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 $618.7 million, based on the
closing price of a share of Common Stock on June 25, 2004 ($20.09), 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 28, 2005, there were 33,175,623 shares
of the registrant’s Common Stock issued and outstanding.
Selected portions of the registrant’s
proxy statement for its 2005 Annual Meeting of Stockholders (the “2005
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 paragraph (a)(9) to Item 402
of Regulation S-K.
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 defense, space and environmental
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 2004 were $1,016.6 million,
compared with $840.7 million and $772.7 million in 2003 and 2002,
respectively. Our aggregate segment operating profits were $89.2 million,
$61.9 million and $57.3 million in 2004, 2003 and 2002, respectively.
Approximately 57% of our total sales in 2004 were to commercial customers
and the balance was to the U.S. Government, as a prime contractor or subcontractor.
Approximately 43% 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 19% of total sales in 2004.
Our four business segments and their respective
contributions to our total sales in 2004, 2003 and 2002 are summarized in
the following table:
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|
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|
| |
|
Percentage of Sales |
|
| |
|
|
|
| Segment |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
|
|
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|
|
Electronics and
Communications
|
|
|
56 |
% |
|
|
53 |
% |
|
|
50 |
% |
|
Systems Engineering
Solutions
|
|
|
24 |
% |
|
|
25 |
% |
|
|
27 |
% |
|
Aerospace Engines
and Components
|
|
|
18 |
% |
|
|
20 |
% |
|
|
21 |
% |
|
Energy Systems
|
|
|
2 |
% |
|
|
2 |
% |
|
|
2 |
% |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
Our principal executive offices are located
at 12333 West Olympic Boulevard, Los Angeles, California 90064-1021. Our telephone
number is (310) 893-1600.
Strategy
As we grow both organically and through acquisitions,
we are working to become a simpler and more integrated operating company.
Over time, our goal is to continue on our path of high quality revenue and
earnings growth and create a more focused set of businesses that are truly
superior in their niches. We do this by executing on two focused fronts: first,
by strengthening and expanding specific platforms in our core electronics,
instruments and systems engineering businesses through organic growth and
targeted acquisitions; and second, by pursuing operational excellence and
margin expansion initiatives to continuously improve earnings. In addition,
operational excellence to Teledyne means the rapid integration of the businesses
we acquire. We continually evaluate our product lines to ensure that they
are aligned with our strategy.
Our Recent Acquisitions
After completing one acquisition in each of
2001 and 2002, and two acquisitions in 2003, we completed five acquisitions
during our fiscal year ended 2004.
1
We furthered our strategy to expand our presence
in the environmental instrumentation market. On February 27, 2004, we
acquired assets of Hudson, New Hampshire-based Leeman Labs, Inc., a manufacturer
of spectrometers used by environmental and quality control laboratories to
detect low levels of inorganic contaminants in water and other environmental
samples, which products complement the organic analysis instruments of Teledyne
Tekmar Company, a Mason, Ohio-based company acquired in 2003. On June 18,
2004, we acquired Isco, Inc., located in Lincoln, Nebraska and a leading producer
of water quality monitoring instruments, including samplers, flow meters and
on-line process analyzers, which are complementary to our existing environmental
instrumentation product lines.
Our acquisitions have also focused on enhancing
our defense electronics businesses. On July 2, 2004, we completed the
acquisition of Reynolds Industries, Incorporated, a supplier of specialized
high voltage connectors and subassemblies for defense, aerospace and industrial
applications, with operations in California and the United Kingdom. Reynolds
Industries had historically supplied its high voltage connectors and cables
to our traveling wave tubes.
Two of our 2004 acquisitions furthered our
strategy to develop a broader line of microwave products for our defense customers.
On December 31, 2003, we acquired assets of the Filtronic Solid State
business located in Santa Clara, California. This business, which was subsequently
moved over a short time period to our facility in Mountain View, California,
designs and manufactures customized microwave subassemblies for electronic
warfare, radar and other military applications. Its precision YIG-based oscillators,
filters and amplifiers serve some of the same customers of, and are used on
some of the same military programs, as those of our longer-standing Teledyne
Wireless and Teledyne Microwave Electronic Components (MEC) business
units.
On October 22, 2004, we acquired the assets
of the defense electronics business of Celeritek, Inc., based in Santa Clara,
California. The solid state amplifiers and microwave subassemblies of this
defense electronics business utilize design and manufacturing technology similar
to Teledyne Microwave and are complementary with Teledyne MEC’s line
of high power helix traveling wave tubes used on military, electronic warfare,
radar and communications applications. Like the Filtronic Solid State acquisition,
to obtain various synergies, the operations of this business have been moved
to and consolidated with our facility in Mountain View, California.
On January 3, 2005, in an effort to streamline
operations and reduce costs, the businesses principally operating as Teledyne
Microwave, located in Mountain View, California, and Teledyne MEC, located
in Rancho Cordova, California, were consolidated into one legal entity, Teledyne
Wireless, Inc., a wholly-owned subsidiary of the Company. Teledyne Wireless,
Inc. had been the subsidiary that bought the defense electronics assets of
each of Filtronic Solid State and Celeritek, Inc.
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.
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.
2
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 defense, commercial aerospace, communications,
industrial and medical markets.
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 additional capacity
for various satellite communication systems. Commercial applications for traveling
wave tubes include electromagnetic compatibility test equipment and satellite
communication terminals for mobile newsgathering.
Microwave Components and Subsystems.
We design, develop, and manufacture microwave components used in aerospace
and defense applications. With the acquisition of the assets of Filtronic
Solid State on December 31, 2003, we expanded our microwave products
to include customized microwave subassemblies for electronic warfare, radar
and other military applications. With the acquisition of the defense electronics
business of Celeritek, Inc. on October 22, 2004, we design and manufacture
gallium arsenide-based RF and microwave components and subassemblies for electronic
warfare, radar and other military applications.
High Voltage Connectors and Subassemblies.
On July 2, 2004, through the acquisition of Reynolds Industries,
Incorporated, we became a supplier of specialized high voltage connectors
and subassemblies for defense, aerospace and industrial applications. We also
now produce pilot helmet mounted display components and subsystems for the
Joint Helmet Cueing System, which is designed to give military pilots the
ability to designate a target just by looking at it.
Microelectronic Modules. We develop
and manufacture custom microelectronic modules that provide both high reliability
and extremely dense packaging for military applications. Our microelectronic
modules are used for optical communications on the F-22 Raptor and 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 VME-Flex
TM 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.
Relays and Switches. Teledyne Relays
supplies electromechanical relays, solid-state power relays and coaxial switching
devices to military and aerospace markets.
Electronics Manufacturing Services.
We serve the market for high-mix, low-volume manufacturing of sophisticated
military electronics equipment principally from our facility in Tennessee.
3
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
process control instrumentation. Since then, through acquisitions, we have
greatly expanded our presence in the environmental instrumentation markets.
In addition to environmental monitoring instruments, we also serve a range
of other market applications including industrial process control, petrochemical
manufacturing, semiconductor manufacturing, drug discovery and energy exploration
and production.
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.
On February 27, 2004, we added inorganic
analysis to our environmental capabilities by acquiring the assets of Leeman
Labs, Inc. 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.
Since our acquisition of Isco, Inc. on June 18,
2004, we produce water quality monitoring products such as wastewater samplers
and open channel flow meters. Flow meters detect leaks in sewer systems and
monitor run off in storm drains. Teledyne Isco, Inc. also manufactures chromatography
instruments and accessory for purification of organic compounds. Its liquid
chromatography customers include pharmaceutical laboratories involved in drug
discovery and development. Additionally, Teledyne Isco manufactures chemical
separation instruments for industrial and research use.
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 began selling gas analyzers to 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.
| |
|
| |
Other Commercial 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
4
increasingly providing our systems
to the Airbus A320 and A330/340 family aircraft, and we estimate that our
forward fit market share was approximately 60% at the end of 2004. In addition,
our Aviation Information Solutions (AIS) business 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. Teledyne Controls’ Optical Quick
Access Recorder is used on the U.S. Air Force’s C-17 Globemaster III
military transport aircraft. Teledyne Controls’ communications software
has been embedded in aircraft flight management systems for the C-130 Transport
and B-767 Tanker aircraft of the U.S. Air Force.
Microelectronic Modules. In addition
to military microelectronic modules, we develop and manufacture custom microelectronic
modules that provide both high reliability and extremely dense packaging for
implantable medical devices, such as pacemakers and defibrillators, and commercial
communication products.
Relays and Switches. In addition to
military and aerospace markets, Teledyne Relays supplies electromechanical
relays, solid-state power relays and coaxial switching devices to industrial
and commercial markets. Applications include microwave and wireless communication
infrastructure, RF and general broadband test equipment, test equipment used
in semiconductor manufacturing, and industrial and commercial machinery and
control equipment.
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.
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.
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.
We manufacture, principally for one customer, key subsystems in medical equipment
such as magnetic resonance imaging (MRI) and x-ray systems.
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.
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 Defense Department major
prime contractors.
Our Technologies Group plays significant roles
in diverse 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.
During 2004, we continued our long-standing
support of several missile defense programs, including the Ground-based Midcourse
Defense (“GMD”) Program, Missile Defense Systems Exerciser and,
as part
5
of the Lockheed Martin team, the
Targets and Countermeasures program. This program involves the test 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 Terminal High Altitude Area Defense (“THAAD”).
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 also continued our work on the International Space Station Cargo Mission
Contract at the Johnson Space Center in 2004. This six-year contract, which
began in 2003, 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. 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.
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. During 2004, we continued our
work on the U.S. Army’s Non-Stockpile Chemical Material Program in support
of 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 use detonation chambers
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.
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.
As part of homeland security initiatives, we
are supporting the Federal Aviation Administration in the development of an
Automated Airborne Flight Alert System. This system, developed in conjunction
with Teledyne Controls, is designed to detect flight irregularities by providing
selected aircraft flight data and situational awareness data to ground agencies
over existing communications links.
6
Through Teledyne Solutions, Inc., we are a
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 engineering and services support to other major Department
of Defense customers including the Missile Defense Agency, the Program Executive
Office for Missiles and Space, the Defense Threat Reduction Agency, the Mobile
Corps of Engineers and the Army Environmental Center.
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.
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
aircraft. In addition to these long-standing products, our engines power new
high-speed composite aircraft, including the Cirrus SR-20 and SR-22, the Diamond
C1, and the Lancair Columbia 300, 350 and 400 series. We are also continuing
to work with Honda Motor Company to explore the development of a new aircraft
piston engine primarily targeted at lower power markets not currently served
by our existing business.
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, and our Fairhope, Alabama service center,
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
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. 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 continue to 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
TM 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
TM sealed lead acid batteries.
We design, develop and manufacture small turbine
engines primarily used in tactical missiles for military markets.
7
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 baseline JASSM system. In 2004, we shipped 167 JASSM missile engines,
and during 2005, we expect to ship approximately 280 engines as full rate
production of the missile begins.
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.
In 2004, we entered into a contract related
to the U.S. Army’s Future Combat System for the development of new and
derivative turbine engines for unmanned air vehicles, commonly called UAVs,
and other future aircraft.
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 Teledyne, 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 2004, in partnership with Boeing and under a ten-year
$57 million contract signed in 2003 with the U.S. Department of Energy
we completed the initial design and began construction of an operational prototype
of the new Multi-Mission Radioisotope Thermoelectric Generator (“MMRTG”)
capable of supporting planetary landing and deep space probe missions. If
selected for flight, the first of two production units could be used to power
the Mars Science Lander scheduled to launch in 2009.
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
TM 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.
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, in 2004 we started
fabrication of an operation prototype of a PEM fuel cell power system for
use in the Second Generation Reusable Launch Vehicle, a concept vehicle designed
as a replacement for the Space Shuttle.
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 2004, 2003 or 2002.
Approximately 43%, 46%, and 46% of our total
sales for 2004, 2003 and 2002, 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 2004, 2003
and 2002, our largest program with the U.S. Government, The Boeing Company —
Ground-based Midcourse Defense contract,
8
represented 5.4%, 5.8%, and 7.5%
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
| |
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|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
(in millions) |
|
|
Electronics and
Communications
|
|
$ |
147.3 |
|
|
$ |
142.0 |
|
|
$ |
115.2 |
|
|
Systems Engineering
Solutions
|
|
|
240.4 |
|
|
|
210.3 |
|
|
|
202.4 |
|
|
Aerospace Engines
and Components
|
|
|
26.0 |
|
|
|
24.7 |
|
|
|
25.5 |
|
|
Energy Systems
|
|
|
19.4 |
|
|
|
10.7 |
|
|
|
9.3 |
|
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|
|
|
|
|
|
|
|
|
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Total U.S. Government
sales
|
|
$ |
433.1 |
|
|
$ |
387.7 |
|
|
$ |
352.4 |
|
| |
|
|
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|
|
|
|
Our total backlog of confirmed orders was approximately
$471.3 million at January 2, 2005, $369.7 million at December 28,
2003, and $324.1 million at December 29, 2002. We expect to fulfill
96% of such backlog of confirmed orders during 2005.
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. During 2004, as part of on-going
acquisition integration efforts, some of our Teledyne Instruments companies
began reviewing and joining internal sales and servicing efforts.
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.
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 $263.3 million, $218.1 million, and $196.8 million on research
and development and bid and proposal costs for 2004, 2003, and 2002, respectively.
Customer-funded research and development, most of which
9
was attributable to work under contracts
with the U.S. Government, represented approximately 88%, 87%, and 87% of total
research and development costs for 2004, 2003, and 2002, respectively.
In 2004, approximately 71% of the $32.6 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 $33.0 million in 2005.
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,
at an annual fee of $100,000. In November 2004, we exercised our option
to purchase all rights and interests in the Teledyne marks for $412,000.
Employees
Our total current workforce consists of approximately
6,600 employees. The International Union of United Automobile, Aerospace
and Agricultural Implement Workers of America represents approximately 300 employees
in Mobile, Alabama under a collective bargaining agreement that expires by
its terms on February 20, 2007. This union also represents approximately 29
of our employees in Toledo, Ohio under a collective bargaining agreement that
expires by its terms on November 8, 2006. In addition, this union represents
approximately 35 employees in Abbeville, Alabama under a collective bargaining
agreement that has been extended and expires on April 16, 2005. We consider
our relations with our employees to be good.
10
Executive Management
Teledyne’s executive management includes:
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| Name and Title |
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Age |
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Principal Occupations Last 5 Years
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Executive Officers:
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Robert Mehrabian*
Chairman, President and Chief Executive Officer; Director
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63 |
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|
Dr. Mehrabian is the Chairman, President
and Chief Executive Officer of Teledyne. He has been the President and
Chief Executive Officer of Teledyne since its formation in 1999. 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 Teledyne, Mellon Financial Corporation
and PPG Industries, Inc. |
| |
John T. Kuelbs*
Senior Vice President, General Counsel and Secretary
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62 |
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Mr. Kuelbs has been the Senior Vice
President, General Counsel and Secretary of Teledyne 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. |
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Dale A. Schnittjer*
Vice President and Chief Financial Officer
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60 |
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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 Teledyne from November 29,
1999 to January 27, 2004. Mr. Schnittjer also served as Acting
Chief Financial Officer and Treasurer of Teledyne 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. |
11
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| Name and Title |
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Age |
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Principal Occupations Last 5 Years
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Susan L. Main* Vice
President and Controller
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46 |
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Ms. Main has been Vice President and
Controller of the Company since March 2004. Prior to joining the
Company, Ms. Main served as Vice President Controller of Water Pik
Technologies, Inc. from its spin-off from ATI in November 1999
to March 2004. Prior to that, Ms. Main has held numerous financial
roles with government, industrial and commercial segments of ATI and
Teledyne, Inc. |
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Segment Management:
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James M. Link* President,
Teledyne Brown Engineering, Inc.
