UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

 

Commission file number: 1-15295

Teledyne Technologies Incorporated

(Exact name of registrant as specified in its charter)

 

 

1049 Camino Dos Rios

Thousand Oaks, California 91360-2362

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (805) 373-4545

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ  No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer þ        Accelerated filer o        Non-accelerated filer o        Smaller reporting company o

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No þ

 

The aggregate market value of the registrant’s Common Stock held by non-affiliates was $1,719.3 million, based on the closing price of a share of Common Stock on June 29, 2008 ($48.94), which is the last business day of the registrant’s most recently completed fiscal second quarter. Shares of Common Stock known by the registrant to be beneficially owned as of February 24, 2009 by the registrant’s directors and the registrant’s executive officers subject to Section 16 of the Securities Exchange Act of 1934 are not included in the computation. The registrant, however, has made no determination that such persons are “affiliates” within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934.

 

At February 24, 2009, there were 36,019,970 shares of the registrant’s Common Stock issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Selected portions of the registrant’s proxy statement for its 2009 Annual Meeting of Stockholders (the “2009 Proxy Statement”) are incorporated by reference in Part III of this Report. Information required by paragraphs (d)(1)-(3) and (e)(5) of Item 407 of Regulation S-K is not incorporated by reference in this Form 10-K or in any other filing of the registrant. Such information shall not be deemed “soliciting material” or to be filed with the Commission as permitted by Item 407 of Regulation S-K.

 

 

INDEX

 

 

 

 

 

Who We Are

 

Teledyne Technologies Incorporated is a leading provider of sophisticated electronic components and subsystems, instrumentation and communications products, including defense electronics, monitoring and control instrumentation for marine, environmental and industrial applications, harsh environment interconnect products, data acquisition and communications equipment for air transport and business aircraft, and components and subsystems for wireless and satellite communications. We also provide engineered systems and information technology services for defense, space, environmental and nuclear applications, manufacture general aviation engines and components, and supply energy generation, energy storage and small propulsion products.

 

We serve niche market segments where performance, precision and reliability are critical. Our customers include government agencies, aerospace prime contractors, energy exploration and production companies, major industrial companies, and airlines and general aviation companies.

 

Total sales in 2008 were $1,893.0 million, compared with $1,622.3 million and $1,433.2 million in 2007 and 2006, respectively. Our aggregate segment operating profit and other segment income were $218.5 million, $194.9 million and $155.3 million in 2008, 2007 and 2006, respectively. Approximately 60% of our total sales in 2008 were to commercial customers and the balance was to the U.S. Government, as a prime contractor or subcontractor. Approximately 48% of these U.S. Government sales were attributable to fixed price-type contracts and the balance to cost plus fee-type contracts. Sales to international customers accounted for approximately 24% of total sales in 2008.

 

Our businesses are divided into and managed as four business segments; namely, Electronics and Communications, Engineered Systems, Aerospace Engines and Components and Energy and Power Systems. Our four business segments and their respective contributions to our total sales in 2008, 2007 and 2006 are summarized in the following table:

 

 

We are a Delaware corporation that was spun off as an independent company from Allegheny Teledyne Incorporated (now known as Allegheny Technologies Incorporated) on November 29, 1999. Our principal executive offices are located at 1049 Camino Dos Rios, Thousand Oaks, California 91360-2362. Our telephone number is (805) 373-4545.

 

Strategy

 

Our strategy continues to emphasize growth in our core markets of instrumentation, defense electronics and government engineered systems. Our core markets are characterized by high barriers to entry and include specialized products and services not likely to be commoditized. We intend to strengthen and expand our core businesses with targeted acquisitions. We aggressively pursue operational excellence to continually improve our margins and earnings. At Teledyne, operational excellence includes the rapid integration of the businesses we acquire. Over time, our goal is to create a set of businesses that are truly superior in their niches. We intend to continue to evaluate our product lines to ensure that they are aligned with our strategy.

Our Recent Acquisitions

 

During fiscal 2008, we engaged in a number of acquisitions intended to expand and strengthen our product and service offerings in our core instrumentation and defense markets, as well as our aircraft data acquisition and communications business.

 

 

Teledyne spent $246.1 million, net of cash acquired, on these acquisitions. All of the acquisitions are part of the Electronics and Communications segment.

 

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 website as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the Securities and Exchange Commission (the “SEC”). In addition, our Corporate Governance Guidelines, our Corporate Objectives and Guidelines for Employee Conduct, our codes of ethics for financial executives, directors and service providers 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, 1049 Camino Dos Rios, Thousand Oaks, California 91360-2362, and a copy of such requested document will be provided to you, free-of-charge.

 

In April 2008, 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 this Form 10-K the CEO and CFO certifications required under Section 302 of the Sarbanes-Oxley Act of 2002.

 

Our Business Segments

 

Our businesses are divided into and managed as four segments; namely, Electronics and Communications, Engineered Systems, Aerospace Engines and Components and Energy and Power Systems. Financial information about our business segments can be found in Note 13 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

 

Electronics and Communications

 

Our Electronics and Communications segment provides a wide range of specialized electronic systems, instrumentation, components and services that address niche market applications in defense, marine, environmental, industrial, commercial aerospace, communications and scientific markets.

 

Electronic Instruments

 

During 2001, we formed Teledyne Instruments, a group of business units drawn from our Electronics and Communications segment and our then called Systems Engineering Solutions segment, to focus on industrial monitoring and process control applications. Since then and through acquisitions, we have grown three additional instrumentation platforms, marine, environmental and industrial.

 

Marine Instrumentation.  Historically, through Teledyne Geophysical Instruments, we have manufactured 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.

 

Through various acquisitions over the last several years, we have greatly expanded our underwater acoustic and marine instrumentation capabilities.

 

 

 

We also provide a broader range of end-to-end undersea interconnect solutions to the offshore oil and gas, defense, oceanographic and telecom markets.

 

 

Environmental Instrumentation.  We offer a wide range of products for environmental monitoring.

 

 

Laboratory Instrumentation.  We provide laboratory instrumentation that complements our environmental monitoring business.

 

 

 

Industrial Process Instrumentation.  A group of Teledyne businesses serve the process control and monitoring needs of industrial plants with instruments that include gas analyzers, vacuum and flow measurement devices, package integrity inspection systems and torque measurement sensors.

 

 

Defense Electronics, Products and Services

 

Microwave Components and Subsystems.  Historically, through Teledyne MEC, we have designed and manufactured helix traveling wave tubes that are used to provide broadband power amplification of microwave signals. Military applications include radar, electronic warfare and satellite communication. Through Teledyne Microwave, we design, develop and manufactures RF and microwave components and subassemblies used in aerospace and defense applications, including electronic warfare and radar.

 

Over the last several years, we have expanded our microwave components and subsystems businesses with the goal of providing more highly integrated microwave subsystems to our defense customers.

 

 

High Reliability Connectors and Cable Assemblies.  We have also expanded our connectors and cable assemblies businesses.

 

 

Imaging Sensors.  We design and produce advanced focal plane arrays, sensors, and subsystems covering a broad spectrum of light from below 0.3 micron ultra-violet to 18 micron long-wave infrared.

 

 

 

Military Microelectronics and Electronics Manufacturing.  Through Teledyne Microelectronics Technologies, 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. We also serve the market for high-mix, low-volume manufacturing of sophisticated military electronics equipment principally from our facility in Tennessee.

