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 2005 were $1,206.5 million, compared with
$1,016.6 million and $840.7 million in 2004 and 2003,
respectively. Our aggregate segment operating profit and other
segment income were $126.6 million, $89.2 million and
$61.9 million in 2005, 2004 and 2003, respectively.
Approximately 58% of our total sales in 2005 were to commercial
customers and the balance was to the U.S. Government, as a
prime contractor or subcontractor. Approximately 47% 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 18% of total
sales in 2005.
Our four business segments and their respective contributions to
our total sales in 2005, 2004 and 2003 are summarized in the
following table:
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Percentage of Sales
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Segment
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2005
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2004
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2003
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Electronics and Communications
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60
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%
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56
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%
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53
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%
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Systems Engineering Solutions
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22
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%
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24
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%
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25
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%
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Aerospace Engines and Components
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16
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%
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18
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%
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20
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%
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Energy Systems
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2
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%
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2
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%
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2
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%
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100
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%
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100
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%
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100
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%
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Our principal executive offices are located at 12333 West
Olympic Boulevard, Los Angeles, California 90064-1021. Our
telephone number is
(310)
893-1600.
Strategy
Our strategy emphasizes growth in our core markets of defense
electronics, environmental instruments and government systems
engineering. We intend to strengthen and expand our core
businesses with targeted acquisitions. We intend to aggressively
pursue operational excellence to continually improve our margins
and earnings. Operational excellence to Teledyne includes the
rapid integration of the businesses we acquire. Over time, our
goal is to create a set of businesses that are truly superior in
their niches. We intend to continue to evaluate our product
lines to ensure that they are aligned with our strategy.
Our Recent Acquisitions
During 2005 and subsequently, Teledyne has engaged in a number
of acquisitions intended to add to its product and service
offerings in the electronic instrumentation market.
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In August 2005, we acquired RD Instruments, Inc., a designer and
manufacturer of acoustic Doppler instrumentation principally
located in San Diego, California. In October 2005, our new
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subsidiary Teledyne RD Instruments, Inc., purchased assets of
software developer GeoPerception, Inc., and in November 2005, we
purchased the remaining stock of MGD Technologies, Inc., a
provider of acoustic Doppler flow meter products, that had been
majority owned by RD Instruments, Inc.
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In January 2006, we completed the acquisition of Benthos, Inc.,
a manufacturer of oceanographic products and package inspection
systems located in North Falmouth, Massachusetts.
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In addition to complementing each other, the above-listed
acquisitions expand the existing underwater acoustic instruments
of Teledyne Geophysical Instruments and the existing water flow
measurement instruments of Teledyne Isco, Inc., the latter
itself being a June 2004 acquisition.
Other acquisitions have continued to focus on broadening our
line of microwave products for defense and other commercial
customers:
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•
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In June 2005, we completed the acquisition of Cougar Components
Corporation, a designer and manufacturer of RF and microwave
cascadable amplifiers and subsystems for signal processing
equipment located in Sunnyvale, California.
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In October 2005, our subsidiary, Teledyne Cougar, Inc., acquired
assets of the microwave technical solutions business of Avnet,
Inc., relating to its standard RF and microwave components and
high reliability screening and value-added testing services.
Such assets have been primarily consolidated with Teledyne
Cougar’s operations.
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These acquisitions serve the same markets and customers as our
other defense electronics businesses and also complement our
2004 acquisitions of the defense electronics assets of Filtronic
Solid State and Celeritek, Inc.
Teledyne spent $58.4 million, net of cash acquired, on
acquisitions in 2005. Teledyne spent $32.2 million, net of
cash acquired, in 2006 for the Benthos acquisition.
Each of the acquired businesses is part of our Electronics and
Communications segment. Their results are included in our
consolidated financial statements since their respective dates
of acquisition. The Benthos acquisition was completed in fiscal
year 2006.
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, Executive 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.
In April 2005, we submitted to the New York Stock Exchange the
CEO certification required by Section 303A.12(a) of the New
York Stock Exchange Listed Company Manual. The certification was
not qualified in any respect. Additionally, we filed with the
SEC as exhibits to our
Form
10-K
the CEO
and CFO certifications required under Section 302 of the
Sarbanes-Oxley Act of 2002.