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62 |
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Retired Lieutenant General Link has been
the President of Teledyne Brown Engineering since July 2001. Prior
to that, Mr. Link served as Senior Vice President of Science Applications
International Corporation (SAIC) Applied Technology Group in Huntsville,
Alabama. Before joining SAIC, Mr. Link had a distinguished 33-year
career with the U.S. Army where he last served as Deputy Commanding
General of the U.S. Army Materiel Command. Mr. Link is a director
of Dewey Electronics Corporation. |
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Aldo Pichelli* Senior
Vice President and Chief Operating Officer, Electronics and Communications
Segment
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53 |
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Mr. Pichelli has been Senior Vice
President and Chief Operating Officer of Teledyne’s Electronics
and Communications segment since July 22, 2003. Prior to that,
he served as Vice President and General Manager of Teledyne Instruments
since its formation in 2001. Mr. Pichelli held various management
and financial positions with several Teledyne companies (including former
companies) since 1980, having been the Vice President and General
Manager of Teledyne Analytical Instruments from 1997 to 2000 and the
General Manager of Teledyne Hastings Instruments from 1996 to 1997.
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Bryan L. Lewis
President, Teledyne Continental Motors, Inc.
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55 |
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Mr. Lewis has been the President of
Teledyne Continental Motors since 1992. From 1990 to 1992, he was President
of the turbine engine operations of Teledyne, Inc. Mr. Lewis has
held various technical and general management positions during his more
than 21 years with Teledyne and its predecessors. |
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Rhett Ross President,
Teledyne Energy Systems, Inc.
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40 |
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Mr. Ross has been President of Teledyne
Energy Systems, Inc. since its formation in June 2001 for the purposes
of the transaction with Energy Partners, Inc. Prior to that, he was
General Manager of the Teledyne Energy Systems business unit. Before
joining the Company in July 2000, Mr. Ross operated R4 Energy,
a consulting business specializing in energy technologies. From 1993
to 1999, Mr. Ross was Vice President — Product Development
of Energy Partners, Inc., a fuel cell development company. |
12
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| Name and Title |
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Age |
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Principal Occupations Last 5 Years
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Other Officers:
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Robert W. Steenberge
Chief Technology Officer
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57 |
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Mr. Steenberge has been Teledyne’s
Chief Technology 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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Ivars R. Blukis
Chief Business Risk Assurance Officer
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|
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62 |
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Mr. Blukis has been Chief Business Risk
Assurance Officer since January 2002 and is responsible for the
internal audit function. Prior to that, Mr. Blukis was the Vice
President, Finance and Administration, for Teledyne Electronics Technologies.
Since joining Teledyne in 1976, Mr. Blukis has held various financial
and administrative positions with its microwave electronics components
business unit. |
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Robyn E. McGowan
Vice President-Administration and Human Resources and Assistant Secretary
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40 |
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Ms. McGowan has been Vice President —
Administration and Human Resources of the Company since April 2003
and Vice President — Administration since December 2000.
Prior to becoming a Vice President, she served as Director of Administration.
She has been an Assistant Secretary of Teledyne 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. |
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Melanie S.
Cibik Vice President, Associate General Counsel and Assistant Secretary
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45 |
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Miss Cibik has been Vice President
of the Company since December 2000, Associate General Counsel since
the spin-off, and an Assistant 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, now known as Kirkpatrick & Lockhart Nicholson
Graham LLP. |
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Shelley D.
Green Treasurer
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46 |
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Ms. Green has been the Treasurer of Teledyne
since 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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Robert L. Schaefer
Associate General Counsel, General Counsel of the Electronics and
Communications Segment
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59 |
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Mr. Schaefer has been an Associate General
Counsel of Teledyne and the General Counsel of Teledyne’s Electronics
and Communications segment since June 2000. He has served as an Assistant
Secretary since April 2002. Prior to joining Teledyne, he was Director
of Legal for Raytheon Missile Systems. |
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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.
|
13
Dr. Mehrabian has an Amended and Restated
Employment Agreement with Teledyne, 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, 2004,
Dr. Mehrabian’s annual base salary was $631,350. The agreement provides
that Dr. Mehrabian is entitled to participate in Teledyne’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 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 Teledyne (including service to ATI), but not more
than 10 years.
Fifteen current members of management have
entered into Change in Control Severance Agreements with Teledyne. 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 Teledyne 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:
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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 nine 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. |
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• |
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). |
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• |
Payment in cash for unpaid Performance Share Plan awards,
assuming applicable goals are met at 120 percent of performance.
|
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• |
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. |
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• |
Immediate vesting of all stock options, with options being
exercisable for the full remaining term. |
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Removal of restrictions on restricted stock issued by
us under our Restricted Stock Award Programs. |
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Full vesting under our pension plans (within legal parameters).
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Up to $25,000 ($15,000 in some agreements) reimbursement
for actual professional outplacement services. |
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A “gross-up-payment” to cover any excise and
federal income taxes imposed on the executive as a result of the payments
constituting a “golden parachute” as defined in Section 280G
of the Internal Revenue Code. |
14
Risk Factors; Cautionary Statement as to Forward-Looking Statements
The following text highlights various risks
and uncertainties associated with Teledyne. These factors could materially
affect “forward-looking statements” (within the meaning of the Private
Securities Litigation Reform Act of 1995) that we may 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 Teledyne’s 2004 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
including sub-contracts with government prime contractors. Sales under contracts
with the U.S. Government as a whole, including sales under contracts
with the Department of Defense, as prime contractor or subcontractor, represented
approximately 43% of our total revenue for 2004. 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.
While U.S. defense spending has increased
as a result of the September 11th terrorist attacks and the war in Iraq,
it is currently expected to moderate over the next few years. Continued defense
spending does not necessarily correlate to continued business for the Company,
because not all the programs in which Teledyne participates or has current
capabilities may be provided with continued funding. Each of the Middle East
and the North Korean situations could result in a diversion of funds from
programs in which Teledyne participates and redirection of those funds to
pay for costs associated with either situation or programs more closely related
to it.
Our Electronics and Communications segment
provides a variety of products for newer military platforms such as the F/A-22
and F-35 aircraft. Development and production of these aircrafts are very
expensive, and there is no guarantee that the Department of Defense, as it
balances priorities, will continue to provide funding to manufacture and support
these platforms.
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). Then, in 2004, revenues related to
this program totaled approximately $54 million with the increase over
2003 resulting from unanticipated ground tests. The Company expects revenues
from this program to decline in 2005.
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. While the Company anticipates contributing
to President Bush’s announced vision for NASA that includes lunar and
interplanetary exploration, funding for this vision may be reduced in the
near term due to additional funding needs to return the Space Shuttle to flight.
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.
Until November 29, 2004, under one of
our spin-off agreements, we were not able to charge pension costs to the U.S. Government
under our various government contracts. Since such date, we are able to so
15
charge pension costs. While this
might help reduce our pension expense, 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.
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 (43% in 2004 as compared to
44% in 2003 and 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 continue to 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.
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 that the
U.S. Government had declined to intervene in a lawsuit filed under seal
pursuant to the False Claims Act more than four years before. The Company
believes that its Electronic Safety Products unit’s involvement in the
civil action is over, as the plaintiff’s appeal of Company’s motion
to dismiss this action has been denied and the plaintiff’s petition for
a rehearing en banc by the Court of Appeals of the DC Circuit has
also been denied. Should the plaintiff file a petition for certiorari with
the United States Supreme Court by March 21, 2005, the Company intends
to continue its vigorous defense.
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
most of our employees. At year-end 2004, 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 2005, as it was in 2004 and
2003, and the assumed discount rate will be 6.25% in 2005, compared to 6.5%
in 2004 and 7.0% in 2003.
Since the spin-off through 2002, we recorded
pension income. In 2003, we began to incur pension expense and we expect to
continue to incur pension expense. The decline in pension income and the start
16
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 net pension expense of
approximately $6.0 million in 2005, compared to net pension expense of
$8.2 million in 2004 and $6.9 million for 2003. The expected reduced
pension expense in 2005 relates to the termination on November 29, 2004,
of one of our spin-off requirements that prohibited us from charging pension
costs to the U.S. Government under various government contracts until
such date. Given our pension plan’s current underfunded status, in 2004,
we began making required cash contributions to our pension plan. Declines
in the stock market and lower rates of return could increase future years
required contributions to our pension plan.
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 defined benefit Pension Plan, but
participate in an enhanced 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 from North
Korea and others 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 or Homeland Security programs 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.
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, another SARS scare 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.
The government continues to evaluate potential
security issues associated with general aviation. Increased government regulations,
including but not limited to increased airspace regulations, could lead to
an overall decline in air travel and have an adverse affect on our Aerospace
Engines and Components 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 also 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.
Acquisitions involve various inherent risks, such as:
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our ability to assess accurately the value, strengths,
weaknesses, internal controls, contingent and other liabilities and potential
profitability of acquisition candidates; |
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• |
the potential loss of key personnel of an acquired business;
|
17
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• |
our ability to integrate acquired businesses and to achieve
identified financial, operating and other synergies anticipated to result
from an acquisition; |
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• |
our ability to assess, integrate and implement internal
controls of acquired businesses in accordance with Section 404 of
the Sarbanes-Oxley Act of 2002; and |
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• |
unanticipated changes in business and economic conditions
affecting an acquired business. |
While the Company conducts financial and other
due diligence in connection with its acquisitions and generally seeks some
form of protection, including indemnification from a seller and sometimes
an escrow of a portion of the purchase price to cover potential issues, such
acquired companies may have weaknesses or liabilities that are not accurately
assessed or brought to our attention at the time of the acquisition. Further,
such indemnities or escrows may not fully cover such matters. In July 2004,
we acquired Reynolds Industries, Incorporated, a private company that did
not have formal internal controls and compliance systems in place. While the
Company required the sellers to take certain compliance actions prior to the
closing of the acquisition, including with respect to export controls, there
is no assurance that we identified all issues.
In June 2004, we acquired Isco, Inc. While
this company’s products and customer base are complementary to Teledyne’s
existing instrumentation businesses, there is no assurance that we will achieve
all identified financial, operating and distribution synergies.
In connection with acquisitions, we may consolidate
one or more acquired facilities with other Teledyne facilities to obtain synergies
and cost-savings. For example, we have recently relocated the manufacturing
operations of the acquired defense electronics assets of Celeritek, Inc. to
our Mountain View, California facility. 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.
Except for the Filtronic Solid State assets
acquisition, as permitted by SEC rules, our management’s report as to
our assessment of the effectiveness of internal controls over financial reporting
excludes our 2004 acquisitions from its scope and coverage. We plan to evaluate
the internal controls of these acquired companies in 2005, and implement a
formal and rigorous system of internal controls. The Company can provide no
assurance that we will be able to provide a report that contains no significant
deficiencies or material weaknesses with respect to these acquired companies
or other acquisitions.
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 $280.0 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.
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
18
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.
We are also developing new electronic products,
including electronic flight bags and high-density microprocessor connectors,
which are intended to access markets in which Teledyne does not currently
participate or has limited participation. We may be unsuccessful in accessing
these markets if our products do not meet our customers’ requirements,
due to either changes in technology and industry standards or because of actions
taken by our competitors.
We may be unable to successfully introduce new and enhanced products in
a timely and cost-effective manner.
Our operating results depend in part on our
ability to introduce new and enhanced products on a timely basis. Successful
product development and introduction depend on numerous factors, including
our ability to anticipate customer and market requirements, changes in technology
and industry standards, our ability to differentiate our offerings from offerings
of our competitors, and market acceptance.
We may not be able to develop and introduce
new or enhanced products in a timely and cost-effective manner or to develop
and introduce products that satisfy customer requirements. Our new products
also may not achieve market acceptance or correctly anticipate new industry
standards and technological changes.
Technological change and evolving industry standards 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.
The Company is currently working to make sure
that certain of its electronic products sold in European member states comply
with a directive not to contain impermissible levels of lead, mercury, cadmium,
hexavalent chromium, polybrominated biphenyls or polybrominated diphenyl ethers
on or after July 1, 2006. Although many of our products are exempt from
the European directive, we expect that over time component manufacturers may
discontinue selling components that have the restricted substances. This will,
in turn, require Teledyne to accommodate changes in parameters, such as the
way parts are soldered, and may in some cases require redesign of certain
products.
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 the case even if the claims themselves are proven untrue or settled for
immaterial amounts.
While we have general liability and other insurance
policies concerning product liabilities, we have self-insured retentions or
deductibles under such policies with respect to a portion of these liabilities.
For example, our current annual self-insured retention for general aviation
aircraft liabilities incurred in
19
connection with products manufactured
by Teledyne Continental Motors, Inc., is $25.0 million. Our existing
aircraft product liability insurance policy expires in May 2005.
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 had been
engaged in a product recall of piston engine crankshafts whereby the Company
recorded a $12.0 million pretax charge in the second quarter of 2000.
Product recalls have the potential for tarnishing a company’s reputation
and could have a material adverse effect on the sales of our products. In
2002, we reached a monetary settlement related to the 2000 recall with two
of three companies that manufactured and processed allegedly defective steel
subsequently made into aircraft engine crankshafts. We failed to win a jury
verdict against a third company involved in making the steel. The Company
continues to pursue cost recovery through litigation against one other materials
supplier as a result of the 2000 product recall program. There is no assurance
that the Company will recover any costs or the negative impact on its reputation.
The Company has been joined, among a number
of defendants (often over 100), in lawsuits alleging injury or death as a
result of exposure to asbestos. We have not incurred material liabilities
in connection with these lawsuits. The filings typically do not identify any
of the Company’s products as a source of asbestos exposure, and the Company
has been dismissed from cases for lack of product identification, but only
after some defense costs have been incurred. Also, because of the prominent
“Teledyne” name, we may be mistakenly joined in lawsuits involving
a company or business that was not spun off or otherwise assumed by us as
part of our 1999 spin-off. The Company’s historic insurance coverage,
including that of its predecessors, may not fully cover such claims and defense
of such matters, as coverage depends on the year of purported exposure and
other factors. Nonetheless, the Company intends to defend these claims vigorously.
Congress has been considering tort reform to deal with asbestos-related claims
and has recently passed legislation addressing class action lawsuits.
The gas generators manufactured by Teledyne
Energy Systems, Inc. currently contain a sealed, wetted asbestos component.
While the company has begun transitioning to a replacement material, has placed
warning labels on its products and takes care in handling of this material
by employees, there is no assurance that the Company will not face product
liability claims involving this component.
Our Teledyne Brown Engineering’s laboratory
in Knoxville, Tennessee performs radiological analyses. While the laboratory
is certified by the Department of Energy, has other nuclear-related certifications,
and has internal quality controls in place, errors and omissions in analyses
may occur. We currently have errors and omissions insurance coverage and nuclear
liability insurance coverage that might apply depending on the circumstances.