 

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. Since 2006, under a five-year contract, we have produced the Digital Recovery Sequencer to support the F-15, F-16, F-22, F-117, A-10, B-1 and B-2 aircrafts. We also have developed and produce a new sequencer in support of the F-35 Joint Strike Fighter program.

 

Relays and Switches.  Teledyne Relays supplies electromechanical relays, solid-state power relays and coaxial switching devices to military and aerospace markets.

 

Research and Development Services.  Through Teledyne Scientific Company, we provide research and engineering services primarily in the areas of electronics, optics, information sciences and materials technology. Our scientific team delivers research and development services and specialty products to military, aerospace and industrial customers. We strive to maintain close relationships and collaborations with researchers at universities and national laboratories to stay at the forefront of cutting-edge technologies. We also license various technologies to third parties.

 

Other Commercial Electronics

 

Aircraft Information Management.  Our aircraft information management solutions are designed to increase the reliability and efficiency of airline transportation.

 

 

Microwave Components and Microelectronic Modules.  Through Teledyne MEC, we make traveling wave tubes for commercial applications such as electromagnetic compatibility test equipment and satellite communication terminals for mobile newsgathering. Our line of integrated transceiver modules provides high data rate point-to-point connectivity in cellular telephone infrastructure. We also supply microwave devices used in satellite uplink applications.

 

In addition to military microelectronic modules, Teledyne Microelectronic Technologies develops and manufactures 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, Switches and Connectors.  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.

 

Engineered Systems

 

Our Engineered Systems segment, principally through Teledyne Brown Engineering, Inc., applies the skills of its extensive staff of engineers and scientists to provide innovative systems engineering and integration, advanced technology application, software development, and manufacturing solutions to space, military, environmental, energy and air and missile defense requirements.

 

Defense Systems

 

Teledyne Brown Engineering is a well-recognized full-service missile defense contractor with more than 50 years of experience in air and 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 include analyses of alternatives, site operations and deployment, systems engineering, modeling and simulation, test and evaluation, and complex real time hardware-in-the-loop integration with an evolution to Service Oriented Architecture (“SOA”) solutions. Our engineering and technological capabilities include requirements definition, systems design, development, integration and testing, with specialization in SOA and real-time distributed systems.

 

During 2008, we continued our long-standing support of several air and missile defense programs, including the Ground-based Midcourse Defense (“GMD”), Missile Defense Systems Exerciser, the Extended Air Defense Simulation (“EADSIM”) and, as part of the MDA, the Targets and Countermeasures programs. The associated support tasks involve analyses and test and evaluation of ballistic missile defense system performance on a large number of major programs, including the Ground-based Midcourse Defense, Aegis Ballistic Missile Defense, the Patriot Advanced Capability 3, and the Terminal High Altitude Area Defense (“THAAD”) systems. In 2008, we initiated work on an enhanced development activity for a distributed test framework for the entire Ballistic Missile Defense System (“BMDS”).

 

In addition to our missile defense activities, we are supporting many other Defense Department programs. Supported programs include the Navy’s Tactical Medical Logistics (“TML”) program, the Joint Staff Force Structure Screening Tool (“FSST”) and Patriot Missile validation and verification for the Lower Tier Project Office. Tasking spans complex hardware integration and software development and testing, from design through systems fielding and operation.

Aerospace Systems

 

We are active in U.S. space programs 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 various roles in the Space Shuttle program. We 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. This six-year contract, which began in January 2004, 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 also have a prime Blanket Purchase Agreement with the Marshall Space Flight Center for specialized engineering and program support. We perform engineering and software services under this contract for NASA’s new Ares launch vehicles.

 

Chemical, Biological, Radiological and Nuclear (CBRN) Systems

 

We support the U.S. Government’s efforts to clean up dangerous materials and waste. Since 1996, we have supported the U.S. Army’s Non-Stockpile Chemical Materiel Program. We also have begun to apply sophisticated computer aided engineering, design, modeling and manufacturing skills to support the U.S. Army’s Edgewood Chemical and Biological Center.

 

In November 2007, we were awarded a contract from the Department of Defense to develop and test the Joint Material Decontamination System (JMDS) for U.S. military forces. The JMDS will be designed to remove toxic contamination as a result of nuclear, biological and chemical weapons from sensitive electronic equipment, command posts, aircraft and avionics, and other applications where water and harsh decontamination materials could damage or destroy items being decontaminated.

 

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 three 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.

 

Manufactured Products

 

In 2008, we split our manufactured products and related services business from our Aerospace Systems business unit, creating a new business unit known as “Manufactured Products” for external customers across the spectrum of our core business base, including NASA, all of the Departments of Defense Services, commercial customers and Nuclear Quality Hardware for Department of Energy related programs. The products we manufacture are primarily highly engineered and high quality machined and metal fabricated components and assemblies for these specialized markets with identified barriers to entry. Additionally, our Manufactured Products group provides manufacturing services for all products delivered by our Defense Systems, CBRN Systems and Aerospace Systems business units.

 

Expanding on our core nuclear quality-related manufacturing, in February 2008, Fluor Enterprises, Inc., acting as an agent for USEC, awarded us a contract to manufacture and deliver an initial complement of gas centrifuge service modules to support fuel production for commercial nuclear power plants. In May 2008, we received a $92 million follow-on order from USEC to manufacture and deliver 540 gas centrifuge service modules through early 2011. USEC’s financing of such project is subject to receipt of certain loan guarantees from the U.S. Department of Energy.

Teledyne Solutions, Inc.

 

Through Teledyne Solutions, Inc., we are a primary Missile Defense systems engineering contractor. Teledyne Solutions is a principal prime contractor for the Systems Engineering and Technical Assistance Contract in support of the Missile Defense Agency. We also provide engineering and services support to other major Department of Defense customers including the U.S. Army Space and Missile Defense Command, the Program Executive Office for Missiles and Space, the Defense Threat Reduction Agency, and the U.S. Army Aviation and Missile Command.

 

Teledyne CollaborX, Inc.

 

Through Teledyne CollaborX, Inc., we provide full system acquisition lifecycle support from concept development to sustainment. Teledyne CollaborX provides engineering services to the U.S. Air Force, U.S. Army, Office of Secretary of Defense, Missile Defense Agency and select military combatant commands such as the U.S. Joint Forces Command, U.S. Strategic Command, and U.S. Northern Command.

 

Aerospace Engines and Components

 

Our Aerospace Engines and Components segment focuses on the design, development and manufacture of piston engines, aftermarket support and electronic engine controls.

 

Piston Engines

 

Principally through Teledyne Continental Motors, Inc., we design, develop and manufacture piston engines, ignition systems, and aftermarket engines and spare parts for general aviation airframe manufacturers and the aftermarket. We are one of two primary worldwide original equipment producers of piston aircraft engines for the general aviation marketplace.

 

Our current certified OEM product lines include engines for the Cirrus SR-20 and SR-22, the Diamond DA20, Cessna 350 Corvalis and 400 Corvalis series (formerly built by Columbia Aircraft Company), the Liberty XL2, the Beechcraft Bonanza and Baron aircraft, Mooney Ovation and Acclaim lines, and the Piper Seneca V twin-engine aircraft. Our O-200 Light Weight air-cooled engine powers Cessna Aircraft Company’s Light Sport Aircraft known as the SkyCatcher.