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, scientific 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. 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 RF and microwave components and subassemblies
used in aerospace and defense applications, including electronic
warfare and radar. With the 2005 acquisition of Cougar
Components, our products include cascadable amplifiers,
voltage-controlled oscillators and microwave mixers.
High Voltage Connectors and Subassemblies.
Through
Teledyne Reynolds, Inc., we supply specialized high voltage
connectors and subassemblies for defense, aerospace and
industrial applications. We also produce pilot helmet mounted
display components and subsystems for the Joint Helmet Mounted
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. 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.
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 have
developed a new sequencer, which is currently undergoing
testing, 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.
Electronic Manufacturing Services.
We serve the market
for high-mix, low-volume manufacturing of sophisticated military
electronics equipment principally from our facility in Tennessee.
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 in the air we breathe. Teledyne
Monitor Labs, Inc. supplies environmental monitoring systems for
the detection,
3
measurement and reporting of air pollutants from industrial
stack emissions. 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. Through Teledyne Leeman Labs, we provide
inductively coupled plasma laboratory spectrometers that are
used by environmental and quality control laboratories to detect
low levels of inorganic contaminants in water and other
environmental samples.
Teledyne Isco, Inc. produces 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 accessories 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.
Underwater Acoustic 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 continue to adapt this
technology for the military market, where these products can be
used to detect submarines, surface ships and torpedoes.
With the acquisitions of RD Instruments, Inc. and Benthos, Inc.,
we have expanded our underwater acoustic instrumentation
capabilities. Teledyne RD Instruments, Inc.’s acoustic
Doppler current profilers perform precise measurement of
currents at varying depths in oceans and rivers, and its Doppler
Velocity Logs are used for navigation of civilian and military
surface ships and unmanned underwater vehicles and by
U.S. Navy divers. Teledyne Benthos, Inc. is a leading
provider of oceanographic products used by the U.S. Navy,
energy exploration, oceanographic research and port and harbor
security services. Its products include acoustic modems for
networked underwater communication, a three-dimensional sidescan
sonar system and remotely operated underwater vehicles.
Industrial 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
addition, we sell 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 varied applications such as semiconductor
manufacturing, refrigeration, metallurgy and food processing.
Package Inspection Systems.
Since the acquisition of
Benthos, Inc., under the
Taptone
®
brand, we develop quality control equipment for flexible
plastic, glass and other packaging used in the beverage, food
and pharmaceutical markets.
Test Services.
We manufacture torque sensors and provide
technical services for critical applications such as monitoring
valves in nuclear power plants.
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Other Commercial Electronics
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Aircraft Information Management.
Our aircraft information
management solutions are designed to increase the reliability
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 for over
one-half of Boeing aircraft models in existing airline fleets.
We have been increasingly providing our systems to the Airbus
A320 and A330/340 family aircraft, and we estimate that our
forward fit market share was over 50% at the end of 2005. In
addition, our Aviation Information Solutions (AIS) business
4
designs and manufactures aerospace data acquisition devices,
networking products, and flight deck and cabin displays.
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. They are also used 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.
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.
We play significant roles in diverse missile defense areas,
which range from targets and countermeasures, systems
engineering and 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 2005, 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 of the Lockheed Martin team, the Targets
and Countermeasures Program. These programs involve 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”). Additionally, we have commenced
work on an enhanced test program, launched in December 2005, to
support an integrated test lab for the GMD system.
In addition to our missile defense activities, we are supporting
several other U.S. Army programs. After reaching agreement
with Germany’s Rheinmetall Defence Electronics in November
2004 to market
5
its Unmanned Aircraft Systems in the United States, we won
Phase I of a three-phase down select program to develop a
Class III Unmanned Aerial Vehicle under the Future Combat
System Program. During 2005, we also introduced a Multipurpose
Troop Transport Carrier System, which is designed to protect
soldiers from small arms fire and fragments from improvised
explosive devises. This system can be mounted on the Army’s
standard trucks or dismounted and configured on the ground to
provide fixed-position armor protection.