We also have sought indemnities from some of our customers. Our insurance
coverage or indemnities, however, may not be adequate to cover potential problems
associated with faulty radiological analyses.
We cannot assure that we will not have additional
product liability claims or that we will not recall any additional products.
We may have difficulty obtaining product liability and other insurance
coverages, or be subject to increased costs for such coverage.
Insurance costs have increased greatly over
the last few years. As a manufacturer of a variety of products including aircraft
engines used in general aviation aircraft, we have general liability and other
insurance policies that provide coverage beyond self-insured retentions or
deductibles. We cannot assure that, for 2005 and in future years, insurance
carriers will be willing to renew coverage or provide new coverage for product
liability, especially as it relates to general aviation. If such insurance
is available, we may be required to pay substantially higher prices for coverage
and/or increase our levels of self-insured retentions or reserves. The Company’s
current aircraft product liability insurance policy expires in May 2005. In
connection with the last renewal, based on more recent favorable claims experience
and changes to the claims management process, the Company lowered its insurance
premium costs and increased its annual self-insured retention to $25.0 million
from $15.0 million. To alleviate aircraft product liability
20
insurance costs, the Company continues
to try to reduce manufacturing and other costs and also to pass on such insurance
costs through price increases on its aircraft engines and spare parts. The
Company cannot provide assurances that further cost reduction efforts will
prove successful or that customers will accept additional price increases.
For certain electronic components for medical
applications that we manufacture, such as those that go into cochlear implants,
we have asked for indemnities from our customers and/or to be included under
their insurance policies. We cannot, however, provide any assurance that such
indemnities or insurance will offset potential liabilities that we may incur
as a result of our manufacture of such components.
Aside from the uncertainties created by external
events, such as September 11th and subsequent activities, our ability
to obtain product liability insurance and the cost for such insurance are
affected by our historical claims experience. We cannot assure that, for 2005
and in future years, our ability to obtain insurance, or the cost for such
insurance, or the amount of self-insured retentions or reserves will not be
negatively impacted by our experience in prior years.
Increasing competition could reduce the demand for our products and services.
Although we believe that we have certain advantages
that 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. While the market for commercial
aircraft has improved since the downturn triggered by the events of September 11th
and the Iraqi war, another such event would increase the level of uncertainty
regarding future orders for aircraft.
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 develop and manufacture products for customers
in the energy exploration market, which has been cyclical and suffered from
over capacity in prior years. Strong demand and increased prices for oil and
natural gas contributed to substantial revenue growth during 2004 at Teledyne
Geophysical Instruments, which is not expected to be sustained.
We sell products to customers in industries that may undergo rapid and
unpredictable changes.
We develop and manufacture products for customers
in industries that have undergone rapid changes in the past. For example,
we manufacture products and provide manufacturing services to companies that
serve telecommunications markets. During 2001, many segments of the telecommunications
market experienced a dramatic and rapid downturn that resulted in cancellations
or deferrals of orders for our products and services. This market segment,
or others that we serve, may exhibit rapid changes in the future and may adversely
affect our operating results, or our production levels, or both.
21
We are subject to the risks associated with international sales.
During 2004, international sales accounted
for approximately 19% 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:
| |
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• |
political and economic instability; |
| |
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• |
international terrorism; |
| |
| |
• |
export controls; |
| |
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• |
changes in legal and regulatory requirements; |
| |
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• |
U.S. and foreign government policy changes affecting the
markets for our products; |
| |
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• |
changes in tax laws and tariffs; |
| |
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• |
convertibility and transferability of international currencies; and
|
| |
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• |
exchange rate fluctuations. |
Any of these factors could have a material
adverse effect on our business, results of operations and financial condition.
Exchange rate fluctuations may negatively affect the cost of our products
to international customers and therefore reduce our competitive position.
Given the current exchange rate between the U.S. Dollar and the British
Pound Sterling, European contracts for which we are paid in U.S. Dollars
could be negatively affected to the extent the underlying costs to the Company
to fulfill the contract are paid in Pounds Sterling. In prior years, weak
conditions in Asian economies have affected our results of operations adversely.
The September 11th terrorist attacks, as well as fears of an international
arms race, have resulted in increased export scrutiny of sales of some of
our products to international customers. Travel restrictions to Middle Eastern
and other countries may negatively affect continuing international sales or
service revenues from such regions.
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.
While the Company has an environmental management
system and compliance program applicable to its operating facilities, including
a “review and audit” program to monitor compliance where each facility
is reviewed and audited by an internal environmental team every three years,
such internal control is designed to reduce environment risk, it does not
eliminate potential environmental liabilities. In addition, as the Company
continues to pursue acquisitions, while it conducts environmental-related
due diligence and generally seeks some form of protection, including indemnification
from a seller, such acquired companies may have environmental liabilities
that are not accurately assessed or brought to our attention at the time of
the acquisition.
Some of our businesses work with highly dangerous
substances that require heightened standards of care. For example, as a systems
contractor for the U.S. Army’s Program Manager for Non-Stockpile
Chemical Materiel, we conduct research, development, manufacturing, test and
evaluation and site operations related to the safe and environmentally protective
disposal of small caches of chemical munitions and materiel located in over
30 states and territories. 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 in a former program, 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
22
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 16 to Notes to Consolidated Financial Statements.
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.
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 to expand our profitable niche businesses, we continually evaluate
our product lines to ensure that they are aligned with our strategy. For example,
we determined that the on-line process control instruments business of the
German subsidiary of Isco, Inc. was not aligned with our strategy, and in
February 2005, we entered into an agreement to sell this non-strategic business.
Our ability to dispose of product lines 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 non-strategic product lines will be sold.
Also, we cannot provide any assurance as to the availability, timing, terms
or conditions of alternative courses of action, including closure, or the
sale of any non-strategic product line cannot be consummated.
Provisions of our governing documents, applicable law, and our Change
in Control Severance Agreements could make an acquisition of Teledyne more
difficult.
Our Restated Certificate of Incorporation,
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 in a transaction not approved by our board
of directors more difficult. We have also entered into Change in Control Severance
Agreements with 15 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 $7.6875 to a
high of $31.97 per share. At February 28, 2005, our closing stock
price was $30.58. Fluctuations in our stock price could continue. Among the
factors that could affect our stock price are:
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• |
quarterly variations in our operating results; |
| |
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• |
strategic actions by us or our competitors, such as acquisitions;
|
| |
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• |
adverse business developments, such as the engine recall
by Teledyne Continental Motors in 2000; |
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| |
• |
war in the Middle East or elsewhere; |
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• |
additional terrorist activities; |
23
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• |
increased military or homeland defense activities; |
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• |
changes to the Federal budget; |
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• |
improvements in the semiconductor, telecommunications,
commercial aviation and electronic manufacturing services markets; |
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• |
general market conditions; and |
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• |
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.
While the Company believes its control systems are effective, there are
inherent limitations in all control systems, and misstatements due to error
or fraud may occur and not be detected.
The Company continues to take action to assure
compliance with the internal controls, disclosure controls and other requirements
of the Sarbanes-Oxley Act of 2002. Our management, including our Chief Executive
Officer and Chief Financial Officer, cannot guarantee that our internal controls
and disclosure controls will prevent all possible errors or all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
In addition, the design of a control system must reflect the fact that there
are resource constraints and the benefit of controls must be relative to their
costs. Because of the inherent limitations in all control systems, no system
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and
that breakdowns can occur because of simple error or mistake. Further, controls
can be circumvented by individual acts of some persons, by collusion of two
or more persons, or by management override of the controls. The design of
any system of controls also is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions.
Over time, a control may be inadequate because of changes in conditions or
the degree of compliance with the policies or procedures may deteriorate.
Because of inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
A serious earthquake in California could adversely affect our business,
results of operations and financial condition.
Several of our facilities could be subject
to a catastrophic loss caused by earthquake due to their locations. Many of
our production facilities and our headquarters are located in California and
thus are in areas with above average seismic activity. If any of these facilities
or our California headquarters were to experience a catastrophic earthquake
loss and notwithstanding our disaster recovery plans (including relating to
information technology systems), it could disrupt our operations, delay production,
shipments and revenue and result in large expenses to repair or replace the
facility or facilities.
24
Our principal facilities as of January 2,
2005 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.
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| Facility Location |
|
Principal Use |
|
Owned/Leased |
| |
|
|
|
|
| Electronics and Communications
Segment |
|
Defense Electronics
|
|
|
|
|
|
Rancho Cordova,
California
|
|
Development and production of traveling
wave tubes |
|
Owned |
|
Los Angeles, California
|
|
Development and production of electronic
components and subsystems |
|
Owned and Leased |
|
Northridge, California
|
|
Development of electronic seat ejection
sequencers |
|
Leased |
|
Mountain View, California
|
|
Production of microwave integrated circuits
and systems |
|
Owned |
|
Los Angeles, California
|
|
Development and production of high voltage
connectors and subassemblies and pilot helmet mounted display components
and subsystems |
|
Leased |
|
Santa Maria, California
|
|
Development and production of high voltage
capacitor products |
|
Leased |
|
Tracy, California
|
|
Development and production of precision
secondary explosive components including initiators and detonators |
|
Leased |
|
Hudson, New Hampshire
|
|
Production of printed circuit boards |
|
Owned |
| Instrumentation Products
|
|
City of Industry,
California
|
|
Development and production of precision
oxygen analyzers |
|
Owned |
|
San Diego,
California
|
|
Development and production of environmental
monitoring instruments |
|
Leased |
|
Englewood, Colorado
|
|
Development and production of environmental
monitoring systems |
|
Leased |
|
Lincoln, Nebraska
|
|
Development and production of water quality
monitoring products, chemical separation instruments and flash chromatography
instruments and consumables |
|
Owned |
|
Hudson, New Hampshire
|
|
Development and production of environmental
monitoring instruments |
|
Leased |
|
Mason, Ohio
|
|
Development and production of environmental
monitoring instruments |
|
Leased |
|
Houston, Texas
|
|
Development and production of geophysical
streamer cables and hydrophones for seismic monitoring |
|
Owned |
|
Hampton, Virginia
|
|
Development and production of vacuum and
flow measurement instruments |
|
Owned |
| Other Commercial Electronics
|
|
Los Angeles, California
|
|
Development and production of digital data
acquisition systems for monitoring commercial aircraft and engines |
|
Leased |
|
Hawthorne, California
|
|
Production of electromechanical relays
|
|
Owned |
|
San Diego,
California
|
|
Development and production of connectors
|
|
Leased |
|
Lewisburg, Tennessee
|
|
Development and manufacturing of electronic
components and subsystems |
|
Owned |
25
| |
|
|
|
|
| Facility Location |
|
Principal Use |
|
Owned/Leased |
| |
|
|
|
|
| Systems Engineering Solutions
Segment |
|
Huntsville, Alabama
|
|
Provision of engineering services and products,
including systems engineering, optical engineering, software and hardware
engineering, and instrumentation technology |
|
Owned and Leased |
|
Knoxville, Tennessee
|
|
Laboratories and offices in support of
environmental services |
|
Leased |
|
Arlington, Virginia
|
|
Defense program offices supporting governmental
customers |
|
Leased |
| Aerospace Engines and Components
Segment |
|
Mobile, Alabama
|
|
Design, development and production of new
and rebuilt piston engines, ignition systems and spare parts for the
general aviation market |
|
Leased |
|
Redlands, California
|
|
Manufacturing of batteries for the general
aviation market |
|
Owned |
|
Mattituck, New York
|
|
Supply of aftermarket parts, services and
engine overhauls for the general aviation market |
|
Leased |
|
Toledo, Ohio
|
|
Design, development and production of small
turbine engines for aerospace and military markets |
|
Leased |
| Energy Systems Segment
|
|
Hunt Valley, Maryland
|
|
Manufacturing, assembling and maintenance
of gas generators, power generating systems and fuel cell test stations
|
|
Leased |
|
West Palm Beach,
Florida
|
|
Research and development of fuel cell components
and systems |
|
Leased |
We also own or lease facilities elsewhere in
the United States and outside the United States, including facilities in:
Tijuana, Mexico; Gloucester, Newbury and West Drayton, England; Cumbernauld,
Scotland; Cwmbran, Wales; and Ottawa, Canada. Our corporate executive offices
are located at 12333 West Olympic Boulevard, Los Angeles, California
90064-1021.
Item 3. Legal Proceedings.
From time to time, we become involved in various
lawsuits, claims and proceedings related to the conduct of our business, including
those pertaining to product liability, patent infringement, commercial, employment
and employee benefits. While we cannot predict the outcome of any lawsuit,
claim or proceeding, our management does not believe that the disposition
of any pending matters is likely to have a material adverse effect on our
financial condition or liquidity. The resolution in any reporting period of
one or more of these matters, however, could have a material adverse effect
on the results of operations for that period.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of Teledyne’s
stockholders during the fourth quarter of 2004.
26
Item 5. Market for Registrant’s Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities.
Price Range of Common Stock and Dividend Policy
Our Common Stock is listed on the New York
Stock Exchange and traded under the symbol “TDY.” The following
table sets forth, for the periods indicated, the high and low sale prices
for the Common Stock as reported by the New York Stock Exchange.
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High |
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Low |
|
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|
|
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|
|
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|
2003
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$ |
16.22 |
|
|
$ |
10.92 |
|
|
2nd Quarter
|
|
$ |
15.20 |
|
|
$ |
12.40 |
|
|
3rd Quarter
|
|
$ |
15.74 |
|
|
$ |
13.07 |
|
|
4th Quarter
|
|
$ |
19.60 |
|
|
$ |
14.26 |
|
| |
|
2004
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$ |
21.75 |
|
|
$ |
18.05 |
|
|
2nd Quarter
|
|
$ |
20.49 |
|
|
$ |
17.00 |
|
|
3rd Quarter
|
|
$ |
25.39 |
|
|
$ |
18.94 |
|
|
4th Quarter
|
|
$ |
30.90 |
|
|
$ |
23.06 |
|
| |
|
2005
|
|
|
|
|
|
|
|
|
|
1st Quarter
(through February 28, 2005)
|
|
$ |
31.97 |
|
|
$ |
26.00 |
|
On February 28, 2005, the closing sale
price of our Common Stock as reported by the New York Stock Exchange
was $30.58 per share. As of February 28, 2005, there were approximately
7,069 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.
The Company did not repurchase any of its Common
Stock in the fourth quarter of 2004.
27
Item 6. Selected Financial Data.
The following table presents our summary consolidated
financial data. We derived the following historical selected financial data
from our audited consolidated financial statements. We have reclassified some
amounts reported in previous years to conform to our 2004 presentation. Theses
reclassifications did not effect our reported results of operations or stockholders’
equity. Our fiscal year is determined based on a 52- or 53-week convention
ending on the Sunday nearest to December 31. The five-year summary of
selected financial data should be read in conjunction with the discussion
under “Item 7 — Management’s Discussion and Analysis
of Financial Condition and Results of Operations.”