 

Aftermarket Support

 

In addition to the sales of OEM engines, we actively support the replacement aircraft engine market. Piston aircraft engines have a FAA authorized time between overhauls. Our aftermarket support includes building and rebuilding of complete engines, as well as providing a full complement of spare parts such as cylinders, crankcases, fuel systems, crankshafts, camshafts and ignition products. Also, through our Factory Services division with locations in Mattituck, New York, Fairhope, Alabama and Mobile, Alabama, we provide repairs and overhauls of piston engines and engine installations to the general aviation marketplace for both Teledyne Continental Motors and Textron Lycoming aircraft engines.

 

Electronic Engine Controls

 

Through Aerosance, Inc., we developed the first production certified full authority digital electronic controls (FADEC) for piston aircraft engines. These controls, known as PowerLink^tm FADEC, 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 electronic-centered maintenance of our engines. We provided the 100th certified production engine to an OEM in 2008. We continue to believe that these control systems will become standard equipment on new aircraft and will be retrofitted on higher-end piston engine general aviation aircraft in the future.

Energy and Power Systems

 

Our Energy and Power Systems segment designs and manufactures hydrogen gas generators, thermoelectric, electrochemical and fuel cell-based power sources, batteries and small turbine engines.

 

Teledyne Energy Systems, Inc.

 

Teledyne Energy Systems, Inc., a majority owned subsidiary of Teledyne, was formed in 2001 by combining Teledyne Brown Engineering’s then existing Energy Systems business unit with assets and intellectual properties of then Florida-based Energy Partners, Inc.

 

Through Teledyne Energy Systems, 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 manufacturing, optical fiber production, chemical processing, specialty metals, float glass and other industrial processes. Our historic sales of hydrogen generators have been largely to developing countries.

 

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 2006, in partnership with Boeing and under a ten-year $57 million contract signed in 2003 with the U.S. Department of Energy, we completed all of the testing of the Multi-Mission Radioisotope Thermoelectric Generator capable of supporting planetary landing and deep space probe missions. We began production of this generator for potential use to power the Mars Science Laboratory currently scheduled to launch in the fall of 2011.

 

In conjunction with its thermoelectric power systems for space, we also have ongoing development and prototyping work with NASA on PEM fuel cell stacks and systems. These systems are being developed in support of potential manned and robotic missions to the moon and Mars.

 

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.

 

Aviation Batteries

 

Our Gill^® line of lead acid batteries is widely recognized as the premier power source for general aviation. We have developed premium Valve Regulated Lead Tin (LT 7000 Series) aviation batteries for business and light jet applications. Our LT7000 Series battery is now certified as Original Equipment on the Embraer Phenom 100 Jet. Our LT7000 Series battery has also been selected for the Embraer Phenom 300 Jet and the Bell 429 Helicopter, which are scheduled for certification in 2009. Teledyne Battery Products is also exploring military battery opportunities.

 

Turbine Engines

 

Teledyne Turbine Engines designs, develops and manufactures small turbine engines primarily used in tactical missiles for military markets.

 

Our J402 engine powers the Harpoon missile system. Derivatives of this engine power the Standoff Land Attack Missile and the Standoff Land Attack Missile-Expanded Response. Lockheed Martin Corporation selected a derivative of the J402 engine to power the Joint Air-to-Surface Standoff Missile (“JASSM”). We are the sole source provider of engines for the 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 2008, 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. We continue to work advanced technology for small turbine engines and components under contract to the U.S. Air Force Research Laboratory sponsored Versatile Advanced Affordable Turbine Engine (VAATE) program. Advanced technology engine and component demonstrators continue to be developed for the next generation cruise missile and UAVs.

 

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 2008, 2007 or 2006.

 

Approximately 40%, 41%, and 40% of our total sales for 2008, 2007 and 2006, 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 29%, 30% and 30% of our total sales for 2008, 2007 and 2006, respectively. In 2008, 2007 and 2006, 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 3.5%, 4.3% and 4.9% 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

 

 

As described on pages 17 through 20, there are risks associated with doing business with the U.S. Government. In 2008, approximately 48% of our U.S. Government prime contracts and subcontracts were fixed price type contracts, compared to 42% in 2007 and 47% in 2006. Under these types of contracts, we bear the inherent risk that actual performance cost may exceed the fixed contract price. Such contracts are typically not subject to renegotiation of profits if we fail to anticipate technical problems, estimate costs accurately or control costs during performance. Additionally, U.S. Government contracts are subject to termination by the U.S. Government at its convenience, without identification of any default. When contracts are terminated for convenience, we typically recover costs incurred or committed, settlement expenses and profit on work completed prior to termination. We had five U.S. Government contracts terminated for convenience in 2008, compared to four in 2007 and two in 2006.

 

Our total backlog of confirmed orders was approximately $842.8 million at December 28, 2008, $707.2 million at December 30, 2007 and $582.4 million at December 31, 2006. We expect to fulfill 98% of such backlog of confirmed orders during 2009.

 

Sales to international customers accounted for approximately 24% of total sales in 2008, compared with 22% in 2007 and 21% in 2006. In 2008, we sold products to customers in over 100 foreign countries. 90 percent of our sales to foreign customers were made to customers in 28 foreign countries.

 

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 and other business units have been working to consolidate or share 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 offices in foreign countries to facilitate international sales for various businesses.

 

Competition

 

We believe that technological capabilities and innovation and the ability to invest in the development of new and enhanced products are critical to obtaining and maintaining leadership in our markets and the industries in which we compete. 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 $395.8 million, $355.1 million, and $307.0 million on research and development and bid and proposal costs for 2008, 2007, and 2006, respectively. Customer-funded research and development, most of which was attributable to work under contracts with the U.S. Government, represented approximately 83% of total research and development costs for each of 2008, 2007, and 2006.

 

In 2008, approximately 80.7% of the $65.6 million in Company-funded research and development and bid and proposal costs were incurred in our Electronics and Communications businesses. We expect the level of Company-funded research and development and bid and proposal costs to be approximately $71.6 million in 2009.

 

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 8,800 employees. The International Union of United Automobile, Aerospace and Agricultural Implement Workers of America represents approximately

240 active employees in Mobile, Alabama under a collective bargaining agreement that expires by its terms on February 20, 2010. This union also represents approximately 20 of our active employees in Toledo, Ohio under a collective bargaining agreement that expires by its terms on November 10, 2009. We consider our relations with our employees to be good.

 

Executive Management

 

Teledyne’s executive management includes:

 

 

 

 

Dr. Mehrabian and Teledyne have entered into a Fourth Amended and Restated Employment Agreement dated as of January 21, 2009. Under the agreement, we will employ Dr. Mehrabian as the Chairman, President and Chief Executive Officer through at least December 31, 2010, because 12 months notice of nonrenewal has not been given prior to the expiration of the current term of December 31, 2009. The agreement automatically renews for a successive one year unless either party gives the other written notice of its election not to renew at least 12 months before the expiration of the current term or any successive renewal terms. If notice is given, Dr. Mehrabian would then retire on December 31st of the year following the 12th month after receipt of the notice. Under the agreement, Dr. Mehrabian’s annual base salary is $840,000. 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 annually starting six months following his retirement and for a period of 10 years, 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.

