021, and a copy of such requested document will be provided to you, free of charge.
Our Business Segments
Electronics and Communications
Our Electronics and Communications segment, sometimes referred to as Teledyne Electronic Technologies, provides a wide range of specialized electronic systems, instruments, components and services that address niche market applications in commercial aerospace, defense, communications, industrial and medical markets.
Instrumentation Products
During 2001, we formed Teledyne Instruments, a group of business units drawn from our Electronics and Communications segment and our Systems Engineering Solutions segment, to focus on monitoring and
2
Environmental Instruments. As a result of our acquisitions, we offer a wide range of products for environmental monitoring. Teledyne Advanced Pollution Instrumentation, Inc., manufactures a broad line of instruments for monitoring low levels of gases such as sulfur dioxide, carbon monoxide and ozone. Teledyne Monitor Labs, Inc., supplies environmental monitoring systems for the detection, measurement and reporting of air pollutants. Teledyne Tekmar Company manufactures instruments that automate the preparation and concentration of drinking water and wastewater samples for the analysis of volatile organic compounds in gas chromatographs. It also provides laboratory analytical systems for the detection of total organic carbon.
Gas Analysis. Teledyne Analytical Instruments was a pioneer in the development of precision oxygen analyzers and now offers a broad range of products with various sensitivities for petrochemical, semiconductor manufacturing and other industrial applications. We also manufacture analyzers for a variety of other gases for such market applications. In 2003, we received orders for gas analyzers from a leading supplier of carbon dioxide to the food and beverage market.
Vacuum and Flow Measurement. Teledyne Hastings Instruments manufactures a broad line of instruments for precise measurement and control of vacuum and gas flows. Our instruments are used in such varied applications as semiconductor manufacturing, refrigeration, metallurgy and food processing.
Geophysical Instruments. We manufacture geophysical streamer cables, hydrophones and specialty products used in offshore hydrocarbon exploration (to locate oil and gas reserves beneath the ocean floor). We have been adapting this technology for the military market, where these products can be used to detect submarines, surface ships and torpedoes.
Test Services. We manufacture torque sensors and provide technical services for such critical applications as monitoring valves in nuclear power plants.
Aerospace and Defense Electronics
Aircraft Information Management. Our aircraft information management solutions are designed to increase the safety and efficiency of airline transportation. Through Teledyne Controls, we are a leading supplier of digital flight data acquisition and flight safety systems to civil aviation customers. These systems acquire data for use by the aircraft’s flight data recorder, and record additional data for the airline’s operation, such as performance and engine condition monitoring. We have provided these systems to our airline customers for over one-half of Boeing aircraft models in existing airline fleets. We have been increasingly providing our systems to Airbus A320 and A330/340 family aircraft, and we estimate that our forward fit market share was approximately 50% at the end of 2003. In July 2003, we acquired the Aviation Information Solutions (AIS) businesses of Spirent plc. AIS designs and manufactures aerospace data acquisition devices, networking products, and flight deck and cabin displays.
Although our data acquisition, recording and communications products are primarily used on commercial aircraft, we have been pursuing military applications. The U.S. Air Force selected our Optical Quick Access Recorder for use on its C-17 Globemaster III military transport aircraft. A prototype Digital Data Acquisition System and a Wireless GroundLink™ System have been flight certified on a U.S. Navy P-3 aircraft. Teledyne Controls was also awarded a subcontract under a U.S. Air Force program to embed its communications software into aircraft flight management systems for the C-130 Transport and B-767 Tanker aircraft.
Traveling Wave Tubes. Our helix traveling wave tubes are used to provide broadband power amplification of microwave signals. Military applications include radar, electronic warfare and satellite communication. We were the first company to offer multi-band tubes that permit a satellite communication earth station to quickly switch from one satellite system to another without the need for transmitter replacement. Sales of triband traveling wave tubes have increased as the U.S. military adds
3
Microwave Components and Subsystems. We design, develop, and manufacture microwave components used in aerospace and defense applications. On December 31, 2003, we acquired certain U.S. assets of Filtronic Solid State from Filtronic plc. The Solid State business designs and manufactures customized microwave subassemblies for electronic warfare, radar and other military applications.
Microelectronic Modules. We develop and manufacture custom microelectronic modules that provide both high reliability and extremely dense packaging for military applications, as well as implantable medical devices and commercial communication products. Our microelectronic modules are used for optical communications on the F-22 Raptor and we have been selected to provide similar products for the F-35 Joint Strike Fighter. We also develop custom tamper-resistant microcircuits designed to provide enhanced security in military communication.