Five-Year Summary of Selected Financial Data
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the fiscal years
|
|
| |
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
2000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(In millions, except per share
amounts) |
|
|
Sales
|
|
$ |
1,016.6 |
|
|
$ |
840.7 |
|
|
$ |
772.7 |
|
|
$ |
744.3 |
|
|
$ |
795.1 |
|
|
Income from continuing
operations
|
|
$ |
41.7 |
|
|
$ |
29.7 |
|
|
$ |
25.4 |
|
|
$ |
6.8 |
|
|
$ |
31.9 |
|
|
Net income
|
|
$ |
41.7 |
|
|
$ |
29.7 |
|
|
$ |
25.4 |
|
|
$ |
6.6 |
|
|
$ |
32.3 |
|
|
Working capital
|
|
$ |
124.4 |
|
|
$ |
129.5 |
|
|
$ |
102.6 |
|
|
$ |
115.3 |
|
|
$ |
107.6 |
|
|
Total assets
|
|
$ |
624.8 |
|
|
$ |
433.6 |
|
|
$ |
398.9 |
|
|
$ |
355.7 |
|
|
$ |
357.3 |
|
|
Long-term debt and
capital lease obligations
|
|
$ |
74.4 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
30.0 |
|
|
$ |
— |
|
|
Stockholders’
equity
|
|
$ |
262.1 |
|
|
$ |
221.0 |
|
|
$ |
176.8 |
|
|
$ |
173.0 |
|
|
$ |
163.1 |
|
|
Basic earnings per
common share — continuing operations
|
|
$ |
1.29 |
|
|
$ |
0.92 |
|
|
$ |
0.79 |
|
|
$ |
0.21 |
|
|
$ |
1.12 |
|
|
Diluted earnings
per common share — continuing operations
|
|
$ |
1.24 |
|
|
$ |
0.91 |
|
|
$ |
0.77 |
|
|
$ |
0.21 |
|
|
$ |
1.08 |
|
|
Basic earnings per
common share
|
|
$ |
1.29 |
|
|
$ |
0.92 |
|
|
$ |
0.79 |
|
|
$ |
0.20 |
|
|
$ |
1.13 |
|
|
Diluted earnings
per common share
|
|
$ |
1.24 |
|
|
$ |
0.91 |
|
|
$ |
0.77 |
|
|
$ |
0.20 |
|
|
$ |
1.09 |
|
28
Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
Teledyne Technologies Incorporated (“Teledyne”)
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.
Strategy
As we grow both organically and through acquisitions,
we are working to become a simpler and more integrated operating company.
Over time, our goal is to continue on our path of high quality revenue and
earnings growth and create a more focused set of businesses that are truly
superior in their niches. We do this by executing on two focused fronts: first,
by strengthening and expanding specific platforms in our core electronics,
instruments and systems engineering businesses through organic growth and
targeted acquisitions; and second, by pursuing operational excellence and
margin expansion initiatives to continuously improve earnings. In addition,
operational excellence to Teledyne means the rapid integration of the businesses
we acquire. 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, and two acquisitions in 2003, we completed five acquisitions
during our fiscal year ended 2004.
We furthered our strategy to expand our presence
in the environmental instrumentation market. On February 27, 2004, we
acquired assets of Hudson, New Hampshire-based Leeman Labs, Inc., (“Leeman”)
a manufacturer of spectrometers used by environmental and quality control
laboratories to detect low levels of inorganic contaminants in water and other
environmental samples, which products complement the organic analysis instruments
of Teledyne Tekmar Company, a Mason, Ohio-based company acquired in 2003.
On June 18, 2004, we acquired Isco, Inc., (“Isco”) located
in Lincoln, Nebraska and a leading producer of water quality monitoring instruments,
including samplers, flow meters and on-line process analyzers, which are complementary
to Teledyne’s existing environmental instrumentation product lines.
Our acquisitions have also focused on enhancing
our aerospace and defense electronics businesses. On July 2, 2004, we
completed the acquisition of Reynolds Industries, Incorporated, (“Reynolds”)
a supplier of specialized high voltage connectors and subassemblies for defense,
aerospace and industrial applications, with operations in California and the
United Kingdom. Reynolds Industries had historically supplied its high
voltage connectors and cables to our traveling wave tubes.
Two of our 2004 acquisitions furthered our
strategy to develop a broader line of microwave products for our defense customers.
On December 31, 2003, we acquired assets of the Filtronic Solid State
(“Solid State”) business located in Santa Clara, California.
This business, which was subsequently moved over a short time period to our
facility in Mountain View, California, designs and manufactures customized
microwave subassemblies for electronic warfare, radar and other military applications.
Its precision YIG-based oscillators, filters and amplifiers serve some of
the same customers of, and are used on some of the same military programs,
as those of our longer-standing Teledyne Wireless and Teledyne Microwave Electronic
Components (“MEC”) business units.
On October 22, 2004, we acquired the assets
of the defense electronics business of Celeritek, Inc., (“Celeritek”)
based in Santa Clara, California. The solid state amplifiers and microwave
subassemblies of
29
this defense electronics business
utilize design and manufacturing technology similar to Teledyne Microwave
and are complementary with Teledyne MEC’s line of high power helix traveling
wave tubes used on military, electronic warfare, radar and communications
applications. Like the Solid State acquisition, to obtain various synergies,
the operations of this business have been moved to and consolidated with our
facility in Mountain View, California.
On January 3, 2005, in an effort to streamline
operations and reduce costs, the businesses principally operating as Teledyne
Microwave, located in Mountain View, California, and Teledyne MEC, located
in Rancho Cordova, California, were consolidated into one legal entity, Teledyne
Wireless, Inc., a wholly-owned subsidiary of the Company. Teledyne Wireless,
Inc. had been the subsidiary that bought the defense electronics assets of
each of Solid State and Celeritek.
All of the acquisitions are part of our Electronics
and Communications segment. Their results are included in our consolidated
financial statements since their respective dates of acquisition. Since the
acquisition of certain assets of the Filtronic Solid State business occurred
after Teledyne’s 2003 fiscal year, this acquisition is not reflected
in the balance sheet or income statement at year-end 2003.
Our fiscal year is determined based on a 52-
or 53-week convention ending on the Sunday nearest to December 31. The
following is our financial information for 2004, 2003 and 2002 (in millions,
except per-share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
1,016.6 |
|
|
$ |
840.7 |
|
|
$ |
772.7 |
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of sales
|
|
|
746.3 |
|
|
|
636.7 |
|
|
|
584.9 |
|
| |
Selling, general
and administrative expenses
|
|
|
203.4 |
|
|
|
157.0 |
|
|
|
145.6 |
|
| |
Restructuring and
other charges
|
|
|
— |
|
|
|
— |
|
|
|
(0.7 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Total costs and
expenses
|
|
|
949.7 |
|
|
|
793.7 |
|
|
|
729.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income before
other income and expense and income taxes
|
|
|
66.9 |
|
|
|
47.0 |
|
|
|
42.9 |
|
| |
Interest and debt
expense, net
|
|
|
1.9 |
|
|
|
0.8 |
|
|
|
0.6 |
|
| |
Other income (expense)
|
|
|
3.0 |
|
|
|
(1.6 |
) |
|
|
(0.2 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income before
income taxes
|
|
|
68.0 |
|
|
|
44.6 |
|
|
|
42.1 |
|
| |
Provision for income
taxes
|
|
|
26.3 |
|
|
|
14.9 |
|
|
|
16.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
41.7 |
|
|
$ |
29.7 |
|
|
$ |
25.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic earnings
per common share
|
|
$ |
1.29 |
|
|
$ |
0.92 |
|
|
$ |
0.79 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted earnings
per common share
|
|
$ |
1.24 |
|
|
$ |
0.91 |
|
|
$ |
0.77 |
|
| |
|
|
|
|
|
|
|
|
|
We operate in four business segments: Electronics
and Communications; Systems Engineering Solutions; Aerospace Engines and Components;
and Energy Systems. The segments’ respective contributions as a percentage
of total sales for 2004, 2003 and 2002 are summarized in the following table:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Percentage of Sales |
|
| |
|
|
|
| Segment |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
|
|
|
|
|
Electronics and
Communications
|
|
|
56 |
% |
|
|
53 |
% |
|
|
50 |
% |
|
Systems Engineering
Solutions
|
|
|
24 |
% |
|
|
25 |
% |
|
|
27 |
% |
|
Aerospace Engines
and Components
|
|
|
18 |
% |
|
|
20 |
% |
|
|
21 |
% |
|
Energy Systems
|
|
|
2 |
% |
|
|
2 |
% |
|
|
2 |
% |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
30
Results of Operations
| |
|
|
|
|
|
|
|
|
| Sales |
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
|
|
Electronics and
Communications
|
|
$ |
567.9 |
|
|
$ |
446.9 |
|
|
Systems Engineering
Solutions
|
|
|
242.2 |
|
|
|
212.5 |
|
|
Aerospace Engines
and Components
|
|
|
181.8 |
|
|
|
165.5 |
|
|
Energy Systems
|
|
|
24.7 |
|
|
|
15.8 |
|
| |
|
|
|
|
|
|
|
Total sales
|
|
$ |
1,016.6 |
|
|
$ |
840.7 |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Net Income |
|
|
|
|
|
|
|
|
|
|
|
Electronics and
Communications
|
|
$ |
54.4 |
|
|
$ |
33.0 |
|
|
Systems Engineering
Solutions
|
|
|
27.1 |
|
|
|
23.2 |
|
|
Aerospace Engines
and Components(a)
|
|
|
6.1 |
|
|
|
6.4 |
|
|
Energy Systems
|
|
|
1.6 |
|
|
|
(0.7 |
) |
| |
|
|
|
|
|
|
| |
Segment operating
profit and other segment income
|
|
|
89.2 |
|
|
|
61.9 |
|
| |
Corporate expense
|
|
|
(19.8 |
) |
|
|
(14.9 |
) |
| |
Interest and debt
expense, net
|
|
|
(1.9 |
) |
|
|
(0.8 |
) |
| |
Other income (expense)
|
|
|
0.5 |
|
|
|
(1.6 |
) |
| |
|
|
|
|
|
|
|
Income before taxes(b)
|
|
|
68.0 |
|
|
|
44.6 |
|
| |
Provision for income
taxes
|
|
|
26.3 |
|
|
|
14.9 |
|
| |
|
|
|
|
|
|
|
Net income
|
|
$ |
41.7 |
|
|
$ |
29.7 |
|
| |
|
|
|
|
|
|
| |
|
|
| (a) |
|
Total year 2004 includes the receipt of $2.5 million
pursuant to an agreement with Honda Motor Co., Ltd. related to the piston
engine business. |
| |
| (b) |
|
Total year 2003 provision for taxes includes a $2.4 million
income tax benefit from the reversal of an income tax contingency reserve
which was determined to be no longer needed during 2003. |
We reported 2004 net sales of $1,016.6 million,
compared with net sales of $840.7 million for 2003. Net income was $41.7 million
($1.24 per diluted share) for 2004, compared with $29.7 million
($0.91 per diluted share) for 2003.
The increase in sales in 2004, compared with
2003, reflected improvement in all four reporting segments. The largest increase
in sales was in the Electronic and Communications segment which grew, both
organically and through strategic acquisitions, including: Tekmar Company,
acquired in May 2003; Spirent’s Aviation Information Solutions businesses,
acquired in June 2003; Filtronic Solid States’ defense assets, acquired
in December 2003; Leeman Labs’ assets acquired in February 2004; Isco
Inc., acquired in June 2004; Reynolds Industries, Inc. acquired in July 2004;
and Celeritek’s defense assets, acquired in October 2004. The incremental
increase in revenue from acquisitions in 2004, compared with 2003, was $98.6 million.
The increase in segment operating profit and
other segment income for 2004, compared with 2003, reflected improved results
in the Electronics and Communications, System Engineering Solutions and Energy
Systems segments, partially offset by lower operating profit in the Aerospace
Engines and Components segment. The largest increase was in the Electronic
and Communications segment and included incremental operating profit from
acquisitions and related synergies of $11.8 million.
Cost of sales in total dollars was higher in
2004, compared with 2003. The increase was primarily due to higher sales which
resulted from organic growth and acquisitions. Fiscal year 2004 included $0.5 million
in LIFO expense compared with a $5.1 million in LIFO income in 2003.
Cost of sales as a percentage of net sales for 2004 was lower compared with
2003. The lower cost of sales percentage in 2004, reflected a lower cost of
sales percentage for recent acquisitions which due to the nature of their
business, carry a
31
lower cost of sales percentage than
most of Teledyne’s other businesses. The cost of sales percentage for
2004 for Teledyne’s existing businesses was relatively flat compared
with 2003.
Selling, general and administrative expenses,
including research and development and bid and proposal expense, in total
dollars were higher in 2004, compared with 2003. This increase was primarily
due to higher sales, which resulted from organic growth and acquisitions as
well as higher corporate general and administrative expenses, offset in part
by lower bid and proposal expense in the Systems Engineering Solutions segment.
The higher corporate expense was impacted by internal and external costs related
to Sarbanes-Oxley Act Section 404 compliance and auditing efforts and
higher compensation expense. Selling, general and administrative expenses
for 2004, as a percentage of sales, were higher compared with 2003, and reflected
higher corporate expenses and also reflected a higher selling expense percentage
for recent acquisitions which due to the nature of their business, carry a
higher selling expense percentage than most of Teledyne’s existing businesses,
partially offset by lower bid and proposal spending.
Included in operating profit in 2004 was pension
expense of $8.7 million, of which $0.5 million was recoverable in
accordance with U.S. Government Cost Accounting Standards (CAS) from
certain government contracts. Included in 2003 operating profit was $6.9 million
of pension expense of which none was recoverable in accordance with CAS. The
increase in pension expense in 2004 compared with 2003, reflects, in part,
a reduction in the discount rate assumption for the Company’s defined
benefit plan as well as the decline in the market value of the Company’s
pension assets during 2002, 2001 and 2000.
The Company’s effective tax rate for 2004
was 38.7%, compared with 33.3% for 2003. Total year 2003 reflected an income
tax benefit of $2.4 million due to the reversal of an income tax contingency
reserve which was determined to be no longer needed during the third quarter
of 2003. Excluding this benefit, the Company’s effective tax rate for
2003 would have been 38.7%.
Sales under contracts with the U.S. Government
were approximately 43% of net sales in 2004 and 46% in 2003. International
sales represented approximately 19% in 2004 and 16% of net sales in 2003.
Total interest expense including facility fees
and other bank charges was $2.2 million in 2004 and $1.0 million
in 2003. Interest income was $0.3 million in 2004 and $0.2 million
in 2003. The higher interest expense in 2004 reflected interest on debt incurred
for acquisitions.
Other income for 2004 included the receipt
of $2.5 million pursuant to an agreement with Honda Motor Co., Ltd. which
is included as part of the Aerospace Engines and Components segment operating
profit and other segment income for segment reporting purposes. In 2003, we
recorded a $2.3 million charge, in other expense, for the write-off of
the Company’s remaining cost-based investment in a private company engaged
in manufacturing and development of micro optics and microelectromechanical
devices. Fiscal years 2004 and 2003 also include sublease rental income and
royalty income in other income.