Sixteen current members of management have entered into Change in Control Severance Agreements with Teledyne. The agreements have a three-year, automatically renewing term. Under the agreements, the executive is entitled to severance benefits if (1) there is a change in control of Teledyne and (2) within three months before or 24 months after the change in control, either we terminate the executive’s employment for reasons other than for cause or the executive terminates employment for good reason. “Severance benefits” consist of:

 

 

The agreements were amended as of December 31, 2008 to defer certain payments for six months following a separation of service to assure compliance with Section 409A of the Internal Revenue Code.

 

 

Risk Factors; Cautionary Statement as to Forward-Looking Statements

 

The following text highlights various risks and uncertainties associated with Teledyne. These factors could materially affect “forward-looking statements” (within the meaning of the Private Securities Litigation Reform Act of 1995) that we may from time to time make, including forward-looking statements contained in “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K and in Teledyne’s 2008 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.

Continuing disruptions in the global economy, the financial markets, the currency markets and the energy markets, as well as government responses to these disruptions, may adversely impact our business and results of operations.

 

Continuing distress in the financial markets has had an adverse impact on the availability of credit and liquidity resources, although we do not believe that any lender commitments under our current $590 million credit facility, which expires in July 2011, have been adversely affected. Continued market deterioration, however, could jeopardize certain counterparty obligations, including those of the insurers and financial institutions with which we do business. Some of our customers may face issues gaining access to sufficient credit, which could result in an impairment of their ability to make timely payments to us or a determination to cancel, delay or otherwise not purchase our products. Due to reduced credit availability, many of our marine survey customers have been delaying the building of new exploration vessels and also reducing maintenance expenditures on their existing fleet, which would adversely affect sales of our geophysical streamer cables and hydrophones. Lack of availability of consumer credit and the general economic downturn have adversely impacted the market for general aviation aircraft, which generally means lower sales of piston engines and related components by us. Some of our suppliers may also face issues gaining access to sufficient credit to maintain their businesses, which could reduce the availability of some components and, to the extent such suppliers are single source suppliers, could adversely affect our ability to continue to manufacture and sell our products. As a result of recent fluctuations in currency markets and the stronger U.S. Dollar relative to many other major currencies, our products priced in U.S. Dollars may be more expensive relative to products of our foreign competitors, which could result in lower sales. In addition, the non-dollar denominated earnings of our foreign operations may be lower when reported by us in U.S. Dollars. A slowdown in economic activity caused by a recession would likely reduce worldwide demand for energy and result in lower oil and natural gas prices, which could result in lower sales at our business units that supply the oil and gas industry. Government responses to these market disruptions, such as the approved emergency economic stabilization and stimulus legislation, could result in reductions in spending for defense programs and other government programs in which we participate.

 

Our pension expenses and the value of our pension assets are affected by factors outside of our control, including the performance of plan assets, the stock market, interest rates and actuarial data.

 

We have a defined benefit pension plan covering most of our employees hired prior to 2004. The value of the combined pension assets is currently less than our accumulated pension benefit obligation. Given our pension plan’s underfunded status, in 2004 we began making required cash contributions to our pension plan. In 2008, given the market conditions and the reduction in pension asset values, we made additional contributions of $50.0 million beyond what was required under ERISA. In February 2009, we made voluntary cash contributions of $80.0 million and currently anticipate making additional contributions of about $37.1 million during the year. For 2008, 2007 and 2006, cash contributions totaled $58.7 million, $7.5 million and $20.9 million, respectively. The lower contribution level in 2007 is due primarily to the merger into our pension plan of the overfunded Rockwell Scientific Company pension plan in September 2006, which was part of our September 2006 acquisition of Rockwell Scientific Company. The accounting rules applicable to our pension plan require that amounts recognized in the 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. Declines in the stock market and lower rates of return could increase required contributions to our pension plan. Any decreases or increases in market interest rates will affect the discount rate assumption used in projecting pension benefit obligations. If and to the extent decreases are not offset by contributions and asset returns, our cash contributions and SFAS No. 87 expense could increase under the plans. For additional discussion of pension matters, see the discussion under “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition” and Notes 2 and 12 to Notes to Consolidated Financial Statements. At the end of 2007, we changed some investment allocations to reduce exposure to deterioration in the subprime mortgage market. In 2008, given market disruptions and volatility, we maintained a greater amount in fixed income investments, including in U.S. Treasury notes, to achieve some stability in our pension assets. However, our investment strategy may not be successful if problems in the credit, financial

and stock markets persist. Due to timing of investment allocation changes, we also may not benefit from any upswings in certain investments.

 

We sell products and services to customers in industries that are cyclical and sensitive to changes in general economic activity.

 

We develop and manufacture products for customers in the energy exploration and production markets, each of which has been cyclical and suffered from fluctuating market demands. Strong demand and increased prices for oil and natural gas contributed to substantial revenue growth at Teledyne Geophysical Instruments, ODI and other members of our Marine Group. A cyclical downturn in these markets may materially affect future operating results, particularly given our broader range of marine instrumentation businesses acquired since 2003.

 

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. As a result of economic conditions and significant tightening of the credit markets, it may be difficult for the commercial airlines and aircraft leasing companies to obtain credit to buy new airplanes. Delays or changes in aircraft and component orders could impact the future demand for our Teledyne Controls and other products and have a material adverse effect on our business, results of operations and financial condition.

 

Many of the OEM customers of our Aerospace Engines and Components segment are privately-held and may not be well-capitalized. In 2007, one of the airplane manufacturer customers of Teledyne Continental Motors filed a petition for bankruptcy, resulting in a $1.7 million write down of our accounts receivable. In February 2008, Adam Aircraft filed for bankruptcy protection. While at the time of filing, we had no unpaid receivables from Adam Aircraft, we recently had to pay back a small amount to the bankruptcy administrator due to the purported preferential timing of payments from Adam Aircraft to us. Any future credit problems with our customers could result in similar or larger write downs or reimbursements, and have a material adverse effect on the business, results of operations and financial condition of our Aerospace Engines and Components segment.

 

Some of our businesses are also suppliers to the semiconductor industry, which is highly cyclical by nature. The semiconductor industry has experienced significant, and sometimes prolonged, downturns. Any downturn in the semiconductor industry or any other industry that uses a significant number of semiconductor devices, such as consumer electronic products, telecommunication devices, or computing devices could have a material adverse effect on our business and operating results.

 

In addition, we sell products and services to customers in industries that are sensitive to the level of general economic activity and consumer spending habits 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. Some of our businesses serve industries such as power generation and petrochemical refining, which may be negatively impacted by reductions in global capital expenditures and manufacturing capacity.

 

Our dependence on revenue from government contracts subjects us to many risks:

 

Our revenue from government contracts depends on the continued availability of funding from the U.S. Government, and, accordingly, we have the risk that 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 40% of our total revenue for 2008, as compared to 41% and 40% of our total revenue for 2007 and 2006, 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. The timing of program cycles can also affect our results of operations for a particular quarter or year. It is not uncommon for the Department of Defense to delay the timing of awards for major programs for six to twelve months, or more, beyond the original anticipated timeframe.

 

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 and then decline over the next few years. The continued war on terrorism and the Iraqi and Afghanistan situations could result in a diversion of funds from programs in which Teledyne participates. In addition, continued defense spending does not necessarily correlate to continued business for us, because not all of the programs in which we participate or have current capabilities may be provided with continued funding. Further, our new President and leadership of the U.S. Government could implement, over time, reductions in defense spending and further changes in programs in which we participate.