Rigid-Flex Printed Circuit Boards. Our patented rigid-flex printed circuit boards permit our customers to assemble reliable high-density electronic modules that are used in a variety of military and commercial aerospace applications. Our new VME-Flex™ products have been designed into two major defense programs.
Sequencers. Teledyne Electronic Safety Products continues to provide microprocessor-controlled aircraft ejection seat sequencers and related support elements to military aircraft programs, including the F/ A-18E/ F and F/ A-22. We are currently developing a new sequencer in support of the F-35 Joint Strike Fighter program.
Other Electronic Components
Wireless Transceivers and Amplifiers. Our line of integrated transceiver modules provides high data rate point-to-point connectivity in cellular telephone infrastructure. We also supply solid-state microwave power amplifiers used in satellite uplink terminals for corporate networking and to provide two-way internet access via satellite for both consumer and commercial customers.
Relays and Switches. Teledyne Relays supplies electromechanical relays, solid-state power relays and coaxial switching devices to industrial, commercial, aerospace and military markets. Applications include microwave and wireless communication infrastructure, RF and general broadband test equipment, test equipment used in semiconductor manufacturing, general-purpose military applications, satellite and aircraft, and industrial and commercial machinery and control equipment.
Connectors. We manufacture custom surface mount connectors for applications in computer disk drives and consumer medical electronic devices. Teledyne Interconnect Devices also manufactures high-density land grid array connectors for high-end microprocessors and Digital Micromirror Device sockets.
Electronic Manufacturing Services
Electronics Equipment and Printed Circuit Card Assembly . We serve the market for high-mix, low-volume manufacturing of electronic products principally through facilities in Tennessee and Mexico. The products we manufacture include sophisticated military electronics equipment. We also manufacture, principally for one customer, key subsystems in medical equipment such as magnetic resonance imaging (MRI) and x-ray systems.
Optoelectronic Modules. We provide turnkey manufacturing services for custom optoelectronic modules used in high data rate communications. Our capabilities include submicron alignment of single mode fiber, environmental and life certification, and test of transmitter and receiver capabilities at data rates up to 40 gigabits per second.
4
Systems Engineering Solutions
Our Systems Engineering Solutions segment, principally through Teledyne Brown Engineering, Inc., applies the skills of its extensive staff of engineers and scientists to provide innovative systems engineering, advanced technology, and manufacturing solutions to defense, space, environmental, and homeland security requirements.
Defense
Teledyne Brown Engineering is a well-recognized full-service missile defense contractor with over 50 years of experience in missile defense and related systems integration. Our diverse customer base in this field includes the U.S. Army Aviation and Missile Command (“AMCOM”), the U.S. Army’s Space and Missile Defense Command (“SMDC”), the Missile Defense Agency (“MDA”) and major prime defense contractors.
Our Technologies Group plays significant roles in diverse national missile defense areas, which range from targets and countermeasures, systems engineering, modeling and simulation, to test and evaluation, as well as other related areas. Our engineering and technological services include systems design, development, integration and testing, with specialization in real-time distributed systems. In 2003, the Technologies Group, which possesses core competencies in software-based test and evaluation, data analysis and modeling and simulation, achieved the Software Engineering Institute’s Capability Maturity Model (or “CMM”) Level 4 rating.
During 2003, we continued our long-standing support of the Ground-based Midcourse Defense (“GMD”) Program. In December 2003, we also broadened our role in ballistic missile defense by winning, as part of the Lockheed Martin team, the Targets and Countermeasures program awarded by the Missile Defense Agency. This program involves the test of missile defense technologies and verification of ballistic missile defense system performance on a large number of major programs, including the Airborne Laser, the Kinetic Energy Interceptor, the Ground-based Midcourse Defense, the Aegis Ballistic Missile Defense, the Patriot Advanced Capability 3, and the Theater High Altitude Area Defense (“THAAD”).
We have developed and maintain a variety of world-class modeling and simulation tools, ranging from architecture/force structure to components-requirement-focused tools. In 2003, we expanded our Space Control activities for the U.S. Strategic Command. Although we do not have a contract with U.S. Strategic Command, it is our understanding that it plans to replace one of its existing software models with our Extended Air Defense Simulation (“EADSIM”). The EADSIM software provides complex multi-force simulations of air, missile and space warfare. It is used by almost 400 agencies in 10 foreign countries for defense analysis training and operational planning.