32
| |
|
|
|
|
|
|
|
|
| Sales |
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
|
|
Electronics and
Communications
|
|
$ |
446.9 |
|
|
$ |
388.0 |
|
|
Systems Engineering
Solutions
|
|
|
212.5 |
|
|
|
206.7 |
|
|
Aerospace Engines
and Components
|
|
|
165.5 |
|
|
|
162.9 |
|
|
Energy Systems
|
|
|
15.8 |
|
|
|
15.1 |
|
| |
|
|
|
|
|
|
|
Total sales
|
|
$ |
840.7 |
|
|
$ |
772.7 |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Net Income |
|
|
|
|
|
|
|
|
|
|
|
Electronics and
Communications
|
|
$ |
33.0 |
|
|
$ |
35.9 |
|
|
Systems Engineering
Solutions
|
|
|
23.2 |
|
|
|
20.6 |
|
|
Aerospace Engines
and Components
|
|
|
6.4 |
|
|
|
2.7 |
|
|
Energy Systems
|
|
|
(0.7 |
) |
|
|
(1.9 |
) |
| |
|
|
|
|
|
|
| |
Segment operating
profit and other segment income
|
|
|
61.9 |
|
|
|
57.3 |
|
| |
Corporate expense
|
|
|
(14.9 |
) |
|
|
(14.4 |
) |
| |
Interest and debt
expense, net
|
|
|
(0.8 |
) |
|
|
(0.6 |
) |
| |
Other income (expense)
|
|
|
(1.6 |
) |
|
|
(0.2 |
) |
| |
|
|
|
|
|
|
|
Income before taxes
|
|
|
44.6 |
|
|
$ |
42.1 |
|
| |
Provision for income
taxes(a)
|
|
|
14.9 |
|
|
|
16.7 |
|
| |
|
|
|
|
|
|
|
Net income
|
|
$ |
29.7 |
|
|
$ |
25.4 |
|
| |
|
|
|
|
|
|
| |
|
|
| (a) |
|
Total year 2003 provision for taxes includes a $2.4 million
income tax benefit from the reversal of an income tax contingency reserve
which was determined to be no longer needed during 2003. |
We reported 2003 net sales of $840.7 million,
compared with net sales of $772.7 million for 2002. Net income was $29.7 million
($0.91 per diluted share) for 2003, compared with $25.4 million
($0.77 per diluted share) for 2002.
The increase in sales in 2003, compared with
2002, reflected improvement in all four reporting segments. The largest sales
growth was in the Electronic and Communications segment notwithstanding a
difficult environment in some of the companies commercial markets. The higher
sales in Electronics and Communications segment resulted from both organic
growth and strategic acquisitions, including Monitor Labs, acquired in September
2002, Tekmar Company, acquired in May 2003, and Spirent’s Aviation Information
Solutions businesses, acquired in June 2003. The incremental increase in revenue
from acquisitions in 2003, compared with 2002, was $39.9 million.
The increase in segment operating profit for
2003, compared with 2002, reflected improved results in the System Engineering
Solutions, Aerospace Engines and Components and Energy Systems segments, partially
offset by lower operating profit in the Electronics and Communications segment.
The Electronic and Communications segment included incremental operating profit
from acquisitions and related synergies of $1.9 million.
Cost of sales in total dollars was higher in
2003, compared with 2002. The increase was in line with higher sales and also
reflected higher pension expense, partially offset by product mix differences.
Cost of sales as a percentage of net sales for 2003 was relatively flat compared
with 2002. While the percentages were comparable, the 2003 percentage
reflected the impact of pension expense compared with pension income in 2002.
The impact was offset, in part, by product mix differences and $5.1 million
in LIFO income in 2003 compared with $0.8 million in LIFO income in 2002.
Total year 2003 also reflected an improvement in cost of sales as a percentage
of sales due to finalization of award and incentive fee negotiations for work
performed on certain contracts in prior years in the Systems Engineering Solutions
33
segment. At December 29, 2002,
Teledyne recorded income of $0.1 million following the final resolution
of the 2001 restructuring, asset impairment and other charge.
Selling, general and administrative expenses,
including research and development and bid and proposal expense, in total
dollars were higher in 2003, compared with 2002. This increase was in line
with higher sales which resulted from organic growth and acquisitions. The
increased bid and proposal expense was primarily driven by bidding opportunities
in the Systems Engineering Solutions segment. Selling, general and administrative
expenses for 2003, as a percentage of sales, were relatively flat compared
with 2002, reflecting the benefit of higher sales and continued cost control.
Included in operating profit in 2003 was pension
expense of $6.9 million compared with pension income of $2.3 million
in 2002. The increase in pension expense in 2003 compared with 2002, reflects,
in part, a reduction in the discount rate assumption for the Company’s
defined benefit plan as well as the decline in the market value of the Company’s
pension assets during 2002, 2001 and 2000.
The Company’s effective tax rate for 2003
was 33.3%, compared with 39.7% for 2002. Total year 2003 reflected an income
tax benefit of $2.4 million due to the reversal of an income tax contingency
reserve which was determined to be no longer needed during the third quarter
of 2003. Excluding this benefit, the Company’s effective tax rate for
2003 would have been 38.7%.
Sales under contracts with the U.S. Government
were approximately 46% of net sales in 2003 and 2002. International sales
represented approximately 16% of net sales in 2003 and 2002.
Total interest expense including facility fees
and other bank charges was $1.0 million in 2003 and $0.9 million
in 2002. Interest income was $0.2 million in 2003 and $0.3 million
in 2002.
In 2003, we recorded a $2.3 million charge,
in other expense, for the write-off of the Company’s remaining cost-based
investment in a private company engaged in manufacturing and development of
micro optics and microelectromechanical devices. In 2002, we recorded a $0.5 million
charge, in other expense, related to the partial write-down of this investment.
Fiscal years 2003 and 2002 also include sublease rental income and royalty
income in other income.
2001 Restructuring, Asset Impairment and Other Charge Information
In 2001, the Company recorded a $26.4 million
pretax charge of which $7.5 million was for asset impairments, $8.8 million
was for restructuring and other charges, $9.8 million was for inventory
write-downs and a $0.3 million pretax charge for discontinued operations.
During 2002, the Company completed the efforts
related to the 2001 charge, recording actual expenses of $26.3 million.
At year-end 2002, the cumulative restructuring charges were $8.1 million,
$0.7 million lower than the 2001 year-end estimate, the cumulative
charges to cost of sales related to excess and obsolete inventory were $10.4 million,
$0.6 million higher than the 2001 year-end-estimate, with no change
to either the asset impairment charge or the charge for discontinued operations.
This resulted in $0.2 million of income in the Electronics and Communications
segment in 2002 and an additional cost impact of $0.1 million in the
Systems Engineering segment during 2002. No amounts remain on the balance
sheet related to the charge.
34
Segments
The following discussion of our four segments
should be read in conjunction with Note 14 to the Notes to Consolidated
Financial Statements.
Electronics and Communications
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
(Dollars in millions)
|
|
|
Sales
|
|
$ |
567.9 |
|
|
$ |
446.9 |
|
|
$ |
388.0 |
|
|
Operating profit
|
|
$ |
54.4 |
|
|
$ |
33.0 |
|
|
$ |
35.9 |
|
|
Operating profit
% of sales
|
|
|
9.6 |
% |
|
|
7.4 |
% |
|
|
9.3 |
% |
|
International sales
% of sales
|
|
|
27.6 |
% |
|
|
21.4 |
% |
|
|
21.7 |
% |
|
Governmental sales
% of sales
|
|
|
25.9 |
% |
|
|
31.8 |
% |
|
|
29.7 |
% |
|
Capital expenditures
|
|
$ |
12.8 |
|
|
$ |
14.9 |
|
|
$ |
8.3 |
|
Our Electronics and Communications segment
provides a wide range of specialized electronic systems, instruments, components
and services that address niche market applications in commercial aerospace,
communications, defense, industrial and medical markets.
Our Electronics and Communications segment
sales were $567.9 million in 2004, compared with sales of $446.9 million
in 2003. Operating profit was $54.4 million in 2004, compared with $33.0 million
in 2003.
Sales in 2004, compared with 2003, reflected
revenue growth in defense electronic products, electronic instruments, telecommunication
subsystems, avionics products and relay products. This growth was partially
offset by lower sales from electronic manufacturing services, primarily driven
by lower government sales. The revenue growth in defense electronic products
was driven by sales of traveling wave tubes and ejection seat sequencers,
the acquisition of Reynolds Industries, Incorporated on July 2, 2004,
and the acquisition of assets of Filtronic Solid State on December 31,
2003. Electronic instruments revenue for 2004, compared 2003, was favorably
impacted by the acquisition of Isco on June 18, 2004, the acquisition
of Leeman Labs’ assets on February 27, 2004, increased shipments
of geophysical sensors for the petroleum exploration market and increased
sales of other instrument products. Electronic instruments revenue for 2004,
compared with 2003, was also favorably impacted by the acquisition of Tekmar
Company on May 16, 2003. The revenue growth in avionics products was
favorably impacted by the acquisition of the Aviation Information Solutions
(“AIS”) businesses from Spirent plc on June 27, 2003. The increase
in revenue from acquisitions for 2004, compared with 2003, was $98.6 million.
Incremental operating profit from acquisitions including synergies for 2004,
compared with 2003, was $11.8 million. Segment operating profit was favorably
impacted by acquisitions and organic sales growth partially offset by an increase
in pension expense. Pension expense was $6.0 million for 2004 compared
with pension expense of $5.1 million in 2003. Operating profit in 2003
was favorably impacted by a $1.8 million reduction in LIFO reserve, which
resulted from a reduced inventory level, mostly offset by a $0.9 million
fourth quarter write-down on slow moving test equipment inventory and contract
settlements totaling $0.8 million. No LIFO adjustment was made in 2004.
2003 compared with 2002
Our Electronics and Communications segment
sales were $446.9 million in 2003, compared with sales of $388.0 million
in 2002. Operating profit was $33.0 million in 2003, compared with $35.9 million
in 2002.
Sales in 2003, compared with 2002, reflected
revenue growth in defense electronic products, electronic manufacturing services,
avionics products, electronic instruments, medical products and commercial
35
lighting products. The revenue growth
in defense electronic products was driven by traveling wave tubes and military
microelectronics. The revenue growth in electronic manufacturing services
was driven by increased sales to military customers. Revenue growth in avionics
products was driven by the acquisition of the Aviation Information Solutions
businesses in June 2003, partially offset by continued weakness in the commercial
aviation market. Electronic instruments revenue was favorably impacted by
the acquisition of Monitor Labs Incorporated at the end of the third quarter
of 2002 and the acquisition of Tekmar-Dohrmann in May 2003. This revenue growth
in electronic instruments was partially offset by reduced sales of geophysical
sensors for the petroleum exploration market. The increase in revenue from
acquisitions for 2003, compared with 2002, was $39.9 million. Incremental
operating profit from acquisitions including synergies for 2003, compared
with 2002, was $1.9 million. Operating profit in 2003 was favorably impacted
by increased sales and a $1.8 million reduction in LIFO reserve, which
resulted from a reduced inventory level, compared with LIFO income of $0.6 million
in 2002. These operating profit improvements were more than offset by a $0.9 million
fourth quarter write-down on slow moving test equipment inventory, contract
settlements totaling $0.8 million and higher pension expense. In 2002,
the Company recorded a $0.8 million write-down of certain optoelectronics
equipment due to lower than expected utilization. Segment operating profit
in 2003 included $5.1 million of pension expense, compared with $2.0 million
of pension income in 2002.
Systems Engineering Solutions
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
(Dollars in millions)
|
|
|
Sales
|
|
$ |
242.2 |
|
|
$ |
212.5 |
|
|
$ |
206.7 |
|
|
Operating profit
|
|
$ |
27.1 |
|
|
$ |
23.2 |
|
|
$ |
20.6 |
|
|
Operating profit
% of sales
|
|
|
11.2 |
% |
|
|
10.9 |
% |
|
|
10.0 |
% |
|
International sales
% of sales
|
|
|
0.1 |
% |
|
|
0.1 |
% |
|
|
1.3 |
% |
|
Governmental sales
% of sales
|
|
|
99.3 |
% |
|
|
99.0 |
% |
|
|
98.0 |
% |
|
Capital expenditures
|
|
$ |
1.7 |
|
|
$ |
1.5 |
|
|
$ |
3.1 |
|
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.
Our Systems Engineering Solutions segment sales
were $242.2 million in 2004, compared with sales of $212.5 million
in 2003. Operating profit was $27.1 million in 2004, compared with $23.2 million
in 2003.
Sales for 2004, compared with 2003, reflected
revenue growth in core defense and environmental and aerospace programs. The
higher operating profit in 2004, compared with 2003, was primarily due to
higher sales and improved margins on various time and material contracts.
Operating profit in 2003 was negatively impacted by the recognition of a $1.0 million
loss on an office sublease agreement. Segment operating profit in 2004 included
$0.8 million of pension expense, of which $0.5 million was recoverable
in accordance with CAS from certain government contracts, compared with $0.3 million
of pension expense in 2003 of which none was recoverable in accordance with
CAS.
Our Systems Engineering Solutions segment sales
were $212.5 million in 2003, compared with sales of $206.7 million
in 2002. Operating profit was $23.2 million in 2003, compared with $20.6 million
in 2002.
36
Sales in 2003, compared with 2002, reflected
increased work in environmental and core defense programs, partially offset
by lower sales in aerospace programs. Operating profit in 2003, compared with
2002, was favorably impacted by increased sales and $4.1 million related
to both the finalization of negotiation of prior year award and incentive
fees for work performed on certain contracts, primarily the Ground-based Midcourse
Defense and Pressurents, Propellants, and Calibration contracts. Operating
profit in 2003 also reflected improved margins for environmental programs.
Operating profit in 2003 was negatively impacted by the recognition of a $1.0 million
loss on an office sublease agreement. Segment operating profit in 2003 included
$0.3 million of pension expense, compared with $0.2 million of pension
income in 2002.
Aerospace Engines and Components
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
(Dollars in millions)
|
|
|
Sales
|
|
$ |
181.8 |
|
|
$ |
165.5 |
|
|
$ |
162.9 |
|
|
Operating profit
|
|
$ |
6.1 |
|
|
$ |
6.4 |
|
|
$ |
2.7 |
|
|
Operating profit
% of sales
|
|
|
3.4 |
% |
|
|
3.9 |
% |
|
|
1.7 |
% |
|
International sales
% of sales
|
|
|
20.2 |
% |
|
|
23.5 |
% |
|
|
21.7 |
% |
|
Governmental sales
% of sales
|
|
|
14.3 |
% |
|
|
14.9 |
% |
|
|
15.6 |
% |
|
Capital expenditures
|
|
$ |
3.2 |
|
|
$ |
3.2 |
|
|
$ |
3.6 |
|
Our Aerospace Engines and Components segment,
principally through Teledyne Continental Motors, Inc., focuses on the design,
development and manufacture of piston engines, turbine engines, electronic
engine controls and aviation batteries.
Our Aerospace Engines and Components segment
sales were $181.8 million in 2004, compared with sales of $165.5 million
in 2003. Operating profit was $6.1 million in 2004, compared with $6.4 million
in 2003.