 

Changes in policy and budget priorities by our new President, Administration and Congress for various Defense and NASA programs could impact our Engineered Systems segment. For example, changes in national space policy that affect NASA’s budget are likely and we anticipate significant scrutiny of missile defense budgets.

 

Our Electronics and Communications segment provides a variety of products for newer military platforms such as the F/A-22 and F-35 aircraft. Development and production of these aircraft 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. Reallocation of funding priorities within the Department of Defense could also affect repair and spares sales for older military platforms, including, by way of example, sales of our traveling wave tubes for F-15, F-16, F-18, EA-6B, B-52, B-1, C-130 and U-2 aircraft. The late 2007 grounding of the Air Force’s F-15 fleet as a result of apparent structural failures resulted in decreased 2008 sales for products we supply to the F-15 program.

 

Our participation in government programs may decrease or be subject to renegotiation as those programs evolve over time.

 

The relocation to Huntsville, Alabama of the Missile Defense Agency or MDA has resulted in the transfer to the MDA of certain missions and functions from the U.S. Army Space and Missile Defense Command or SMDC. New leadership at the MDA is conducting solicitations that could impact support by our Engineered Systems segment to the Agency. For example, all MDA government engineering support services work is now to be recompeted at the conclusion of each existing contract, and several major prime contracts under which we perform such services are nearing the end of their respective periods of performance. MDA is also reconsidering its policy on Organizational Conflict of Interest or OCI. It is reviewing all OCI mitigation plans and may be more restrictive of the risk of successful mitigation which the Agency accepts going forward, potentially limiting our participation in certain major MDA programs, such as Ground Based Midcourse Defense. Additionally, the General Accounting Office or GAO has issued rulings which favor small businesses interests under multiple award IDIQ or Indefinite Delivery/Indefinite Quantity contracts. Several of the contracts under which we perform engineering support services for MDA are this type and, as a result, our engineering services business could be significantly impacted.

 

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 (“GMD”) program has been moving toward the end of the program cycle resulting in declining revenues. Revenues from this contract in 2006 and 2007 totaled approximately $48 million and $45 million, respectively. In 2008, revenues related to this program declined to $43 million, and are expected to continue to decline in 2009 and 2010, even though Teledyne Brown Engineering remains a major subcontractor. This anticipated decline is due to a number of factors including the completion of the current GMD deployment cycle, the change in political environment

which might impact the proposed European GMD defense sites and a possible refocus of MDA resources towards Ballistic Missile Defense Systems research and development applications.

 

We have been a significant participant in NASA programs, traditionally through our Engineered Systems segment and through Teledyne Scientific Company. Our current NASA activities focus on the International Space Station and the James Webb Space Telescope. As NASA approaches completion of the International Space Station and retirement of the Space Shuttle, our Engineered Systems segment has moved away from its historical role in scientific payload development and integration and toward supporting NASA with concept development, engineering services, and prototype development for the new Ares vehicles for space exploration. It is possible that the new President, Administration and Congress will shift funding away from exploration toward other priorities such as Earth Science and aeronautics. Such policy and priority changes would likely negatively impact our business.

 

We may not be successful in bidding for future contracts, which would reduce our revenues or slow our growth.

 

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. In addition, we may spend substantial amounts of time, money and effort, including design, development and marketing activities, required to prepare bids and proposals for contracts that may not be awarded to us.

 

Our contracts with the U.S. Government are subject to termination rights that could adversely affect us.

 

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. Even when not expressly included in a U.S. Government contract, courts have found termination for convenience to be present as a matter of public procurement policy. Termination-for-convenience provisions provide only for the recovery of costs incurred or committed, settlement expenses, and profit on work completed prior to termination. Termination-for-default clauses impose liability on the contractor for excess costs incurred by the U.S. Government in reprocuring undelivered items from another source. During 2008, Teledyne had five U.S. Government contracts terminated for convenience. We did not have any of our U.S. Government contracts terminated for default during 2008.

 

We may lose money or generate less than expected profits on our fixed-price government contracts and we may lose money if we fail to meet certain pre-specified targets in government contracts.

 

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 (48% in 2008, 42% in 2007 and 47% in 2006). 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. Under such contracts, we must absorb cost overruns, notwithstanding the difficulty of estimating all of the costs we will incur in performing these contracts. Our failure to anticipate technical problems, estimate costs accurately or control costs during performance of a fixed-price contract may reduce the profitability of a fixed-price contract or cause a loss. We have also experienced some volatility in the pricing of certain raw materials and components underlying our fixed price contracts. Such contracts are typically not subject to renegotiation of profits if we fail to anticipate technical problems, estimate costs accurately or control costs during performance. We cannot assure that our contract loss provisions in our financial statements will be adequate to cover all actual future losses. We may lose money on some contracts if we fail to meet these estimates.

 

Certain fees under some of our U.S. Government contracts are linked to meeting specified technical, cost and/or schedule targets, including development or testing deadlines. Fees may also be influenced or be dependent on the collective efforts and success of other defense contractors over which we had no or limited control.

Our business is subject to government contracting regulations and our failure to comply with such laws and regulations could harm our operating results and prospects.

 

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. 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 business unit or division is not a “presently responsible contractor,” that business 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.

 

United States and global responses to terrorism, the Iraq situation, Mexican border town violence and nuclear proliferation concerns increase uncertainties with respect to many of our businesses and may adversely affect our business and results of operations.

 

United States’ and global responses to terrorism, the Iraq situation, Mexican border town violence 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 us. The reaction to Iran’s continuing desire to explore nuclear capabilities could affect adversely oil prices and some of our businesses.

 

While some of our businesses that provide products or services to the U.S. Government experienced greater demand for their products and services as a result of increased U.S. Government defense spending, various responses could realign government programs and affect the composition, funding or timing of our government programs. Our new President, Administration and Congress could also further affect responses and 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 curtail less pressing non-defense programs in which we do participate, including Department of Energy or NASA programs. Government spending could also shift towards non-defense programs in which we do not currently participate, such as medical research programs of the National Institutes of Health.

 

Air travel declines have occurred after terrorist attacks and heightened security alerts, as well as after the SARS and bird flu scares. Additional declines in air travel resulting from such factors and other factors could adversely affect the financial condition of many of our commercial airline and aircraft manufacturer customers and in turn could adversely affect our Electronics and Communications segment.

 

Deterioration of financial performance of airlines could result in a 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 (including user fees), could lead to an overall decline in air travel and have an adverse affect on our Aerospace Engines and Components and Energy & Power Systems segments. 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 of our Aerospace Engines and Components segment and associated products of Teledyne Battery Products. Potential reductions in the need for general aviation aircraft maintenance as a result of 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, lower oil prices could decrease oil exploration and petrochemical refining activities and hinder our marine and other instrumentation businesses, including Teledyne Geophysical Instruments, Teledyne TSS Limited, Teledyne Benthos, Teledyne D.G. O’Brien and

majority-owned ODI, as well as some of our other businesses such as Teledyne Storm Products. In addition, instability in the Middle East or other oil-producing regions could adversely affect expansion plans of the oil and gas industry customers of our instrumentation and cable solutions businesses.

 

Violence and crime in Mexico, particularly in border towns where we conduct some manufacturing activities, could adversely affect our relays and cable solutions businesses.