Aerospace
We have been active in U.S. space programs for almost 50 years and continue to be a significant contributor to NASA programs. Our Systems Group plays a key role in the International Space Station (“ISS”), one of the most complex scientific endeavors ever undertaken, and has had roles in the Space Shuttle program. We have provided 24-hour-per-day service for the payload operation cadre for the ISS Payload Operations and Integration Center, located at NASA’s Marshall Space Flight Center. We have also manufactured more than 50 flight-qualified hardware items for use on cargo integration on the ISS. As a subcontractor to Lockheed Martin, we were awarded the International Space Station Cargo Mission Contract at the Johnson Space Center in 2003. This six-year contract involves providing services related to planning, preparation and execution of cargo missions to the ISS.
We have been the prime contractor for the Propellants, Pressurants and Calibration Services Contract at Marshall Space Flight Center since 1971. In 2003, our role was extended for another five years. Under this contract, we furnish management, personnel, equipment and materials to operate and maintain the propellant and pressurant generating systems, storage and distribution systems, including work on the Space Shuttle and ISS, as well as management and operation of the calibration facilities at the Marshall Space Flight Center.
5
Environmental Systems
We support the U.S. Government’s efforts to clean up dangerous materials and waste. Since 1996, we have supported the U.S. Army’s Non-Stockpile Chemical Materiel Program and we continue to operate the Rapid Response System, a mobile chemical waste treatment system used to process chemical agents for disposal. These chemical agents had been used in the past to train military personnel in the detection, measurement and decontamination of dangerous chemicals. In 2003, for example, we won a $20.4 million U.S. Army contract to support the destruction of binary chemical warfare materiel stored at the Pine Bluff Arsenal in Arkansas. We also produce canisters for the processing, stabilization and storage of nuclear-waste products. In addition, we produce detonation chambers for use in the disposal of both chemical weapons and conventional munitions.
We operate a Department of Energy-certified radiological analysis services laboratory in Knoxville, Tennessee. This laboratory has received certification from the National Environmental Laboratory Accreditation Program in 13 states, including Utah where the Department of Energy maintains its primary waste depository. With its Nuclear Utilities Procurement Issues Committee certification, the laboratory can serve commercial utilities.
Homeland Security
Since the 1950s, we have worked to defend the nation from ballistic missiles, and we are now working to leverage our environmental capabilities into the Homeland Defense market, where expertise in the destruction of small lots of hazardous material may be required. In the Homeland Security arena, we offer to police departments and other first responders our WaterSabre™ mobile disaster response system to investigate and neutralize suspected explosive devices. This system is a remotely operated, ultra-high-pressure waterjet cutting system, mounted on a hazardous duty robot, and integrated with an emergency response vehicle. Cameras mounted on the robot provide a view of the cutting process and suspected devices to the operator in the vehicle, which can be located up to approximately 1,300 feet away.
Our support of the Federal Aviation Administration also increased in 2003 with a proof of concept for the Automated Airborne Flight Alert System. This effort is to demonstrate a data system that will provide selected aircraft flight data and situational awareness data to ground agencies for homeland security purposes.
Teledyne Solutions, Inc.
Through Teledyne Solutions, Inc., we are the primary Ballistic Missile Defense (“BMD”) systems engineering and technical assistance contractor for the U.S. Army. Teledyne Solutions has responsibility for the Systems Engineering and Technical Assistance Contract (“SETAC”) in support of the U.S. Army Space and Missile Defense Command. We also provide Systems Engineering and Technical Assistance support to other major Department of Defense customers including the Missile Defense Agency and the Program Executive Office for Air, Space, and Missile Defense.
Aerospace Engines and Components
Our Aerospace Engines and Components segment focuses on the design, development and manufacture of piston engines, turbine engines, electronic engine controls and aviation batteries.
Piston Engines
Principally through Teledyne Continental Motors, Inc., 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 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
6
In addition to the sales of new aircraft engines to aircraft producers, we actively support the aircraft engine aftermarket. Piston aircraft engines are produced with a finite utilization life generally expressed as time between overhauls. Our aftermarket support includes building and rebuilding of complete engines, as well as providing a full complement of spare parts such as cylinders, crankcases, fuel systems, crankshafts, camshafts and ignition products. In addition, 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.