Sales in 2004, compared with 2003, reflected
revenue growth in OEM piston engines, aftermarket piston engines and parts
sales, and slightly higher turbine engine sales. Turbine engine sales for
2004, compared with 2003, were higher primarily due to increased spare parts
sale and favorable Joint Air-to-Surface Standoff Missile (“JASSM”)
engine sales, partially offset by reduced Improved Tactical Air-Launched Decoy
(“ITALD”) and Harpoon cruise missile engines. Operating profit in
2004 included the receipt of $2.5 million pursuant to an agreement with
Honda Motor Co., Ltd. related to the piston engine business. While the terms
of the piston engine agreement are confidential, the Company anticipates receiving
$5.0 million in 2005 and $2.5 million in 2006 under the agreement. Segment
operating profit for 2004 also reflected a $4.8 million increase in aircraft
product liability insurance costs and self insurance reserve expense, a $1.7 million
charge for environmental matters and LIFO expense of $0.5 million. Operating
profit in the piston engine business in 2003 was positively impacted by a
$3.3 million reduction in LIFO reserve, which resulted from a reduced
inventory level. Segment operating profit in 2004 included $1.5 million
of pension expense, compared with $1.3 million of pension expense in
2003.
Our Aerospace Engines and Components segment
sales were $165.5 million in 2003, compared with sales of $162.9 million
in 2002. Operating profit was $6.4 million in 2003, compared with $2.7 million
in 2002.
Sales in 2003, compared with 2002, reflected
revenue growth in OEM piston engines, partially offset by reduced sales of
aftermarket products and services. Operating profit in the piston engine business
was positively impacted by an improved cost structure, productivity improvements
and a $3.3 million reduction in LIFO reserve, which resulted from a reduced
inventory level, partially offset by an increase of
37
$4.1 million for aircraft product
liability insurance costs and self insurance reserve expense. Operating profit
in 2002 included $0.2 million from a reduction in LIFO reserve. Sales
from turbine engines were unfavorably impacted by lower revenue from spare
parts for Air Force training aircraft and lower Harpoon cruise missile engine
sales, partially offset by higher revenue from ITALD engines and favorable
Joint Air-to-Surface Standoff Missile (“JASSM”) engine sales. Operating
profit for turbine engines was lower in 2003, compared with 2002, and resulted
from lower sales and a less favorable product mix. Segment operating profit
in 2003 included $1.3 million of pension expense, compared with $0.5 million
of pension income in 2002.
Energy Systems
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2003 |
|
|
2002 |
|
|
2001 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
(Dollars in millions)
|
|
|
Sales
|
|
$ |
24.7 |
|
|
$ |
15.8 |
|
|
$ |
15.1 |
|
|
Operating profit/(loss)
|
|
$ |
1.6 |
|
|
$ |
(0.7 |
) |
|
$ |
(1.9 |
) |
|
Operating profit/(loss)
% of sales
|
|
|
6.5 |
% |
|
|
(4.4 |
)% |
|
|
(12.6 |
)% |
|
International sales
% of sales
|
|
|
17.0 |
% |
|
|
22.8 |
% |
|
|
28.3 |
% |
|
Governmental sales
% of sales
|
|
|
78.5 |
% |
|
|
67.7 |
% |
|
|
61.2 |
% |
|
Capital expenditures
|
|
$ |
1.1 |
|
|
$ |
0.6 |
|
|
$ |
0.4 |
|
Our Energy Systems segment, through Teledyne
Energy Systems, Inc., provides on-site gas and power generation systems based
on proprietary electrolysis, thermoelectric and fuel cell technologies.
Our Energy Systems segment sales were $24.7 million
in 2004, compared with sales of $15.8 million in 2003. The 2004 operating
income was $1.6 million, compared with a 2003 operating loss of $0.7 million.
The increase in sales for 2004, compared with
2003, resulted from multi-year government contracts, which were awarded, in
2003, for fuel cell and thermoelectric power generator work. Operating profit
for 2004, compared with the operating loss in 2003, was favorably impacted
by the growth in sales and by a reduction in research and development costs.
The operating loss in 2003 included $0.4 million in charges for contract
claims and the recognition of a $0.5 million loss on a facility sublease
agreement. Segment operating profit included pension expense of $0.1 million
in 2004, compared with no pension expense in 2003.
Our Energy Systems segment sales were $15.8 million
in 2003, compared with sales of $15.1 million in 2002. The 2003 operating
loss was $0.7 million, compared with an operating loss of $1.9 million
in 2002.
Sales in 2003 reflected revenue growth in government
programs related to multi-year contracts which were won, in 2003, primarily
for thermoelectric generator development, partially offset by reduction in
commercial revenue, primarily hydrogen generator sales. The reduction in operating
loss for 2003, compared with 2002, resulted from increased sales, an improved
overhead cost structure, reduced general and administrative and research and
development expenses and the absence of $0.3 million in program cost
adjustments that impacted 2002, partially offset by $0.4 million in charges
for contract claims and the recognition of a $0.5 million loss on a facility
sublease agreement.
38
Financial Condition, Liquidity and Capital Resources
| |
|
| |
Principal Capital Requirements |
Our principal capital requirements are to fund
working capital needs, capital expenditures and debt service requirements,
as well as to fund acquisitions. It is anticipated that operating cash flow,
together with available borrowings under the credit facility described below,
will be sufficient to meet these requirements and could be used to fund some
acquisitions in the year 2005. To support acquisitions, we may need to raise
additional capital. Our liquidity is not dependent upon the use of off-balance
sheet financial arrangements. We have no off-balance sheet financing arrangements
that incorporate the use of special purpose entities or unconsolidated entities.
| |
|
| |
Revolving Credit Agreement |
In June 2004, the Company terminated its then
existing $200.0 million five-year revolving credit agreement and replaced
it with a new $280.0 million credit facility that expires in June 2009.
Excluding interest and fees, no payments are due under the credit facility
until the credit facility terminates. Available borrowing capacity under the
$280.0 million credit facility, which is reduced by borrowings and outstanding
letters of credit, was $203.0 million at year-end 2004. For a description
of some terms of our credit facility, see “Financing Activities”
on page 43.
Contractual
Obligations
The following table summarizes our expected
cash outflows resulting from financial contracts and commitments at January 2,
2005. We have not included information on our normal recurring purchases of
materials for use in our operations. These amounts are generally consistent
from year to year, closely reflect our levels of production, and are not long-term
in nature (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
2010 and |
|
|
|
| |
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
beyond |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease
obligations
|
|
$ |
10.2 |
|
|
$ |
7.5 |
|
|
$ |
4.7 |
|
|
$ |
4.1 |
|
|
$ |
3.2 |
|
|
$ |
10.6 |
|
|
$ |
40.3 |
|
|
Long-term debt obligations
|
|
|
3.1 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
|
|
70.5 |
|
|
|
— |
|
|
|
73.7 |
|
|
Capital lease obligations(a)
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
5.4 |
|
|
|
7.1 |
|
|
Purchase obligations(b)
|
|
|
26.8 |
|
|
|
2.7 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
29.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
40.4 |
|
|
$ |
10.6 |
|
|
$ |
5.1 |
|
|
$ |
4.5 |
|
|
$ |
74.1 |
|
|
$ |
16.0 |
|
|
$ |
150.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (a) |
|
Includes imputed interest and short-term portion |
| |
| (b) |
|
Purchase obligations generally include long-term contractual
obligations for the purchase of goods and services. |
The amounts above exclude our minimum funding
requirements as set forth by ERISA, which are $24.6 million over the
next two years. Our minimum funding requirements after 2004 are dependent
on several factors. We also have payments due under our other postretirement
benefits plans. These plans are not required to be funded in advance, but
are pay as you go. See further discussion in Note 13 of the Notes to
Consolidated Financial Statements
Operating
Activities
In 2004, net cash provided from continuing
operations was $84.9 million, compared with $56.8 million in 2003
and $74.2 million in 2002. The higher net cash provided from continuing
operations for 2004, compared with 2003, reflected improved net income and
lower aircraft product liability settlement payments, as well as operating
cash flow from acquisitions, partially offset by defined benefit pension contributions
of $3.1 million. The deferred income tax component of the cash flow statement
reflected a $6.8 million increase in 2004, a $7.6 million decrease
in 2003 and a $15.2 million increase in 2002 related
39
to the minimum pension liability
adjustment recorded in each year. This adjustment had no impact on cash flows
from operations in 2004.
The decrease in net cash provided from continuing
operations in 2003, compared with 2002, reflected timing differences related
to accounts payable, differences in the cash impact of income taxes, higher
payments in 2003 for aircraft product liability settlements and higher accounts
receivables balances. The higher accounts receivables balances reflected the
impact of higher sales in December 2003 compared to December 2002. In 2003,
cash was used to pay down accounts payable, compared to an increase in accounts
payable for 2002 resulting primarily from timing of inventory and capital
purchases. The deferred income tax and the accrued pension obligation components
of the cash flow statement in 2003 were both affected by the deferred tax
amount of $7.6 million related to the minimum pension liability adjustment
recorded in 2003. This adjustment had no impact on cash flows from continuing
operations in 2003.
Fiscal years 2003 and 2002 reflected payments
for workers compensation claims. The 2002 cash used by discontinued operations
also reflected the payment of a purchase price adjustment.
Working capital was $124.4 million at
year-end 2004, compared with $129.5 million at year-end 2003. The decrease
in working capital was due to lower cash balances, offset in part, by working
capital from recent acquisitions. The lower cash balances reflects cash used
to pay down debt incurred for recent acquisitions. We continue to emphasize
improvements in working capital management.
Balance Sheet
Changes
The changes in the following selected components
of Teledyne balance sheet are discussed below (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
11.4 |
|
|
$ |
37.8 |
|
|
Accounts receivables,
net
|
|
$ |
141.7 |
|
|
$ |
121.3 |
|
|
Inventories, net
|
|
$ |
97.7 |
|
|
$ |
63.6 |
|
|
Long-term deferred
income taxes, net
|
|
$ |
28.3 |
|
|
$ |
19.7 |
|
|
Property, plant
and equipment, net
|
|
$ |
90.8 |
|
|
$ |
76.0 |
|
|
Goodwill, net
|
|
$ |
166.0 |
|
|
$ |
56.2 |
|
|
Acquired intangible
assets, net
|
|
$ |
26.0 |
|
|
$ |
5.4 |
|
|
Accounts payable
|
|
$ |
62.3 |
|
|
$ |
48.1 |
|
|
Short-term accrued
liabilities
|
|
$ |
97.0 |
|
|
$ |
74.9 |
|
|
Other long-term
liabilities
|
|
$ |
54.9 |
|
|
$ |
38.4 |
|
|
Long-term debt and
capital lease obligations, net of current portion
|
|
$ |
74.4 |
|
|
$ |
— |
|
|
Accrued pension
obligation
|
|
$ |
46.7 |
|
|
$ |
25.6 |
|
|
Accumulated other
comprehensive loss
|
|
$ |
(22.3 |
) |
|
$ |
(11.3 |
) |
The lower balance in cash and cash equivalents
at January 2, 2005, compared with December 28, 2003 reflected cash
used to acquire businesses and capital spending, partially offset by positive
cash flow from operations. The higher balance in accounts receivables, inventory,
property, plant and equipment and accounts payable reflected the impact of
businesses acquired in 2004. The increase in long-term deferred income taxes
reflected the $6.8 million increase related to the minimum pension liability
adjustment. Goodwill and acquired intangible assets reflect the impact of
acquisitions. The increase in short-term accrued liabilities reflected liabilities
for businesses acquired in 2004 and higher compensation accruals. The increase
in other long-term liabilities reflected an increase in the aircraft product
liability reserve. The accrued pension obligation increased primarily as a
result of the increase in the unfunded pension liability in 2004, partially
offset by pension contributions. The change in the accumulated other comprehensive
loss
40
reflected the $10.9 million
non-cash adjustment related to the increase in the unfunded pension liability
in 2004. The adjustment to the accumulated other comprehensive loss component
of equity was required since the difference between the value of the Company’s
pension assets and the accumulated pension benefit obligation was larger as
of year-end 2004, compared with year-end 2003 (the “unfunded pension
liability”). The reduction to equity did not affect net income and was
recorded net of $6.8 million in deferred taxes. The increase in long-term
debt and capital lease obligations resulted from cash used to acquire businesses
in 2004 and a capital lease assumed in the Reynolds acquisition.
Net cash used in investing activities included
capital expenditures as presented below:
Capital Expenditures
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
(In millions) |
|
|
Electronics and
Communications
|
|
$ |
12.8 |
|
|
$ |
14.9 |
|
|
$ |
8.3 |
|
|
Systems Engineering
Solutions
|
|
|
1.7 |
|
|
|
1.5 |
|
|
|
3.1 |
|
|
Aerospace Engines
and Components
|
|
|
3.2 |
|
|
|
3.2 |
|
|
|
3.6 |
|
|
Energy Systems
|
|
|
1.1 |
|
|
|
0.6 |
|
|
|
0.4 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
18.8 |
|
|
$ |
20.2 |
|
|
$ |
15.4 |
|
| |
|
|
|
|
|
|
|
|
|
During 2005, we plan to invest approximately
$23.0 million in capital principally to reduce manufacturing costs, to
introduce new products and to upgrade capital equipment. Commitments at January 2,
2005 for capital expenditures were approximately $2.6 million.
Investing activities in 2004 included the five
acquisitions. On December 31, 2003, Teledyne acquired the electronic
warfare business of Filtronic Solid State for $12.0 million in cash.
Solid State’s electronic warfare business had sales of approximately
$12.5 million for the fiscal year ended May 2003. On February 27,
2004, Teledyne acquired Leeman Labs’ assets for $8.1 million in
cash which includes a purchase price adjustment. Leeman Labs had sales of
approximately $8.6 million for the fiscal year ended September 30,
2003. On June 18, 2004, Teledyne completed the acquisition of the stock
of Isco for $16.00 per share in cash or $93.8 million net of cash
acquired. Teledyne sold $17.3 million of marketable securities acquired
as part of the Isco acquisition and applied the proceeds against debt. Teledyne
assumed $2.9 million in long-term debt as part of the Isco acquisition.
Isco had sales of approximately $60.8 million for the fiscal year ended
July 25 2003. On July 2, 2004, Teledyne acquired Reynolds for $41.2 million
in cash which includes a purchase price adjustment and is net of cash acquired.
Teledyne assumed a $3.9 million capital lease as part of the Reynolds
acquisition. Reynolds had sales of approximately $35.0 million for the
fiscal year ended April 30, 2004. On October 22, 2004, Teledyne
acquired the defense electronics business of Celeritek, Inc. for $32.7 million
in cash, which includes the receipt of a purchase price adjustment. The defense
electronics business of Celeritek, Inc. had sales of approximately $19.7 million
for the fiscal year ended March 31, 2004.
Investing activities in 2003 included the acquisitions
of AIS and Tekmar Company. On June 27, 2003, Teledyne acquired AIS for
$6.4 million in cash, which is net of a $0.4 million purchase price
adjustment. AIS had sales of approximately $16.8 million for the fiscal
year ended December 2002. On May 16, 2003, Teledyne acquired Tekmar
Company for $13.5 million in cash. Tekmar Company had sales of $22.5 million
for the fiscal year ended in September 2002.
Investing activities in 2002 included the acquisition
of Monitor Labs from Spirent plc on September 27, 2002 for $24.0 million
in cash. Monitor Labs had sales of approximately $25.6 million for the
twelve months ended September 29, 2002. Investing activities in 2002
also included the receipt of a tax refund of $1.1 million related to
the API acquisition.