 

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:

 

 

While we conduct financial and other due diligence in connection with our acquisitions and generally seek 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, including the recent acquisitions of Cormon Limited and Odom Hydrographic Systems, Inc. and the assets of Webb Research Corp. and Demo Systems LLC. Private companies generally may not have as formal or comprehensive internal controls and compliance systems in place as public companies. While we have required various sellers to take certain compliance actions prior to the closing of an acquisition, including making voluntary disclosures under various export control laws and regulations, and have 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. After acquiring a company, notwithstanding pre-closing due diligence, we have discovered issues that required further action, including making voluntary disclosures under various defense and export control laws and regulations.

 

While the products and customer base of the companies we acquired in 2008 are complementary to some of Teledyne’s existing businesses, there is no assurance that we will achieve all identified financial, operating and marketing synergies. We may also experience problems that arise in entering new markets through acquisitions in which we may have little or no experience.

 

Additionally, in 2008, we expanded our United Kingdom presence with the acquisitions of TSS (International) Limited, Filtronic Defence Limited and Cormon Limited. There are additional risks associated with owning and operating businesses internationally, including those arising from U.S. and foreign government policy changes or actions and exchange rate fluctuations.

 

In connection with acquisitions, we may consolidate one or more acquired facilities with other Teledyne facilities to obtain synergies and cost-savings. For example, we have recently combined and relocated, with minimal disruption, the operations of the 2008-acquired Teledyne Impulse and long-time owned Teledyne Interconnect Devices to a new leased facility in San Diego, CA. In 2009, we plan to consolidate the

2008-acquired Moorpark, CA-based operations and assets of Demo Systems LLC, principally with Teledyne Controls, El Segundo, CA. We also plan to relocate the principal operations of both 2008-acquired Teledyne TSS Limited and Teledyne Cormon Limited to more modern and larger facilities close to their current locations. Nonetheless, despite planning, relocation and consolidation 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. As a result, production delays at a new operating location may occur.

 

As permitted by SEC rules, our current management’s report as to our assessment of the effectiveness of internal controls over financial reporting excludes in its scope and coverage our 2008 acquisitions of Filtronic Defence Limited, Cormon Limited and Odom Hydrographic Systems, Inc. and the assets of Webb Research Corp. and Demo Systems LLC. We plan to evaluate more fully the internal controls of such companies and subsequently acquired companies and implement a formal and rigorous system of internal controls at those acquired companies. We can provide no assurance that we will be able to provide a report that contains no significant deficiencies or material weaknesses with respect to these acquired companies or other acquisitions.

 

Our future financial results could be adversely impacted by asset impairment charges.

 

Under Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, we are required to test both acquired goodwill and other indefinite-lived intangible assets for impairment on an annual basis based upon a fair value approach, rather than amortizing them over time. We have chosen to perform our annual impairment reviews of goodwill and other indefinite- lived intangible assets during the fourth quarter of each fiscal year. We also are required to test goodwill for impairment between annual tests if events occur or circumstances change that would more likely than not reduce our enterprise fair value below its book value. These events or circumstances could include a significant change in the business climate, including a significant sustained decline in an entity’s market value, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business, or other factors. If the fair market value is less than the book value of goodwill, we could be required to record an impairment charge. The valuation of reporting units requires judgment in estimating future cash flows, discount rates and estimated product life cycles. In making these judgments, we evaluate the financial health of the business, including such factors as industry performance, changes in technology and operating cash flows. As we have grown through acquisitions, we have accumulated $502.5 million of goodwill, and have $117.0 million of acquired intangible assets, which includes $30.1 million of indefinite-lived intangible assets, out of total assets of $1,534.5 million at December 28, 2008. As a result, the amount of any annual or interim impairment could be significant and could have a material adverse effect on our reported financial results for the period in which the charge is taken. We also may be required to record an earnings charge or incur unanticipated expenses if, as a result of a change in strategy or other reason, we determined the value of other assets has been impaired.

 

We account for the impairment of long-lived assets to be held and used in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS No. 144”). SFAS No. 144 requires that a long-lived asset to be disposed of be reported at the lower of its carrying amount or fair value less cost to sell. An asset (other than goodwill and indefinite-lived intangible assets) is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is not deemed recoverable, the asset is adjusted to its estimated fair value. Fair value is generally determined based upon estimated discounted future cash flows.

 

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. Although we believe that anticipated cash flows from operations and available borrowings under our $590.0 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 us, our businesses and the industries in which we operate, and general economic conditions. We may be unable to successfully raise additional capital, if needed. Failure to successfully raise needed capital on a timely or cost-effective basis could have a material adverse effect on our business, results of operations and financial condition.

 

Our indebtedness could materially and adversely affect our business.

 

As of December 28, 2008, we had $333.2 million in total outstanding indebtedness, including $326.0 million under our $590.0 million credit facility. On February 24, 2009, we had $403.6 million outstanding under our $590.0 million credit facility. Our indebtedness could harm our business by, among other things, reducing the funds available to make new strategic acquisitions. Our indebtedness could also have a material adverse effect on our business by increasing our vulnerability to general adverse economic and industry conditions or a downturn in our business. General adverse economic and industry conditions or a downturn in our business could result in our inability to repay this indebtedness in a timely manner.

 

We may be unsuccessful in our efforts to increase our participation in certain new markets.

 

We intend to both adapt our existing technologies and develop new products to expand into new market segments. For example, we continue to work towards 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 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 and other new markets if our products do not meet our customers’ requirements, as a result of changes in either technology and industry standards or because of actions taken by our competitors.

 

Limitations in funding for applied research and development and technology insertion projects due to the present economic downturn and the significant expenditures in Iraq and Afghanistan may reduce our ability to apply our ongoing investments in nascent market areas. For example, our Engineered Systems segment’s development of Service Oriented Architectures for Department of Defense applications relies heavily on funding from customers who are actively competing for resources with war driven recapitalization, resupply and modernization requirements.

 

Our Engineered Systems segment is also actively pursuing engineered systems work and associated manufacturing opportunities in support of the aviation refurbishment market that is driven by ongoing global conflict. Limitations on capital investment for facilities and/or equipment would reduce the likelihood of significant penetration into this market area.

 

As discussed elsewhere herein, there has been a deterioration in the general aviation market as a direct result of the current economic and credit conditions plaguing the United States and the world generally. In addition to our Aerospace Engines and Components segment, as previously stated, this deterioration could impact battery sales of our Energy and Power Systems segment. While we will try to offset such impact with potential battery sales to the military and in other ways, we may not be able to offset any such impact.

 

We may be unable to successfully introduce new and enhanced products in a timely and cost-effective manner, which could harm our growth and prospects.

 

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. For example, sales of our Total Organic Carbon or TOC laboratory instruments have been adversely affected by enhanced products of several competitors.

 

Our new products also may not achieve market acceptance or correctly anticipate new industry standards and technological changes. As an example, we have been working to develop high power solid state power amplifiers, which could replace our traveling wave tubes in some applications, and, in this area, there is a larger base of potential competitors than for tube amplifiers. As a result, it may be more difficult for our solid state power amplifier products to gain market acceptance. We may also lose any technological advantage to competitors if we fail to develop new products in a timely manner. For example, if Teledyne Continental Motors fails to fully launch Aerosance’s PowerLink FADEC, its electronic engine control product, competitors may be able to introduce similar products that are able to gain market acceptance to the disadvantage of Teledyne’s product. However, in today’s economy, general aviation aircraft owners may disregard technological advancements for upfront costs-savings and determine that they do yet need such electronic engine controls.