Through Aerosance, Inc., we developed the first production full authority digital electronic controls for piston aircraft engines. These controls, known as PowerLink™ 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. We continue the development of FADEC-equipped engines targeted at the most popular models of four and six cylinder piston aircraft engines in use throughout the world. We believe that these control systems will become standard equipment on selected new aircraft and will be retrofitted on higher-end, piston engine general aviation aircraft.
In addition, our Gill™ line of lead acid batteries is widely recognized as the premier power source for general aviation. We are also continuing to develop sealed recombinant batteries for business jet and helicopter applications. Teledyne Battery Products, in conjunction with Teledyne Controls, jointly developed an onboard charging and cockpit display kit that permits existing NiCad battery systems to be replaced with Gill™ sealed lead acid batteries.
Turbine Engines
We design, develop and manufacture small turbine engines primarily used in tactical missiles for military markets.
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. Lockheed Martin Corporation selected a derivative of the J402 engine to power the Joint Air-to-Surface Standoff Missile (“JASSM”). We are the sole source provider of engines for the base JASSM system. The base JASSM production requirement is currently estimated at approximately 2,900 units.
Our J700 engine provides the turbine power for the Improved Tactical Air Launched Decoy (“ITALD”) built for the U.S. Navy. The ITALD system enhances combat aircraft survivability by both serving as a decoy and identifying enemy radar sources.
Energy Systems
Our Energy Systems segment, through Teledyne Energy Systems, Inc., provides hydrogen gas generators and thermoelectric and fuel cell-based power sources. Teledyne Energy Systems, Inc., a majority owned subsidiary of TDY, was formed in 2001 by combining Teledyne Brown Engineering’s Energy Systems business unit with assets and intellectual properties of Florida-based Energy Partners, Inc.
Our energy systems activities include a 50-year history of supplying high reliability energy conversion devices and gas generation products based on thermoelectric and electrochemical processes. We provided the thermoelectric power systems for several successful deep-space missions such as the Viking 1 and Viking 2 Mars Landers and the Pioneer 10 and 11 missions to Jupiter and Saturn. In 2003, in partnership with Boeing, we were awarded a ten-year $57 million contract by the U.S. Department of Energy to develop a new Multi-Mission Radioisotope Thermoelectric Generator (“MMRTG”) capable of supporting
7
We also manufacture hydrogen/oxygen gas generators that utilize the principle of electrolysis to convert water into high purity hydrogen gas at useable pressures. Our Teledyne Titan™ gas generators are used worldwide in electrical power generation plants, semiconductor manufacture, optical fiber production, chemical processing and other industrial processes.
We have a line of fuel cell test stations designed to provide a completely integrated system for fuel cell testing for the PEM fuel cell development market. Our Medusa line of fuel cell test systems provides high quality, simple to use automated test stations for fuel cell and fuel cell stack testing up to 10 kilowatts. In 2003, we also introduced Fuel Cell Testing Services.
We continue to focus our PEM fuel cell development efforts on high reliability, long endurance power systems for the immediate needs of military and aerospace customers. For example, we are currently working on a contract to deliver a PEM fuel cell power system prototype for use in the Second Generation Reusable Launch Vehicle.
Customers
We have hundreds of customers in the electronics, communications, aerospace and defense industries. No commercial customer accounted for more than 10% of our total sales during 2003, 2002 or 2001.
Approximately 46%, 46% and 45% of our total sales
for 2003, 2002 and 2001, respectively, 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 2003, 2002 and 2001, our largest
program with the U.S. Government, The Boeing Company —
Ground-based Midcourse Defense contract, represented 5.8%, 7.5%
and 7.4% of total sales, respectively. Set forth below are sales
by our segments to agencies and prime contractors to the U.S.
Government for the periods presented:
U.S. Government Sales
2003
2002
2001
(in millions)
$
142.0
$
115.2
$
107.8
210.3
202.4
195.7
24.7
25.5
27.3
10.7
9.3
7.8
$
387.7
$
352.4
$
338.6
Our total backlog of confirmed orders was approximately $369.7 million at December 28, 2003, $324.1 million at December 29, 2002 and $300.8 million at December 30, 2001.
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 websites. To promote our products and other capabilities, our personnel regularly participate in relevant trade shows and professional associations. Many of our government contracts are awarded after a competitive bidding process in which we seek to emphasize our ability to provide superior products and technical solutions in addition to competitive pricing.