We have been active in U.S. space programs for almost
50 years and continue to be a significant contributor to
NASA programs. We have played a key role in the International
Space Station (“ISS”), and have had roles in the Space
Shuttle program. We currently supply
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. As a subcontractor to Lockheed Martin, we also
work on the ISS Cargo Mission Contract at the Johnson Space
Center in 2005. This six-year contract, which began in 2003,
involves providing services related to planning, preparation and
execution of cargo missions to the ISS.
We are the prime contractor on the Marshall Space Flight Center
Systems Development and Operations Support Contract, which
provides engineering services and hardware development support
for a variety of space activities. 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, 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 U.S. Army’s 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 2005, we continued our work on the
U.S. Army’s Non-Stockpile Chemical Materiel Program in
support of the destruction of binary chemical warfare materiel
stored at the Pine Bluff Arsenal in Arkansas. We also began
applying sophisticated computer aided engineering, design,
modeling and manufacturing skills to support the
U.S. Army’s Edgewood Chemical and Biological Center.
In addition, we produce canisters for the processing,
stabilization and storage of nuclear-waste products.
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
12 states, including Utah where the largest commercial
radiological waste disposal site resides. With its Nuclear
Utilities Procurement Issues Committee certification, the
laboratory also serves one-third of the nuclear power plants in
United States.
We continue to work to leverage our broad capabilities into the
Homeland Defense market. 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.
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 is a principal prime
6
contractor 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, Alabama Army 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 to the
corresponding aftermarket. We are one of two primary worldwide
original equipment producers of piston aircraft engines for the
general aviation marketplace.
Our current OEM product lines include engines powering
high-speed composite aircraft, such as the Cirrus SR-20 and
SR-22, the Diamond C1, and Lancair Columbia 350 and 400 series,
the Liberty XL2 two seat aircraft, and the twin engine Adam
A500. In addition, our engines power the Raytheon Beech Bonanza
and Baron aircraft, the Mooney Aircraft line of advanced single
engine aircraft, and the New Piper Seneca V twin-engine
aircraft. We also continue 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 have a defined life limit generally
expressed as time between overhauls or TBO. 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 of overhauled piston engines and engine installations
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 and
facilitates modern electronic driven maintenance of our engines.
During 2005, a milestone was realized when Liberty Aircraft
began production and delivery of the XL-2 two seat aircraft
bearing the
PowerLink
tm
controls, 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
®
line of lead acid batteries is widely recognized as the premier
power source for general aviation. We have developed sealed
recombinant batteries for business and light jet applications.
Teledyne Battery Products, in conjunction with Teledyne
Controls, jointly developed an onboard charging and cockpit
display kit that permits existing NiCad battery systems to be
replaced with
Gill
®
sealed lead acid batteries.
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.
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 2005, we continued to work under 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 then
Florida-based Energy Partners, Inc.
We 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, specialty metals, float glass and other
industrial processes. Historically, our sales of hydrogen
generators have been largely to the developing countries.
Recently, however, the combination of rising hydrogen prices and
weather-induced supply disruptions has increased our sales and
sales opportunities in the North American market.
For over 50 years, we have supplied high reliability energy
conversion devices and gas generation products based on
thermoelectric and electrochemical processes. We provided the
thermoelectric power systems for the Pioneer 10 and 11
deep-space missions to Jupiter and Saturn and for the Viking 1
and Viking 2 Mars Landers. In 2005, in partnership with Boeing
and under a ten-year $57 million contract signed in 2003
with the U.S. Department of Energy, we produced and tested
an operational prototype of the new Multi-Mission Radioisotope
Thermoelectric Generator 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
Laboratory scheduled to launch in 2009.
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
12 kilowatts.
In 2005, we successfully supplied NASA with a 12 kilowatt PEM
full cell engineering unit, and have obtained additional work
from NASA to continue development of advanced PEM fuel cell
technologies for space.
8
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
2005, 2004 or 2003.