 

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. In 2009, for example, Teledyne Energy Systems, Inc. currently believes it will continue to incur additional warranty costs as it continues to roll out two new hydrogen generation product lines.

 

Technological change and evolving industry and regulatory 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 operations and financial condition. For example, Teledyne Reynolds’ high voltage connector business could be negatively impacted by marketplace shifts to lower voltage requirements where the number of competitors is larger. 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.

 

Currently accepted industry and regulatory standards are also subject to change, which may contribute to the obsolescence of our products or services. For example, a European directive that certain electronic products must not contain impermissible levels of lead, mercury, cadmium, hexavalent chromium, polybrominated biphenyls or polybrominated diphenyl ethers, took effect on July 1, 2006. As a result, we must make sure that certain of our electronic products sold into European member states comply with this new directive. 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 us to accommodate changes in parameters, such as the way parts are soldered, and may, in some cases, require redesign of certain products. This could lead to increased costs, which we may not be able to recover from our customers, delays in product shipments and loss of market share to competitors. Our sales of environmental monitoring equipment could be negatively impacted if regulatory requirements change to deemphasize environmental monitoring. Similarly, revenues of our Teledyne Test Services business, which provides testing and certification for products used in nuclear power plants, could be negatively impacted in the event of any changes in certification standards by the Nuclear Regulatory Commission. Additionally, the U.S. Environmental Protection Agency has targeted general aviation fuel as a key contributor to lead in the atmosphere and could try to impose lead-free fuel regulations on general aviation. Such a change in the fuel standard could have an adverse impact on sales of our Aerospace Engines and Components segment and also require a significant investment in engine research and development.

We may not be able to reduce the costs of our products to satisfy customers’ cost reduction mandates, which could harm our sales or margins.

 

Given the current economic situation, more and more customers are seeking price reductions of our products. While we continually try to reduce our manufacturing and other costs of our products, without affecting product quality and reliability, there is no assurance that we will be able to do so and do so in a timely manner to satisfy the pricing pressures of our customers. Cost reductions of raw materials and other components used in our products may be beyond our control depending on market, credit and economic conditions. Customers may seek lower cost products from China and other developing countries where manufacturing costs are already lower.

 

The airline industry is heavily regulated, and if we fail to comply with applicable requirements, our results of operations could suffer.

 

Governmental agencies throughout the world, including the U.S. Federal Aviation Administration, or the FAA, prescribe standards and qualification requirements for aircraft components, including virtually all commercial airline and general aviation products, as well as regulations regarding the repair and overhaul of aircraft engines. Specific regulations vary from country to country, although compliance with FAA requirements generally satisfies regulatory requirements in other countries. We include, with the products and replacement parts that we sell to our aircraft manufacturing industry customers, documentation certifying that each part complies with applicable regulatory requirements and meets applicable standards of airworthiness established by the FAA or the equivalent regulatory agencies in other countries. In order to sell our products, we and the products we manufacture must also be certified by our individual original equipment manufacturer, or OEM, customers. If any material authorization or approval qualifying us to supply our products is revoked or suspended, then the sale of the subject product would be prohibited by law, which would have an adverse effect on our business, financial condition and results of operations.

 

From time to time, the FAA or equivalent regulatory agencies in other countries propose new regulations or changes to existing regulations, which are usually more stringent than existing regulations. If these proposed regulations are adopted and enacted, we may incur significant additional costs to achieve compliance, which could have a material adverse effect on our business, financial condition and results of operations.

 

Product liability claims, product recalls and field service actions 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, including aircraft engines and medical devices, 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 approximately $20.1 million, a decrease from $21.0 million for the prior annual period. Our existing aircraft product liability insurance policy expires on May 31, 2009. Additionally, based on facts and circumstances of claims, we have not always accrued amounts up to the applicable annual self-insured retentions. Awarded damages could be more than our accruals.

 

Product recalls can be expensive and tarnish our reputation and have a material adverse effect on the sales of our products. In February 2009, Teledyne Continental Motors commenced a voluntary recall of certain aircraft piston engine cylinders produced since November 2007. We recorded a pretax charge of $18.0 million during the fourth quarter of 2008 to cover estimated costs related to the recall and replacement of affected cylinders. In 2000, Teledyne Continental Motors engaged in a product recall of piston engine crankshafts as a result of which we recorded a $12.0 million pretax charge in the second quarter of 2000.

Through Aerosance, Inc., we have developed electronic controls, known as PowerLink FADEC, for piston aircraft engines that automate many functions requiring manual control, such as fuel flow and power management. While such control systems should improve engine management and facilitate maintenance of engines, we could face additional claims as they become standard equipment on selected new piston engine aircraft or are retrofitted on some piston engine aircraft. New products can trigger additional product liability claims as such products are further tested by actual usage. Additionally, general aviation aircraft crash lawsuits tend to name as defendants manufacturers of a multitude of aircraft-related products as discovery and recoveries are pursued.

 

We have 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 our products as a source of asbestos exposure, and we have 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. Our historic insurance coverage, including that of its predecessors, may not fully cover such claims and defense of such matters, as coverage depends on the year of purported exposure and other factors. Nonetheless, we intend to defend these claims vigorously. Congress from time to time has considered tort reform to deal with asbestos-related claims, but to date nothing has materialized.

 

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 the Nuclear Procurement Issues Committee, also known as NUPIC, and has other nuclear-related certifications and internal quality controls in place, errors and omissions in analyses may occur. We currently have errors and omissions insurance coverage and nuclear liability insurance coverage that might apply depending on the circumstances. We also have sought indemnities from some of our customers. Our insurance coverage or indemnities, however, may not be adequate to cover potential problems associated with faulty radiological analyses.

 

We cannot assure that we will not have additional product liability claims or that we will not recall any additional products.

 

We may have difficulty obtaining product liability and other insurance coverages, or be subject to increased costs for such coverage.

 

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 2009 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. Over the last several years, the number of insurance companies providing general aviation product liability insurance coverage has decreased. 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. Our current aircraft product liability insurance policy expires in May 2009 and has an annual self-insured retention of approximately $20.1 million.

 

To offset aircraft product liability insurance costs, we continue 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. We cannot provide assurances that further cost reduction efforts will prove successful or that customers will accept additional price increases. Aircraft engines and spare part cost increases, coupled with increased costs of insurance for general aviation aircraft owners, tend to result in decreasing aftermarket sales of our piston engines and component parts. This, in turn, leaves our Aerospace Engines and Components segment more dependent on sales to OEMs, which is more dependent on general economic conditions.

For certain electronic components for medical applications that we manufacture, such as those that go into cardiac defibrillators, we have asked for indemnities from our customers and/or to be included under their insurance policies. We cannot, however, provide any assurance that such indemnities or insurance will offset potential liabilities that we may incur as a result of our manufacture of such components.

 

Aside from the uncertainties created by external events that can affect insurance coverages, such as the American International Group, Inc. 2008 failure and bailout, the devastating 2005 hurricane season or September 11th events, our ability to obtain product liability insurance and the cost for such insurance are affected by our historical claims experience. While we have taken steps to improve our claims management process over the last few years, we cannot assure that, for 2009 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. For example, the combination of the network activities of Nokia and Siemens negatively impacted our wireless transceivers business. Low-cost competition from China and other developing countries could also result in decreased demand for our products.