41
In all acquisitions, the results are included
in the Company’s consolidated financial statements from the date of each
respective acquisition. The allocation of the purchase price for the acquisition
of Tekmar Company was completed as of year-end 2003 and the allocation of
the purchase price for the acquisition of AIS was completed in the first quarter
of 2004. The allocation of the purchase price for the Isco, Reynolds, Solid
State and Leeman Labs acquisitions are complete as of year-end 2004. Each
of the above acquisitions is part of the Electronics and Communications segment.
Approximately $36.4 million of goodwill recorded in 2004 is deductible
for tax purposes. The Company is in the process of specifically identifying
the amount to be assigned to intangible assets for the Celeritek acquisition
and has made preliminary estimates as of January 2, 2005, since there
was insufficient time between the acquisition date and the end of the quarter
to finalize the valuation. The preliminary amount of goodwill recorded as
of January 2, 2005 for the Celeritek acquisition, was $25.0 million.
The preliminary amount of intangible assets recorded as of January 2,
2005 for the Celeritek acquisition, was $3.9 million. These amounts were
based on estimates that are subject to change pending the completion of the
Company’s internal review and the receipt of third party appraisals.
The following table summarizes the total intangible
assets acquired as part of the five acquisitions made in 2004 and the two
acquisitions made in 2003 (dollars in millions):
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted |
|
| |
|
|
|
average |
|
| |
|
January 2, |
|
|
useful life |
|
| |
|
2005 |
|
|
in years |
|
| |
|
|
|
|
|
|
|
Intangibles
not subject to amortization:
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
121.2 |
|
|
|
n/a |
|
|
Trademarks
|
|
|
10.0 |
|
|
|
n/a |
|
| |
|
|
|
|
|
|
| |
Total
|
|
$ |
131.2 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
Intangibles
subject to amortization:
|
|
|
|
|
|
|
|
|
|
Proprietary Technology
|
|
$ |
10.0 |
|
|
|
9.7 |
|
|
Customer List/ Relationships
|
|
|
4.7 |
|
|
|
6.4 |
|
|
Patents
|
|
|
0.2 |
|
|
|
14.9 |
|
|
Non-compete agreements
|
|
|
0.2 |
|
|
|
5.0 |
|
|
Backlog
|
|
|
0.9 |
|
|
|
1.1 |
|
| |
|
|
|
|
|
|
| |
Total subject
to amortization
|
|
$ |
16.0 |
|
|
|
6.2 |
|
| |
|
|
|
|
|
|
Amortizable intangible assets are amortized
over their estimated useful lives on a straight line basis. The Company recorded
$1.4 million and $0.2 million in amortization expense in 2004 and
2003, respectively, for acquired intangible assets. The expected future amortization
expense for the next five years is as follows (in millions): 2005-$2.4, 2006-$1.7,
2007-$1.6, 2008-$1.6, 2009-$1.5.
42
The following is a summary at the acquisition
date of the estimated fair values of the assets acquired and liabilities assumed
for the five acquisitions made in 2004 (in millions):
| |
|
|
|
|
|
Current assets,
excluding cash acquired
|
|
$ |
50.4 |
|
|
Property, plant
and equipment
|
|
|
19.7 |
|
|
Goodwill
|
|
|
110.1 |
|
|
Intangible assets
|
|
|
20.6 |
|
|
Other assets
|
|
|
19.5 |
|
| |
|
|
|
| |
Total assets
acquired
|
|
|
220.3 |
|
|
Current liabilities,
including short-term debt
|
|
|
28.2 |
|
|
Long-term debt
|
|
|
0.5 |
|
|
Long-term capital
lease
|
|
|
3.8 |
|
| |
|
|
|
| |
Total liabilities
assumed
|
|
|
32.5 |
|
|
Purchase price,
net of cash acquired
|
|
$ |
187.8 |
|
| |
|
|
|
Cash provided by financing activities for 2004
also reflected net borrowings under the revolving credit agreement. Cash used
in financing activities for 2002 reflected the payment of long-term debt.
Cash provided by financing activities for fiscal years 2004, 2003 and 2002
reflect proceeds from the exercise of stock options.
In June 2004, the Company terminated its then
existing $200.0 million five-year revolving credit agreement and replaced
it with a new $280.0 million credit facility that expires in June 2009.
At year-end 2004, we had $203.0 million of available committed credit
under the credit facility, which can be utilized, as needed, for daily operating
and periodic cash needs, including acquisitions. Borrowings under the credit
facility bear interest, at our option, at a rate based on either a defined
base rate or the London Interbank Offered Rate (LIBOR), plus applicable margins.
The credit agreement also provides for facility fees that vary between 0.15%
and 0.30% of the credit line, depending on our capitalization ratio as calculated
from time to time. The credit agreement requires the Company to comply with
various financial and operating covenants, including maintaining certain consolidated
leverage and interest coverage ratios, as well as minimum net worth levels
and limits on acquired debt. Total debt at year-end 2004 includes the $70.0 million
outstanding under the credit facility and $3.2 million assumed in the
Isco acquisition, of which $3.1 million is current. The Company also
assumed a $3.9 million capital lease in the Reynolds acquisition, of
which $0.1 million is current. We also had $0.5 million in long-term
debt outstanding at year-end 2004 under a $5.0 million uncommitted bank
facility. This credit line is utilized, as needed, for periodic cash needs.
At January 2, 2005, the Company had $10.0 million in outstanding
letters of credit.
In March 2003, Teledyne announced that its
Board of Directors authorized the Company to purchase, from time to time,
up to one million shares of its Common Stock in open market or privately negotiated
transactions through March 31, 2004. No repurchases were made under the
program.
In connection with the spin-off, a defined
benefit pension plan was established and Teledyne 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. The Company has changed its
retirement benefits for non-union new hires. As of January 1, 2004, non-union
new hires participate in an enhanced defined contribution plan as opposed
to the company’s existing defined benefit plan. Currently, Teledyne anticipates
making an after-tax cash contribution of approximately $9.0 million to
its defined benefit pension plan in 2005. Also, under one of its spin-off
43
agreements, after November 29,
2004, the Company is able to charge pension costs to the U.S. Government
under certain government contracts in accordance with CAS.
Statement of Financial Accounting Standard
(“SFAS”) No. 87, “Employers’ Accounting for Pensions,”
requires that a minimum pension liability be recorded if the value of pension
assets is less than the accumulated pension benefit obligation. This condition
existed since year-end 2002. In accordance with the requirements of SFAS No. 87,
the Company has a $22.7 million non-cash reduction to stockholders’
equity, a long-term intangible asset of $7.2 million and a long-term
additional pension liability of $44.3 million at year-end 2004. As of
year-end 2003, the Company had a $11.8 million non-cash reduction to
stockholders’ equity, a long-term intangible asset of $8.5 million and
an additional long-term pension liability of $27.9 million. The adjustments
to equity did not affect net income and are recorded net of deferred taxes.
The reduction will be reversed should the value of the pension assets exceed
the accumulated pension benefit obligation as of a future measurement date.
See Note 13 of the Notes to Consolidated Financial Statements for additional
pension disclosures.
Other Matters
As noted earlier, the Company’s effective
tax rate for 2004 was 38.7%, compared with 33.3% for 2003 and 39.7% for 2002.
Total year 2003 reflected an income tax benefit of $2.4 million due to
the reversal of an income tax contingency reserve which was determined to
be no longer needed during the third quarter of 2003. Excluding this benefit,
the Company’s effective tax rate for 2003 would have been 38.7%. Based
on the Company’s 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 January 2, 2005 will
be realized.
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 goods 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 |
We have not utilized derivative financial instruments
such as futures contracts, options and swaps, forward foreign exchange contracts
or interest rate swaps and futures during 2004 or 2003. We believe that adequate
controls are in place to monitor any hedging activities. 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 and operate facilities in countries that have been
politically stable. Also, our foreign risk management objectives are geared
towards stabilizing cash flow from the effects of foreign currency fluctuations.
Most of the Company’s sales are denominated in U.S. dollars which
mitigates the effect of exchange rate changes. Any borrowings under the Company’s
revolving credit line are based on a fluctuating market interest rate and,
consequently, the fair value of any outstanding debt should not be affected
materially by changes in market interest rates. Overall, we believe that our
exposure to interest rate risk and foreign currency exchange rate changes
is not material to our financial condition or results of operations.
| |
|
| |
Related Party Transactions |
In connection with the spin-off, Teledyne and
ATI entered into several agreements governing the separation of our businesses
and various employee benefits, compensation, tax, indemnification and transition
arrangements. The Company’s principal spin-off requirements, including
the requirement to ensure a favorable tax treatment, have been satisfied.
Three of our nine directors continue to serve on ATI’s board. In addition,
under one of our spin-off agreements, the Company is able to charge pension
44
costs to the U.S. Government
under certain government contracts after November 29, 2004. In 2004,
we purchased the “Teledyne” name and related logos, symbols and
marks from an affiliate of ATI for $412,000.
Our Chairman, President and Chief Executive
Officer is a director of Mellon Financial Corporation. Another of our directors
is a former chief executive officer and director of Mellon Financial Corporation.
All transactions with Mellon Bank, N.A. and its affiliates are effected under
normal commercial terms, and we believe that our relationships with Mellon
Bank, N.A. and its affiliates are arms-length. Mellon Bank, N.A. is one of
ten lenders under our $280.0 million credit facility, having committed
up to $25.0 million under the facility. It also provides cash management
services and an uncommitted $5.0 million line of credit. Mellon Bank,
N.A. serves as trustee under our pension plan and provides asset management
services for the plan. Mellon Investor Services LLC serves as our transfer
agent and registrar, as well as agent under our stockholders rights plan.
We are subject to various federal, state, local
and international environmental laws and regulations which require that we
investigate and remediate the effects of the release or disposal of materials
at sites associated with past and present operations. These include sites
at which Teledyne has been identified as a potentially responsible party under
the Comprehensive Environmental Response, Compensation and Liability Act,
commonly known as Superfund, and comparable state laws. We are currently involved
in the investigation and remediation of a number of sites. Reserves for environmental
investigation and remediation totaled approximately $3.5 million at January 2,
2005. This amount includes $1.8 million for an environmental matter related
to the Aerospace Engines and Component segment. As investigation and remediation
of these sites proceed and new information is received, the Company expects
that accruals will be adjusted to reflect new information. Based on current
information, we do not believe that future environmental costs, in excess
of those already accrued, will materially and adversely affect our financial
condition or liquidity. However, resolution of one or more of these environmental
matters or future accrual adjustments in any one reporting period could have
a material adverse effect on our results of operations for that period.
For additional discussion of environmental
matters, see Notes 2 and 16 to the Notes to Consolidated Financial Statements.
We perform work on a number of contracts with
the Department of Defense and other agencies and departments of the U.S. Government
including sub-contracts with government prime contractors. Sales under these
contracts with the U.S. Government, which included contracts with the
Department of Defense, were approximately 43% in 2004 and 46% of total sales
in 2003 and in 2002. For a summary of sales to the U.S. Government by
segment, see Note 14 to the Notes to Consolidated Financial Statements.
Sales to the Department of Defense represented approximately 33%, 31% and
30% of total sales for 2004, 2003 and 2002, respectively.
Performance under government contracts has
certain inherent risks that could have a material adverse effect on the Company’s
business, results of operations and financial condition. Government contracts
are conditioned upon the continuing availability of Congressional appropriations,
which usually occurs on a fiscal year basis even though contract performance
may take more than one year. While the overall U.S. military budget declined
in real dollars from the mid-1980s through the early 1990s, U.S. defense
spending has increased and is expected to continue to increase over the next
few years as a result of global responses to terrorism and perceived nuclear
threats. Notwithstanding the potential for increased defense spending, delays
or declines in U.S. military expenditures in the programs in which we
participate could adversely affect our business, results of operations and
financial condition.
For information on accounts receivable from
the U.S. Government, see Note 6 to the Notes to Consolidated Financial
Statements.
45
Our discussion and analysis of financial condition
and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of contingent
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to product returns, allowance for doubtful accounts, inventories,
intangible assets, income taxes, warranty obligations, pension and other postretirement
benefits, long-term contracts, environmental, workers’ compensation and
general liability, aircraft product liability, employee dental and medical
benefits and other contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to
be reasonable under the circumstances at the time, the results of which form
the basis for making our judgments. Actual results may differ materially from
these estimates under different assumptions or conditions. In some cases,
such differences may be material. See “Other Matters — Critical
Accounting Policies”.
The following table reflects significant reserves
and valuation accounts, which are estimates and based on judgments as described
above, at January 2, 2005 and December 28, 2003:
Reserves and Valuation Accounts(a)
| |
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
|
| |
|
(In millions) |
|
|
Allowance for doubtful
accounts
|
|
$ |
2.6 |
|
|
$ |
2.4 |
|
|
LIFO reserves
|
|
$ |
21.7 |
|
|
$ |
21.1 |
|
|
Other inventory
reserves
|
|
$ |
21.2 |
|
|
$ |
14.2 |
|
|
Aircraft product
liability reserves(b)
|
|
$ |
27.4 |
|
|
$ |
13.0 |
|
|
Workers’ compensation
and general liability reserves(b)
|
|
$ |
6.3 |
|
|
$ |
4.5 |
|
|
Warranty reserve
|
|
$ |
6.9 |
|
|
$ |
6.0 |
|
|
Environmental reserves(b)
|
|
$ |
3.5 |
|
|
$ |
2.0 |
|
|
Other accrued liability
reserves(b)
|
|
$ |
3.9 |
|
|
$ |
3.2 |
|
| |
|
| (a) |
This table should be read in conjunction with the Notes
to Consolidated Financial Statements. |
| (b) |
Includes both long-term and short-term reserves. |
Critical Accounting
Policies
Our critical accounting policies are those
that are reflective of significant judgments and uncertainties, and may potentially
result in materially different results under different assumptions and conditions.
We have identified the following as critical accounting policies: revenue
recognition; impairment of long-lived assets; income taxes; inventories and
related allowance for obsolete and excess inventory; aircraft product liability
reserve, accounting for pension plans and accounting for business combinations.
For additional discussion of the application of these and other accounting
policies, see Note 2 of the Notes to Consolidated Financial Statements.
Commercial sales and revenue from U.S. Government
fixed-price-type contracts are generally recorded as shipments are made or
as services are rendered. Occasionally, for certain fixed-price type contracts
that require substantial performance over a long time period (one or more
years) before shipments begin, in accordance with the requirements of Statement
of Position 81-1 “Accounting for Performance of Construction-Type and
Certain Production-Type Contracts”, revenues may be recorded based upon
attainment of scheduled performance milestones which could be time, event
or expense driven. In these few instances, invoices are submitted to the customer
under a contractual agreement and payments are made by the customer. Sales
under cost-reimbursement contracts are recorded as costs are
46
incurred and fees are earned. Since
certain contracts extend over a long period of time, all revisions in cost
and funding estimates during the progress of work have the effect of adjusting
the current period earnings on a cumulative catch-up basis. If the current
contract estimate indicates a loss, a provision is made for the total anticipated
loss.