Approximately 42%, 43%, and 46% of our total sales for 2005,
2004 and 2003, 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. These sales represented 32%,
33% and 31% of our total sales for 2005, 2004 and 2003,
respectively. In 2005, our largest program with the
U.S. Government was the Systems Engineering and Technical
Assistance contract with the Space and Missile Defense Command,
and it represented 5.5% of total sales. In 2004 and 2003, our
largest program with the U.S. Government was The Boeing
Company — Ground-based Midcourse Defense contract,
representing 5.4%, and 5.8% 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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2005
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2004
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2003
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(in millions)
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Electronics and Communications
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$
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198.5
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$
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147.3
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$
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142.0
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Systems Engineering Solutions
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260.0
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240.4
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210.3
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Aerospace Engines and Components
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32.3
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26.0
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24.7
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Energy Systems
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19.8
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19.4
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10.7
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Total U.S. Government sales
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$
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510.6
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$
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433.1
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$
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387.7
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Our total backlog of confirmed orders was approximately
$521.9 million at January 1, 2006, $471.3 million
at January 2, 2005, and $369.7 million at
December 28, 2003. We expect to fulfill 99% of such backlog
of confirmed orders during 2006.
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. As part of on-going
acquisition integration efforts, some of our Teledyne
Instruments companies have been consolidating 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.
Through Teledyne Technologies International Corp. and other
subsidiaries, the Company has established branch offices in
foreign countries to facilitate international sales for various
businesses.
9
Competition
We believe that technological capabilities and innovation and
the ability to invest in the development of new and enhanced
products are critical to obtaining and maintaining leadership in
our markets and the industries in which we compete. Although we
have certain advantages that we believe help us compete
effectively in our markets, each of our markets is highly
competitive. 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 $291.5 million,
$263.3 million, and $218.1 million on research and
development and bid and proposal costs for 2005, 2004, and 2003,
respectively. Customer-funded research and development, most of
which was attributable to work under contracts with the
U.S. Government, represented approximately 85%, 88%, and
87% of total research and development costs for 2005, 2004, and
2003, respectively.
In 2005, approximately 73.6% of the $44.9 million in
Company-funded research and development and bid and proposal
costs were incurred in our electronics and communications
businesses. We expect the level of Company-funded research and
development and bid and proposal costs to be approximately
$54.4 million in 2006.
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.
Employees
Our total current workforce consists of approximately 7,270
employees. The International Union of United Automobile,
Aerospace and Agricultural Implement Workers of America
represents approximately 265 active employees in Mobile, Alabama
under a collective bargaining agreement that expires by its
terms on February 20, 2007. This union also represents
approximately 15 of our active employees in Toledo, Ohio under a
collective bargaining agreement that expires by its terms on
November 9, 2006. 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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64
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Dr. Mehrabian has served as Chairman, President and Chief
Executive Officer of Teledyne for more than five years. He
is a director of Teledyne, Mellon Financial Corporation and PPG
Industries, Inc.
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John T. Kuelbs* Executive Vice President, General Counsel and
Secretary
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63
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Mr. Kuelbs has been Executive Vice President, General Counsel
and Secretary of Teledyne since September 1, 2005. Prior to
that, he was Senior Vice President, General Counsel and
Secretary of Teledyne.
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Dale A. Schnittjer* Senior Vice President and Chief Financial
Officer
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61
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Mr. Schnittjer has been Senior Vice President and
Chief Financial Officer of the Company since
September 1, 2005. From January 27, 2004 to
September 1, 2005, he was Vice President and Chief
Financial Officer of Teledyne. 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.
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Susan L. Main* Vice President and Controller
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47
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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 November 29, 1999 to March 2004.
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Segment Management:
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James M. Link* President, Teledyne Brown Engineering, Inc.
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63
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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. 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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54
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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. Prior to that,
Mr. Pichelli was the Vice President and General Manager of
Teledyne Analytical Instruments.
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Bryan L. Lewis President, Teledyne Continental Motors, Inc.
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56
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Mr. Lewis has been the President of Teledyne Continental Motors
for more than five years.
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Rhett Ross President, Teledyne Energy Systems, Inc.
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41
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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.
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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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Other Officers:
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Ivars R. Blukis Chief Business Risk
Assurance Officer
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63
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Mr. Blukis has been Chief Business Risk Assurance Officer since
January 22, 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.
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Melanie S. Cibik Vice President, Associate General Counsel and
Assistant Secretary
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46
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Miss Cibik has been Vice President, Associate General Counsel
and Assistant Secretary of the Company for more than five years.