8
Principally through Teledyne Technologies International Corp., the Company has established branch offices in foreign countries to facilitate international sales for various businesses.
Competition
We believe that technological capabilities and innovation and the ability to invest in the development of new and enhanced products are critical to obtaining and maintaining leadership in our markets and the industries in which we compete 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 related to improving product lines and developing new products and technologies in the same or similar fields. We spent a total of $218.1 million, $196.8 million and $210.7 million on research and development and bid and proposal costs for 2003, 2002 and 2001, 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 85% of total research and development costs for 2003, 2002 and 2001, respectively.
In 2003, approximately 63% of the $27.9 million in Company-funded research and development and bid and proposal costs were incurred in our electronics and communications businesses. We expect the level of Company-funded research and development and bid and proposal costs to be approximately $31.8 million in 2004.
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 dependent upon any one intellectual property or related group of such properties. We own several hundred active patents and are licensed to use certain patents, technology and other intellectual property rights owned and controlled by others. Similarly, other companies are licensed to use certain patents, technology and other intellectual property rights owned and controlled by us.
Patents, patent applications and license agreements will expire or terminate over time by operation of law, in accordance with their terms or otherwise. We do not expect the expiration or termination of these patents, patent applications and license agreements to have a material adverse effect on our business, results of operations or financial condition.
In connection with our spin-off in 1999, 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
Our total current workforce consists of approximately 5,300 employees. The International Union of United Automobile, Aerospace and Agricultural Implement Workers of America represents approximately 267 employees in Mobile, Alabama under a collective bargaining agreement that expires by its terms on February 21, 2007. This union also represents approximately 24 of our employees in Toledo, Ohio under a collective bargaining agreement that expires by its terms on November 9, 2006. In addition, this union
9
Executive Management
TDY’s executive management includes:
| Name and Title | Age | Principal Occupations Last 5 Years | |||||
|
|
|
|
|||||
|
Executive Officers:
|
|||||||
|
Robert Mehrabian* Chairman, President and Chief
Executive Officer; Director
|
62 | Dr. Mehrabian is the Chairman, President and Chief Executive Officer of TDY. He has been the President 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. | |||||
|
John T. Kuelbs* Senior Vice President, General
Counsel and Secretary
|
61 | Mr. Kuelbs has been the Senior Vice President, General Counsel and Secretary of TDY since November 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* Vice President and Chief
Financial Officer
|
59 | Mr. Schnittjer has been Vice President and Chief Financial Officer of the Company since January 27, 2004. He had served as interim Chief Financial Officer since July 7, 2003. Mr. Schnittjer first became a Vice President on December 19, 2001, and had been the Controller of TDY from November 29, 1999 to January 27, 2004. 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 senior financial positions with several of Teledyne’s aerospace and electronics companies since 1971. | |||||
10
11
| * | 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 Amended and Restated Employment Agreement with Teledyne Technologies, which provides that we will employ him as the Chairman, President and Chief Executive Officer. The agreement terminates on December 31 of each year, but will be extended annually unless either party gives the other written notice prior to October 31 of the year of such term that it will not be extended. Starting September 1, 2003, Dr. Mehrabian’s annual base salary was $610,000. 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.
Fourteen 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 employment for good reason. “Severance benefits” consist of:
| • | A cash payment equal to three times (in the case of Dr. Mehrabian and Messrs. Kuelbs, Schnittjer and Link and one other executive) or two times (in the case of Mr. Pichelli and eight 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. |
12
| • | 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 percent (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 percent of performance. | |
| • | Continued equivalent health and welfare (e.g., medical, dental, vision, life insurance and disability) benefits for a period of up to 36 months (up to 24 months in some agreements) after termination (with the executive bearing any portion of the cost the executive bore prior to the change in control); provided, however, such benefits would be discontinued to the extent the executive receives similar benefits from a subsequent employer. | |
| • | 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 ATI’s Stock Acquisition and Retention Program and our Restricted Stock Award Programs. | |
| • | Full vesting under our pension plans (within legal parameters). | |
| • | Up to $25,000 ($15,000 in some agreements) reimbursement for actual professional outplacement services. | |
| • | A “gross-up-payment” to cover any excise taxes imposed on the executive by Section 4999 of the Internal Revenue Code, as well as income taxes on the “gross-up-payment” and any interest and penalties. |
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 2003 Annual Report to Stockholders.