The Company follows the requirements of Securities
and Exchange Commission Staff Accounting Bulletin No. 101 and No. 104
on revenue recognition.
Some of the Company’s products are subject
to specified warranties and the Company provides for the estimated cost of
product warranties. We regularly assess the adequacy of our preexisting warranty
liabilities and adjust amounts as necessary based on a review of historic
warranty experience with respect to the applicable business or products, as
well as the length and actual terms of the warranties. The product warranty
reserve is included in current accrued liabilities on the balance sheet. Changes
in the Company’s product warranty reserve are as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
| |
|
|
|
|
|
|
|
Balance at beginning
of year
|
|
$ |
6.0 |
|
|
$ |
5.2 |
|
| |
Accruals for product
warranties charged to expense
|
|
|
3.5 |
|
|
|
3.5 |
|
| |
Cost of product
warranty claims
|
|
|
(3.4 |
) |
|
|
(3.9 |
) |
| |
Acquisitions
|
|
|
0.8 |
|
|
|
1.2 |
|
| |
|
|
|
|
|
|
|
Balance at year-end
|
|
$ |
6.9 |
|
|
$ |
6.0 |
|
| |
|
|
|
|
|
|
| |
|
| |
Impairments of Long-Lived Assets |
We monitor the recoverability of the carrying
value of our long-lived assets. An impairment charge is recognized when events
and circumstances indicate that the undiscounted cash flows expected to be
generated by an asset (including any proceeds from dispositions) are less
than the carrying value of the asset and the asset’s carrying value is
less than its fair value. Our cash flow estimates are based on historical
results adjusted to reflect our best estimate of future market and operating
conditions. The net carrying value of assets not recoverable is reduced to
fair value. Our estimates of fair value represent our best estimate based
on industry trends and reference to market rates and transactions. In 2002,
we determined that the carrying amounts of certain of our long-lived assets
were no longer recoverable based on estimates of future operating cash flows
to be generated by these assets. As a result, in 2002, we recorded a $0.8 million
write-down of certain optoelectronic equipment and a $0.5 million charge
related to the partial write-down of the Company’s $2.8 million
cost-based investment in a private company engaged in manufacturing and development
of micro optics and microelectromechanical devices. In 2003, we wrote-off
the remaining $2.3 million of this investment.
| |
|
| |
Accounting for Income Taxes |
As part of the process of preparing our consolidated
financial statements, we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process involves estimating
our actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included within our consolidated balance sheet. We assess the likelihood that
our deferred tax assets will be recovered from future taxable income, recognizing
that future taxable income may give rise to new deferred tax assets. To the
extent that we believe that future recovery is not likely, we must establish
a valuation allowance. To the extent we establish or increase a valuation
allowance, we must include an expense within the tax provision in the income
statement.
Significant management judgment is required
in determining our provision for income taxes, our deferred tax assets and
liabilities and any valuation allowance recorded against our net deferred
tax assets. A valuation allowance of $3.3 million exists as of January 2,
2005. In the event that actual results differ
47
from these estimates, or we adjust
these estimates in future periods, we may need to adjust the valuation allowance,
which could impact our financial position and results of operations.
Provisions for income taxes for 2004, 2003
and 2002 are subject to audit by the Internal Revenue Service and the tax
authorities in the various jurisdictions in which we do business.
| |
|
| |
Inventories and Related Allowance for Obsolete and Excess Inventory
|
Inventories are valued at the lower of cost
(last-in, first-out; first-in, first-out; and average cost methods) or market,
less progress payments. We primarily use the last-in, first-out method of
inventory accounting that reflects current costs in the costs of products
sold. Costs include direct material, direct labor, applicable manufacturing
and engineering overhead, and other direct costs. Inventories have been reduced
by an allowance for excess and obsolete inventories. The estimated allowance
is based on management’s review of inventories on hand compared to assumptions
about future demand and market conditions. If actual future demand or market
conditions are more or less favorable than those currently projected by management,
adjustments may be required. In 2003, we recorded a $0.9 million fourth
quarter write-down on slow moving test equipment inventory in our Electronics
and Communication segment. Total inventories at cost were net of reserves
for excess, slow moving and obsolete inventory of $21.2 million and $14.2 million
at January 2, 2005 and December 28, 2003, respectively. The increase
from 2003 is primarily attributable to reserve balances acquired as part of
acquisitions made in 2004.
| |
|
| |
Aircraft Product Liability Reserve |
We are currently involved in certain legal
proceedings related to aircraft product liability claims. We have accrued
an estimate of the probable costs for the resolution of these claims. This
estimate has been developed in consultation with our insurers, outside counsel
handling our defense in these matters and historical experience, and is based
upon an analysis of potential results, assuming a combination of litigation
and settlement strategies. We do not believe these proceedings will have a
material adverse effect on our consolidated financial position. It is possible,
however, that future results of operations for any particular quarterly or
annual period could be materially affected by specific events occurring in
the period, changes in our assumptions, or the effectiveness of our strategies,
related to these proceedings. The Company has aircraft and product liability
insurance. However, based on a review of claims experience, changes to the
claims management process and an analysis of available options, the Company,
in 2004, increased its annual self-insurance retention for general aviation
aircraft liabilities incurred in connection with products manufactured by
Teledyne Continental Motors to $25.0 million from $15.0 million,
and as a result lowered its annual insurance premium. We cannot assure that,
for 2005 and in future years, our ability to obtain insurance, or the premiums
for such insurance, or the amount of our self-insured retention or reserves
will not be negatively impacted by our experience in prior years or other
factors. Our current aircraft product liability insurance policy expires May
2005.
| |
|
| |
Accounting for Pension Plans |
Teledyne has a defined benefit pension plan
covering most of its employees. The Company accounts for its defined benefit
pension plan in accordance with SFAS No. 87 — “Employers’
Accounting for Pensions,” which requires that amounts recognized in financial
statements be determined on an actuarial basis, rather than as contributions
are made to the plan. A significant element in determining the Company’s
pension income or expense in accordance with SFAS No. 87 is the
expected return on plan assets. The Company has assumed, based upon the types
of securities the plan assets are invested in and the long-term historical
returns of these investments, that the long-term expected return on pension
assets will be 8.5% in 2005, compared with 8.5% in 2004, and its assumed discount
rate will be 6.25% in 2005, compared with 6.5% in 2004. The Company made an
after-tax contribution of $1.9 million to its pension plan in 2004, and
anticipates making an after-tax cash contribution of approximately $9.0 million
to its pension plan in 2005. The assumed long-term rate of return on assets
is applied to the market-related value of plan assets at the end of the previous
year. This produces the expected return on plan assets that is included in
annual pension income or expense for the current year. The cumulative difference
between
48
this expected return and the actual
return on plan assets is deferred and amortized into pension income or expense
over future periods. As noted earlier, since the value of the Company’s
pension assets were less than the accumulated pension benefit obligation,
in accordance with the requirements of SFAS No. 87, the Company
has a $22.7 million non-cash reduction to stockholders’ equity,
a long-term intangible asset of $7.2 million and an additional long-term
pension liability of $44.3 million at year-end 2004. The adjustment to
equity did not affect net income and is net of deferred taxes of $14.4 million.
The charge will be reversed should the value of the pension assets exceed
the accumulated pension benefit obligation as of a future measurement date.
See Note 13 of the Notes to Consolidated Financial Statements for additional
pension disclosures.
| |
|
| |
Accounting for Business Combinations |
The Company accounts for goodwill and purchased
intangible assets under Statement of Financial Accounting Standards (“SFAS”)
No. 141 “Business Combinations” and SFAS No. 142
“Goodwill and Other Intangible Assets”. Business acquisitions are
accounted for under the purchase method by assigning the purchase price to
tangible and intangible assets acquired and liabilities assumed. Assets acquired
and liabilities assumed are recorded at their fair values and the excess of
the purchase price over the amounts assigned is recorded as goodwill. Purchased
intangible assets with finite lives are amortized over their estimated useful
lives. Goodwill and intangible assets with indefinite lives are not amortized,
but reviewed at least annually for impairment. The Company performs an annual
impairment review in the fourth quarter by comparing the fair value of the
reporting units, which are our four business segments, to their carrying values.
Fair values are estimated using discounted cash flow methodologies that are
based on projections of the amounts and timing of future revenues and cash
flows. Based on the annual impairment review completed in the fourth quarter
of 2004, no impairment of goodwill or intangible assets with indefinite lives
was indicated. In all acquisitions, the results are included in the Company’s
consolidated financial statements from the date of each respective acquisition.
| |
|
| |
Recent Accounting Pronouncements |
In December 2004, the Financial Accounting
Standards Board (“FASB”) issued SFAS No. 123R, “Share
Based Payment” (“SFAS No. 123R”) that will require
compensation costs related to share-based payment transactions to be recognized
in the financial statements. With limited exceptions, the amount of compensation
costs will be measured based on the grant date — fair value of the
equity or liability instrument issued. Compensation cost will be recognized
over the period that an employee provides service in exchange for the award.
SFAS No. 123R replaces SFAS No. 123, “Accounting
for Stock-Based Compensation” and supersedes SFAS No. 25, “Accounting
for Stock Issued to Employees.” Beginning with the third quarter of 2005,
Teledyne plans to recognize compensation expense in accordance with FASB No. 123R.
The adoption of this standard for the expensing of stock options is expected
to reduce pretax earnings by $2.2 million in the second half of 2005.
In November 2004, the FASB issued SFAS No
151, “Inventory Costs — an amendment of ARB No. 43 Chapter 4”
(“SFAS No. 151”). SFAS No. 151 amends the guidance
in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). SFAS No. 151 requires that
those items be recognized as current-period charges. SFAS No. 151
is effective for first fiscal years beginning after June 15, 2005. The
adoption of SFAS No. 151 is not expected to have any impact on the
Company.
In December 2003, the FASB issued SFAS No
132, “Employers’ Disclosures about Pensions and Other Postretirement
Benefits” (“SFAS No. 132”). SFAS No. 132
requires additional information
49
regarding the types of plan assets,
investment strategy, measurement date, plan obligations, cash flows and components
of net periodic benefit cost recognized during interim periods as is effective
immediately upon issuance. The Company has included the required disclosures
in Note 13 to the Notes to Consolidated Financial Statements.
In May 2003, the FASB issued SFAS No. 150,
“Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity” (“SFAS No. 150”). This
Statement establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. It represents a significant
change in practice in the accounting for a number of financial instruments,
including mandatorily redeemable equity instruments and certain equity derivatives
that frequently are used in connection with share repurchase programs. SFAS No. 150
must be applied immediately to instruments entered into or modified after
May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15,
2003, except for noncontrolling interests of a limited-life subsidiary which
has been deferred indefinitely. As Teledyne currently has no financial instruments
that would be subject to SFAS No. 150, the adoption had no impact
on the Company.
In April 2003, the FASB issued SFAS No. 149,
“Amendment of Statement 133 on Derivative Instruments and Hedging
Activities” (“SFAS No. 149”). SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. SFAS No. 149 clarifies under what
circumstances a contract with an initial net investment meets the characteristics
of a derivative and when a derivative contains a financing component that
warrants special reporting in the statement of cash flows. SFAS No. 149
is generally effective for contracts entered into or modified after June 30,
2003, and had no impact on Teledyne’s financial position or results of
operations.
In January 2003, the FASB issued Interpretation
No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”).
FIN 46 requires companies to evaluate variable interest entities to determine
whether to apply the consolidation provisions of FIN 46 to those entities.
Companies must apply FIN 46 to entities created after January 31,
2003, and to variable interest entities in which a company obtains an interest
after that date. In October 2003, the FASB deferred the effective date to
the first fiscal year or interim period ending after December 15, 2003,
to variable interest entities in which a company holds a variable interest
that is acquired before February 1, 2003. Teledyne’s adoption of
FIN 46 had no impact on the Company’s consolidated results of operations
or financial position.
In June 2001, the FASB issued SFAS No. 143,
“Accounting for Asset Retirement Obligations,” which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs (“SFAS No. 143”).
Teledyne’ initial adoption of SFAS No. 143, effective January 1,
2003, did not have a material effect on its financial position or results
of operations.
Outlook
Based on its current outlook, the Company’s
management believes that first quarter 2005 earnings per share will be in
the range of approximately $0.37 to $0.40. The full-year 2005 earnings per
share outlook is expected to be in the range of approximately $1.35 to $1.43.
The Company’s estimated effective income tax rate for 2005 is 39.6%.
50
The Company’s 2005 outlook reflects anticipated
sales growth in defense electronics and instrumentation businesses, primarily
due to the full-year effect of the Company’s acquisitions completed in
2004. Organic sales growth of electronic instruments is expected to be offset
by a substantial reduction in sales of geophysical sensors for the energy
exploration market. The Company’s management expects revenue in its Systems
Engineering segment to peak in the first quarter of 2005, due in part to favorable
timing on certain chemical weapons demilitarization programs and the Company’s
systems engineering and technical assistance contract with the U.S. Army.
In addition, revenues in the Company’s Energy Systems segment and its
military turbine engine business are expected to be lower in the second half
of 2005 compared with the second half of 2004.
The full year 2005 earnings outlook includes
approximately $6.0 million or $0.11 per share in pension expense
after recovery of allowable pension costs from our government contracts. Full
year 2004 earnings included $8.7 million or $0.16 per share in gross
pension expense, or $8.2 million or $0.15 per share in net pension
expense after recovery of allowable pension costs from our government contracts.
The decrease in pension expense reflects, in part, the ability to recover
pension cost from the government in 2005, partially offset by increased pension
liability due to a reduction in the discount rate assumption for the Company’s
defined benefit plan. The Company’s assumed discount rate is 6.25% in
2005, compared with 6.5% in 2004.
Beginning with the third quarter of 2005, the
Company plans to recognize compensation expense in accordance with SFAS No. 123
(revised 2004). The adoption of this standard for the expensing of stock options
is expected to reduce earnings per share by approximately $0.05 in the second
half of 2005.
EARNINGS PER SHARE SUMMARY
(Diluted earnings per common
share from continuing operations)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 Full Year |
|
|
|
|
|
| |
|
Outlook |
|
|
2004 Results |
|
|
2003 Results |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Low |
|
|
High |
|
|
Actual |
|
|
Actual |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
(excluding net pension expense, income tax benefit and stock option
expense)
|
|
$ |
1.51 |
|
|
$ |
1.59 |
|
|
$ |
1.39 |
|
|
$ |
0.97 |
|
| |
Net pension expense
after recovery from certain government contracts
|
|
|
(0.11 |
) |
|
|
(0.11 |
) |
|
|
(0.15 |
) |
|
|
(0.13 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
(excluding income tax benefit and stock option expense)
|
|
|
1.40 |
|
|
|
1.48 |
|
|
|
1.24 |
|
|
|
0.84 |
|
| |
Income tax benefit
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.07 |
|
| |
Stock option expense
|
|
|
(0.05 |
) |
|
|
(0.05 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
$ |
1.35 |
|
|
$ |
1.43 |
|
|
$ |
1.24 |
|
|
$ |
0.91 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Safe Harbor Cautionary Statement Regarding Outlook and Other Forward Looking
Data
This Management’s Discussion and Analysis
of Financial Condition and Results of Operations contains forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995,
relating to earnings, growth opportunities, capital expenditures, pen