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Shelley D. Green Treasurer
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47
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Ms. Green has been the Treasurer of Teledyne for more than five
years.
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Robyn E. McGowan Vice President, Administration and Human
Resources and Assistant Secretary
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41
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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 November 29, 1999.
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Robert L. Schaefer Associate General Counsel and Assistant
Secretary, General Counsel of the Electronics and Communications
Segment
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|
|
60
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Mr. Schaefer has been an Associate General Counsel and an
Assistant Secretary of Teledyne and the General Counsel of
Teledyne’s Electronics and Communications segment for more
than five years.
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Robert W. Steenberge Vice President and Chief Technology Officer
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|
|
58
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Mr. Steenberge became a Vice President of the Company on
February 21, 2006, and has been Teledyne’s Chief
Technology Officer for more than five years.
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Jason VanWees Vice President, Corporate Development and Investor
Relations
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34
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Mr. VanWees has been the Vice President, Corporate Development
and Investor Relations since February 21, 2006. Prior to
that, he was Director of Corporate Development and Investor
Relations of Teledyne for more than five years.
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*
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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.
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Dr. Mehrabian and Teledyne have entered into a Second
Amended and Restated Employment Agreement dated as of
January 24, 2006. The agreement provides that we will
employ him as the Chairman, President and Chief Executive
Officer. The agreement terminates on December 31, 2006, but
will automatically 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. Under the
agreement, Dr. Mehrabian’s annual base salary is
$700,003. 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 starting six months 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
12
employment for reasons other than for cause or the executive
terminates employment for good reason. “Severance
benefits” consist of:
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•
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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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•
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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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•
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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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•
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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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•
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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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•
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A “gross-up-payment” to hold the executive harmless
against the impact, if any, of federal excise 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.
|
Item 1A. Risk Factors.
Risk Factors; Cautionary Statement as to Forward-Looking
Statements
The following text highlights various risks and uncertainties
associated with Teledyne. These factors could materially affect
“forward-looking statements” (within the meaning of
the Private Securities Litigation Reform Act of 1995) that we
may 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 Operation” of this
Form
10-K
and in
Teledyne’s 2005 Annual Report to Stockholders. It is not
possible for management to predict all of such factors, and new
factors may emerge. Additionally, management cannot assess the
impact of each such factor on Teledyne or the extent to which
any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking
statements.
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 42% of our total
13
revenue for 2005, as compared to 43% and 46% of our total
revenue for 2004 and 2003, respectively. 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 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.
Hurricane relief efforts, the continued war on terrorism and the
Middle East situation could result in a diversion of funds from
programs in which Teledyne participates. Also, 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.
Our Electronics and Communications segment provides a variety of
products for newer military platforms such as the F/ A-22
aircraft 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 budget priorities, will
continue to provide funding to manufacture and support these
platforms.
Also, over time and for a variety of reasons, programs can
evolve and affect the extent of our participation. For example,
Teledyne Brown Engineering’s Ground-based Midcourse Defense
program was restructured in 2003 to change the emphasis from a
focus on test and evaluation to a focus on deployment and
sustainment. This resulted in a nearly 16% decline in revenues
from this contract that year compared to 2002 (from
$58 million to $49 million). Then, in 2004 and 2005,
revenues related to this program totaled approximately
$54 million and $51 million, respectively, with the
increases over 2003 resulting from unanticipated ground tests.
The Company expects revenues from this program to decline
further in 2006.
In addition, the U.S. Missile Defense Agency or MDA has
been undergoing changes that could affect our Systems
Engineering Solution segment. The MDA is in the process of
relocating personnel from the Washington, DC area to Huntsville,
Alabama. It is difficult to predict the effects of such move and
the efficiencies and costs-savings that the U.S. Government
will try to extract from such relocation, including possible
consolidation with functions of the U.S. Army Space and
Missile Defense Command and other government units. Further, a
new director has begun additional restructuring of the
Ground-based Midcourse Defense program and redefining roles of
program participants, and it is too early to tell the impact of
such changes.