Our dependence on revenue from government contracts subjects us to many risks, including the risk that we may not be successful in bidding for future contracts and the risk that U.S. Government funding for our existing contracts may be diverted to other uses or delayed.
We perform work on a number of contracts with the Department of Defense and other agencies and departments of the U.S. Government. Sales under contracts with the U.S. Government as a whole, including sales under contracts with the Department of Defense, as prime contractor or subcontractor, represented approximately 46% of our total revenue for 2003. 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 Congress makes appropriations available for future fiscal years.
The overall U.S. military budget declined in real dollars from the mid-1980s through the early 1990. However, as a result of the September 11th terrorist attacks and the war in Iraq, U.S. defense spending has increased and is expected to increase over the next few years. Increased defense spending does not necessarily correlate to increased business for the Company, because not all the programs in which TDY participates or has current capabilities may be provided with increased funding. The Middle East situation
13
Also, over time, programs can evolve and affect the extent of our participation. For example, one of Teledyne Brown Engineering’s programs was restructured in 2003 to change the emphasis from a focus on test and evaluation to a focus on deployment and sustainment, which resulted in a nearly 16% decline in revenues from this contract compared to 2002 (from $58 million to $49 million). Revenues from this contract could continue to decline as this program continues to evolve away from areas that Teledyne Brown Engineering historically supported.
Furthermore, we obtain many U.S. Government prime contracts and subcontracts through the process of competitive bidding. We may not be successful in having our bids accepted.
The Department of Defense has revised its small business subcontracting goals for prime contractors to award 40% of the value of its contract to small and/or disadvantaged businesses, an increase from the prior target of 20%. This reduces the available share that may be awarded to Teledyne Brown Engineering, a large business, when teaming with other contractors in a subcontractor capacity. When a company is acting in the prime contractor capacity, this change has the effect of reducing the overall profitability on the contract, because the prime contractor’s profit on the subcontracted portion of that contract is generally lower than on the portion of the contract that is performed directly by the prime contractor.
The Company, principally and traditionally through its Systems Engineering Solutions segment, has been a significant contributor to NASA programs. The centerpiece of our current NASA activities is the International Space Station. As a result of the Columbia Space Shuttle tragedy, NASA’s Space Shuttle programs could be negatively impacted, depending on the duration of the grounding of shuttle flights.
Most of our U.S. Government contracts are subject to termination by the U.S. Government either at its convenience or upon the default of the contractor. Termination-for-convenience provisions provide only for the recovery of costs incurred or committed, settlement expenses, and profit on work completed prior to termination. Termination-for-default clauses impose liability on the contractor for excess costs incurred by the U.S. Government in reprocuring undelivered items from another source.
There is no guarantee that U.S. Government contracts will be profitable. A number of our U.S. Government prime contracts and subcontracts are fixed price-type contracts (44% in 2003 as compared to 41% in 2002). 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.
Certain fees under some of our U.S. Government contracts are linked to meeting development or testing deadlines. Fees may also be influenced or dependent on the collective efforts and success of other defense contractors over which we had no or limited control. In our Systems Engineering Solutions segment, given the finalization of actual fee negotiations for work performed on certain government contracts in prior periods, the level of government award and incentive fees received in 2003 will not continue in 2004.
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. In October 2002, the Company was informed
14
A declining stock market and lower interests rates negatively affect the value of our pension assets and could have a material adverse financial effect on us.
We have a defined benefit pension plan covering substantially all of our employees. At year-end 2003, notwithstanding improved market conditions, because of significant declines in the stock market over the last few years and low interest rates, the value of the pension assets was less than our accumulated pension benefit obligation. The accounting rules applicable to our pension plan require that amounts recognized in financial statements to be determined on an actuarial basis, rather than as contributions are made to the plan. Two significant elements in determining our pension income or pension expense are the expected return on plan assets and the discount rate used in projecting pension benefit obligations. We have assumed, based on the type of securities in which the plan assets are invested and the long-term historical returns of these investments, that the long-term expected return on pension assets will continue to be 8.5% in 2004 as it was in 2003, compared to 9.0% in 2002, and the assumed discount rate will be 6.5% in 2004, compared to 7.0% in 2003 and 7.5% in 2002.