The Company, principally and traditionally through its Systems
Engineering Solutions segment, has been a significant
participant in NASA programs. The centerpiece of our current
NASA activities is the International Space Station. While the
Company anticipates participating in NASA’s lunar and
interplanetary exploration activities, funding for these
activities may be reduced to the extent additional funding is
sought 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 have been able to charge these pension
costs. 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 to 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
14
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. During 2005, other than a small contract of
Teledyne Reynolds relating to the U.S. Navy’s Fleet
Ballistic, Trident II (D-5) program, no
U.S. Government contract was terminated for convenience. We
did not have any of our U.S. Government contracts
terminated for default during 2005.
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 (47%
in 2005, as compared to 43% in 2004 and 44% in 2003). 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.
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 have 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. We have a compliance program
designed to surface issues that may lead to voluntary
disclosures of contracting irregularities 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. Our Electronic Safety Products unit’s
involvement in this civil action is over as a result of
favorable court decisions.
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 2005, notwithstanding improved market
conditions, 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 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 2006, as it was in both 2005
and 2004, and the assumed discount rate will be 6.00% in 2006,
compared to 6.25% in 2005 and 6.50% in 2004. The actual rate of
return on pension assets was 5.1% in 2005 and 9.8% in 2004.
Since the spin-off through 2002, as a result of favorable market
conditions, 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 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. Projected earnings for 2006 are
expected to include approximately $16.4 million in pension
expense under SFAS No. 87, or $6.6 million in net
pension expense after recovery of allowable pension costs from
our CAS covered government contracts. Earnings
15
for 2005 included $12.7 million in pension expense under
SFAS No. 87, or $3.4 million in net pension
expense after recovery of allowable pension costs from our
CAS-covered government contracts. The projected increase in 2006
pension expense reflects, in part, the reduction of the discount
rate assumption for our defined benefit Pension Plan from 6.25%
in 2005 to 6.00% in 2006. Since November 29, 2004, under
one of our spin-off agreements, we are able to charge pension
costs to the U.S. Government under certain government
contracts. Pension expense determined under CAS can generally be
recovered through the pricing of products and services sold to
the U.S. Government. Effective January 1, 2004, in an
effort to reduce 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.
Given our pension plan’s underfunded status, in 2004, we
began making required cash contributions to our pension plan.
For 2005 and 2004, cash contributions for this defined benefit
plan totaled $14.8 million and $3.1 million,
respectively, and we currently expect such contributions to be
approximately $18.8 million for 2006. Declines in the stock
market and lower rates of return could further increase future
years required contributions to our pension plan.
United States’ and global responses to terrorism, the
Middle East situation and nuclear proliferation concerns
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 nuclear proliferation concerns
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.
The reaction to Iran’s stated desire to explore nuclear
capabilities could adversely affect oil prices and some of the
Company’s businesses.
While some of our businesses that provide products or services
to the U.S. Government experienced greater demand 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 the Department of Defense or
Homeland Security programs in which we may not participate or
may not have current capabilities, and this shift could 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, a SARS or bird
flu scare and other factors, could adversely affect our
Electronics and Communications segment.
Continued deterioration of financial performance of airlines
could result in 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 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.
Higher oil prices could reduce general aviation air travel,
negatively affecting our Aerospace Engines and Components
segment. Higher oil prices could also adversely affect
commercial airline-related customers of our Electronics and
Communications segment. Conversely, higher oil prices could
increase oil exploration activities and bolster the businesses
of Teledyne Geophysical Instruments and Teledyne Benthos, Inc.
16
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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•
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the potential loss of key personnel of an acquired business;
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•
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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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•
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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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•
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unanticipated changes in business and economic conditions
affecting an acquired business.
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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, indemnities
or escrows may not fully cover such matters, particularly
matters identified after a closing.
We also have acquired several private companies, such as
Reynolds Industries, Incorporated, Cougar Components Corporation
and RD Instruments, Inc. Private companies generally may not
have internal controls and compliance systems in place that are
as formal or comprehensive as those of public companies. While
the Company has required various sellers to take certain
compliance actions prior to the closing of an acquisition,
including actions relating export controls, and has sought
protections in the purchase agreement for such matters, there is
no assurance that we have identified all issues or will be fully
protected from historic liabilities.
With regard to our 2005 acquisitions and our most recent
acquisition of Benthos, Inc., while these companies’
products and customer base are complementary to some of
Teledyne’s existing businesses, there is no assurance that
we will achieve all identified financial, operating and
marketing 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 recently relocated
the operations of the microwave technical solutions assets
acquired from Avnet Inc. to a Teledyne Cougar facility in
Sunnyvale, California. Despite planning, relocation of
manufacturing operations has inherent risks, as it tends to
involve, among other things, change of personnel, application of
a new business system software and learning or adaptation of
manufacturing processes and techniques. Production delays at the
new operating location could result.
As permitted by SEC rules, our current management’s report
as to our assessment of the effectiveness of internal controls
over financial reporting excludes our 2005 acquisitions from its
scope and coverage. We plan to evaluate more fully the internal
controls of these acquired companies in 2006, and implement a
formal and rigorous system of internal controls at these
acquired companies. The Company can provide no assurance that we
will be able to provide a report that contains no 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 of new or enhanced
products and continuously upgrade our process technology and
manufacturing capabilities.
17
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 the existence of a public offering
market, investor perceptions of 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
have been developing new fuel cell related technologies. The
market for fuel cell technologies is not well established and
there are a number of companies that have announced intentions
to develop and market fuel cell products. Some of these
companies have greater financial and/or technological resources
than we do.
We have also been developing new electronic products, including
electronic flight bags, high-power millimeter traveling wave
tubes and imaging sonar systems, 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.
Additionally, new products may trigger increased warranty costs
as such products are tested further by actual usage. Accelerated
entry of new products to meet heightened market demand and
competitive pressures may cause additional warranty costs as
development and testing time periods might be condensed.
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. For
example, Teledyne Reynolds, Inc.’s high voltage connector
business could be negatively impacted by marketplace shifts to
lower voltage requirements where the number of competitors is
larger. Also, most lighting displays in legacy aircraft use
tubes that require high voltage connectors. LED backlights,
which are increasingly being used for aircraft lighting
displays, have substantially lower voltage requirements.
18
Currently accepted industry standards are also subject to
change, which may contribute to the obsolescence of our products
or services. In this respect, the Company has been working to
make sure that certain of its electronic products sold into
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 a wide variety of 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
connection with products manufactured by Teledyne Continental
Motors, Inc., is $25.0 million. Additionally, based on
facts and circumstances of claims, we have not always accrued
amounts up to the applicable annual self-insured retentions.
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 additional costs.
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 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 matters, as coverage depends on the year of
purported exposure and other factors. Nonetheless, the Company
intends to defend these claims vigorously. Congress continues to
consider legislative reform to deal with asbestos-related claims.
Certain gas generators manufactured by Teledyne Energy Systems,
Inc. contain a sealed, wetted asbestos component. While the
company has been 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 and has other
nuclear-related certifications and internal quality controls in
place, errors and omissions in analyses may occur. We currently
have errors
19
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.
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 2006 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 2006
and has an annual self-insured retention of $25.0 million.
To offset aircraft product liability 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 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 that can
affect insurance coverages, such as the 2005 devastating
hurricane season, our ability to obtain product liability
insurance and the cost for such insurance are affected by our
historical claims experience. While the Company has taken steps
to improve its claims management process over the last few
years, we cannot assure that for 2006 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
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commercial aircraft has improved since the downturn triggered by
the events of September 11th and the war in Iraq,
another such event could 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 at Teledyne Geophysical Instruments since 2003. A
cyclical downturn in these prices may affect future operating
results.
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.
We are subject to the risks associated with international
sales.
During 2005, international sales accounted for approximately 18%
of our total revenues, compared with 19% in 2004 and 16% in
2003. We anticipate that future international sales will
continue to account for a large portion of our revenues. Risks
associated with these sales include:
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political and economic instability;
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international terrorism;
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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; and
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exchange rate fluctuations.
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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. That is, if the U.S. Dollar
strengthens against the British Pound Sterling or Euro, our
European customers may no longer find our product prices more
attractive than European competitors.
The September 11th terrorist attacks, nuclear
proliferation concerns and other factors 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
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.