Since the spin-off through 2002, we recorded pension income. Starting in 2003 and in the future, we expect to incur pension expense. The decline in pension income and the start of pension expense in 2003 is due to the completion, in 2001, of income amortization associated with the transition assets recorded pursuant to Statement of Financial Accounting Standards No. 87 — “Employee’s Accounting for Pensions”, as well as the decline in the value of our pension assets, coupled with reductions in our expected rate of return and discount rate assumptions used for pension plan calculations as described above. We currently expect pension expense of approximately $8.5 million in 2004, compared to pension expense of $6.9 million in 2003 and pension income of $2.3 million for 2002. Given our pension plan’s current underfunded status, we will be required to make cash contributions to our pension plan in 2004. Declines in the stock market and lower rates of return could increase future years required contribution. Also, under one of our spin-off agreements, the earliest we will be able to charge pension costs to the U.S. Government under our various government contracts will be November 29, 2004. The addition of such costs in a bid for U.S. Government contracts, which is in essence an increase to the contract price to be paid, may itself negatively affect an award decision being made in favor of the Company.
Effective January 1, 2004, in an effort to help alleviate additional pension expense in future years, new non-union employee hires do not participate in the Pension Plan, but participate in our Teledyne Technologies Incorporated 401(k) Plan.
United States’ and global responses to terrorism, the Middle East situation and perceived nuclear threats increase uncertainties with respect to many of our businesses and may adversely affect the Company’s business and results of operations.
United States’ and global responses to terrorism, the Middle East situation and perceived nuclear threats increase uncertainties with respect to U.S. and other business and financial markets. Several factors associated, directly or indirectly, with terrorism, the Iraq situation and perceived nuclear threats and responses, may adversely affect the Company.
While some of our businesses that provide products or services to the U.S. Government experienced greater demand for their products and services as a result of increased U.S. Government defense spending, various responses could realign government programs and affect the composition, funding or timing of our government programs. Government spending could shift to defense programs, including Homeland Security, in which we may not participate or may not have current capabilities and curtail less pressing non-defense programs in which we do participate, including Department of Energy or NASA programs.
15
The effect of the decline in air travel on the financial condition of many of our commercial airline and aircraft manufacturer customers, resulting from terrorism, SARS and other factors, could adversely affect our Electronics and Communications segment. Deterioration of financial performance of airlines could result in a further reduction of discretionary spending for upgrades of avionics and in-flight communications equipment, which would adversely affect our Electronics and Communications segment.
As happened after the September 11th terrorist attacks, reinstatement of flight restrictions would negatively impact the market for general aviation aircraft piston engines and components and would adversely affect our Aerospace Engines and Components segment. Potential reductions in the need for general aviation aircraft maintenance due to declines in air travel could also adversely affect our Aerospace Engines and Components segment.
Acquisitions involve inherent risks that may adversely affect our operating results and financial condition.
Our growth strategy includes acquisitions at an increased pace over prior years. 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, operating and other synergies anticipated to result from an acquisition; and | |
| • | unanticipated changes in business and economic conditions affecting an acquired business. |
In May 2003, for example, we acquired Teledyne Tekmar Company. While this company’s products and customer base are complementary to TDY’s existing instrumentation businesses, there is no assurance that we will achieve all identified financial, operating and distribution synergies.
Similarly, in connection with acquisitions, we may consolidate one or more acquired facilities with other TDY facilities to obtain synergies and cost-savings. For example, we have recently relocated the manufacturing operations of the acquired AIS’ Wichita, Kansas facility to our Teledyne Controls’ facility in Los Angeles, California. We are also in the process of moving manufacturing operations of our acquired Solid State business from Santa Clara, California to Mountain View, California. Despite planning, relocation of manufacturing operations has inherent risks, as it tends to involve, among other things, change of personnel and learning or adaptation of manufacturing processes and techniques. Production delays at the new operating location could result.
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. Our ability to raise additional capital will depend on a variety of factors, some of which will not be within our control, including resurgence of the public offering market, investor perceptions of us, our businesses and the industries in which we operate, and general economic 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.
16
We may be unsuccessful in our efforts to increase our participation in certain new markets.
We intend to both adapt our existing technology and develop new products to expand into new market segments. For example, we are developing new fuel cell related technologies. The market for fuel cell technologies is not well established and there are a number of companies that have announced intentions to develop and market fuel cell products. Some of these companies have greater financial and/or technological resources than we do.
&n