21
While the Company, as part of its overall risk management
program, has an environmental management 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 program 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 and binary
chemical agents located at Pine Bluff Arsenal, Arkansas. The
destruction of chemical weapons is an inherently dangerous
activity. Except for a contained fire during a demonstration
testing in an historic program of a process designed to access
rockets, we have not experienced any accidents or other adverse
consequences as a result of our participation in weapon
destruction programs. We cannot, however, assure that we will
not experience any problems in the future. Although the federal
government provides certain indemnities to contractors in these
programs, these indemnities may be insufficient to offset
liabilities that we may incur in connection with our
participation in these programs.
For additional discussion of environmental matters, see the
discussion under the caption “Other Matters —
Environmental” of “Item 7. Management’s
Discussion and Analysis of Results of Operation and Financial
Condition” and Notes 2 and 15 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 has become
even more competitive as the domestic economy has improved in
recent years. While we have engaged in succession planning, the
loss of the services of one or more of our key employees or our
failure to attract, retain and motivate qualified personnel
could have a material adverse effect on our business, financial
condition and results of operations.
We may not be able to sell, 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 March 2005, we
sold 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, if the sale of any non-strategic product line cannot be
consummated.
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Provisions of our governing documents, applicable law, and
our Change in Control Severance Agreements could make an
acquisition of Teledyne Technologies more difficult.
Our Restated Certificate of Incorporation, Amended and Restated
Bylaws and Rights Agreement and the General Corporation Law of
the State of Delaware contain several provisions that could make
the acquisition of control of Teledyne Technologies in a
transaction not approved by our board of directors more
difficult. 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 $39.54 per share. At February 28, 2006, our closing
stock price was $33.13. Fluctuations in our stock price could
continue. Among the factors that could affect our stock price
are:
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variations in our operating results;
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strategic actions by us or our competitors;
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acquisitions;
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adverse business developments;
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war in the Middle East or elsewhere;
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additional terrorist activities;
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increased military or homeland defense activities;
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changes to the Federal budget;
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changes 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.
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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 these companies. We cannot provide assurances as
to our stock price.
The Company’s financial statements are based in part on
estimates required by GAAP, and actual results may differ
materially from those estimated under different assumptions or
conditions.
The Company’s financial statements are prepared in
conformity with generally accepted accounting principles in the
United States. These principles require our management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the
reporting period. For example, estimates are used when
accounting for such items as asset valuations, allowances for
doubtful accounts, depreciation and amortization, impairment
assessments, employee benefits, taxes, aircraft product and
general liability and contingencies. While the Company bases its
estimates on historical experience and on various assumptions
that it believes to be reasonable under the circumstances at the
time made, actual results may differ materially from those
estimated.
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
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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 become inadequate because
of changes in conditions or the degree of compliance with
policies or procedures may deteriorate. Because of inherent
limitations in a cost-effective control system, misstatements
due to error or fraud may occur and may not be detected.
Natural disasters, such as a serious earthquake in California
or a major hurricane in Alabama, could adversely affect our
business, results of operations and financial condition.
Several of our facilities, due to their locations, could be
subject to a catastrophic loss caused by earthquake or a
hurricane. Many of our production facilities and our
headquarters are located in California and thus are in areas
with above average seismic activity. In addition, we have
manufacturing facilities in Southeastern United States and Texas
that have been threatened and struck by major hurricanes. While
Teledyne Continental Motors’ piston-engines manufacturing
facility, located in Mobile, Alabama, and Teledyne Geophysical
Instruments’ facility in Houston, Texas, were relatively
fortunate with respect to the building damage and business
interruption they suffered during the severe 2005 hurricane
season, there can be no assurance that either will be as
fortunate in the future. If any of our California facilities,
including our California headquarters, were to experience a
catastrophic earthquake loss or if any of our Alabama, Tennessee
or Texas facilities were to experience a catastrophic hurricane,
storm or tornado, such event could disrupt our operations, delay
production, shipments and revenue and result in large expenses
to repair or replace the facility or facilities. While Teledyne
has property insurance to partially reimburse it for losses
caused by windstorm and earth movement, such insurance would not
cover all possible losses. Also, our existing disaster recovery
plans (including those relating to our information technology
systems) may not be fully responsive to, or minimize losses
associated with, catastrophic events.
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Item 1B.
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Unresolved Staff Comments.
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None.
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