 

We sell products to customers in industries that may undergo rapid and unpredictable changes, which could adversely affect our operations results or production levels.

 

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, 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 also manufacture products using fuel cell technology, which is a market that is not well established and subject to significant change and evolution.

 

Our Engineered Systems segment would be severely impacted if United States Enrichment Corporation (“USEC”) were unable to continue the American Centrifuge Project as planned. USEC is the ultimate customer for the gas centrifuge service modules being manufactured by us. USEC has been anticipating approval of about $2 billion in U.S. Government loan guarantees through the Department of Energy to secure the balance of funding required to complete the American Centrifuge Project. Failure to secure such guarantees would seriously jeopardize USEC’s ability to finance, and therefore complete, the project.

 

We are subject to the risks associated with international sales.

 

During 2008, sales to international customers accounted for approximately 24% of our total revenues, as compared to 22% in 2007 and 21% in 2006. We anticipate that future sales to international customers will continue to account for a significant percentage of our revenues. Risks associated with these sales include:

 

 

 

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. If the U.S. Dollar continues to strengthen against the British Pound Sterling or Euro, our European customers may no longer find our product prices more attractive than European competitors.

 

Sales of our products and services internationally are subject to U.S. and local government regulations and procurement policies and practices including regulations relating to import-export control. Violations of export control rules could result in suspension of our ability to export items from one or more business units or the entire corporation. Depending on the scope of the suspension, this could have a material effect on our ability to perform certain international contracts. Concerns over theft of technology for military uses, nuclear proliferation concerns, terrorism and other factors have resulted in increased export scrutiny of international sales, including some of our products to international customers. There has also been increasing export oversight and regulation of sales to China. Travel restrictions to Middle Eastern and other countries may negatively affect continuing international sales or service revenues from such regions. There are also U.S. and international regulations relating to investments, exchange controls and repatriation of earnings, as well as varying currency, political and economic risks.

 

Among other things, we are subject to the Foreign Corrupt Practices Act, or FCPA, which generally prohibits U.S. companies and their intermediaries from bribing foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment. In particular, we may be held liable for actions taken by our strategic or local partners even though our partners are not subject to the FCPA. Any determination that we have violated the FCPA could result in sanctions that could have a material adverse effect on our business, financial condition and results of operations.

 

Compliance with increasing environmental regulations and the effects of potential environmental liabilities could have a material adverse financial effect on us.

 

We, like other industry participants, are subject to various federal, state, local and international environmental laws and regulations. We may be subject to increasingly stringent environmental standards in the future, particularly as climate change initiatives increase in focus. Future developments, administrative actions or liabilities relating to environmental and climate change matters could have a material adverse effect on our business, results of operations or financial condition.

 

While we have, as part of our overall risk management program, an environmental management and compliance program applicable to our 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, while we conduct environmental-related due diligence in acquisitions and generally seek some form of protection, including indemnification from a seller, companies we acquire may have environmental liabilities that are not accurately assessed or brought to our attention at the time of the acquisition.

 

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 Note 15 to Notes to Consolidated Financial Statements.

 

Increased environmental regulatory monitoring requirements of the air we breathe and the water we drink could have a favorable effect on the results of operations or financial condition of our instrumentation businesses, including the sulfur dioxide, carbon monoxide and ozone gas monitoring business of Teledyne Advanced Pollution Instrumentation, Inc. and the water quality monitoring business of Teledyne Isco, Inc. In contrast, the U.S. Environmental Protection Agency’s efforts to limit lead emissions from general aviation

gasoline could adversely affect our Aerospace Engines and Components segment unless we develop an engine that uses unleaded fuel or diesel fuel.

 

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 and engineering personnel has become even more competitive as the domestic economy has improved in recent years. Also, our Engineered Systems segment has already begun to face increasing competition for qualified engineering personnel as a result of the Department of Defense 2005 Base Realignment and Closure (also known as BRAC) decisions, particularly as positions continue to move to Huntsville, Alabama over the next several 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, after the June 2004 acquisition of Isco, Inc., we determined that the on-line process control instrumentation business of its German subsidiary was not aligned with our strategy, and in March 2005, we sold this non-strategic business. In 2007, principally because of the decision of a customer to manufacture certain medical products at its facilities in India, we closed our contract manufacturing operations in El Rubi, Mexico and transferred the remaining operations to our La Mesa, Mexico facility and our Lewisburg, Tennessee facility.

 

Our ability to dispose of or exit product lines that may no longer be aligned with our growth 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 that we will be able to sell non-strategic product lines on terms that are acceptable to us, or at all. Also, if the sale of any non-strategic product line cannot be consummated or is not practical, alternative courses of action, including closure, may not be available to us or may be more costly than anticipated.

 

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 16 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 from ATI on November 29, 1999, the market price of our Common Stock has ranged from a low of $7.6875 to a high of $66.21 per share. During 2008 alone, the market price of our Common Stock ranged from $33.90 to $66.21 per share. At February 24, 2009, our closing stock price was $23.29. Fluctuations in our stock price could continue. Among the factors that could affect our stock price are:

 

 

 

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.

 

Our financial statements are based on estimates required by GAAP, and actual results may differ materially from those estimated under different assumptions or conditions.

 

Our 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 items such as asset valuations, allowances for doubtful accounts, depreciation and amortization, impairment assessments, employee benefits, taxes, recall costs, aircraft product and general liability and contingencies. While we base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances at the time made, actual results may differ materially from those estimated.

 

While we believe our control systems are effective, there are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected.

 

We continue to take action to assure compliance with the internal controls, disclosure controls and other requirements of the Sarbanes-Oxley Act of 2002. Our management, including our Chief Executive Officer and Chief Financial Officer, cannot guarantee that our internal controls and disclosure controls will prevent all possible errors or all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls also is based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may be inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements resulting from error or fraud may occur and may not be detected.

Natural disasters, such as a serious earthquake or wildfire in California or a major hurricane in Alabama or Florida, could adversely affect our business, results of operations and financial condition.

 

Several of our facilities, as a result of their locations could be subject to a catastrophic loss caused by an earthquake, a hurricane or a tornado. Many of our production facilities and our headquarters are located in California and thus are in areas with above average seismic activity and may also be at risk of damage in wildfires. In addition, we have manufacturing facilities in the Southeastern United States and Texas that have been threatened and struck by major hurricanes. Our facilities in Alabama, Florida, Kansas, Nebraska and Tennessee have also been threatened by tornados. In 2007, prior to our acquisition of Storm Products Co., a tornado caused minor damage to one of its Dallas, Texas facilities. While Teledyne Continental Motors’ piston-engines manufacturing facility and Teledyne Turbine Engines’ advanced manufacturing cell, each located in Mobile, Alabama, Teledyne Geophysical Instruments’ facility in Houston, Texas, ODI’s facility in Daytona Beach, Florida and Teledyne Odom’s facility in Baton Rouge, Louisiana 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 any one of them will be as fortunate in the future. If any of our California facilities, including our California headquarters, were to experience a catastrophic earthquake or wildfire loss or if any of our Alabama, Florida, Louisiana, Nebraska, Kansas, 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. In addition, 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.

 

 

None.

 

 

Our principal U.S. facilities as of February 24, 2009 are listed below. Although the facilities vary in terms of age and condition, our management believes that these facilities have generally been well maintained and are adequate for current operations.

 

 

We also own or lease facilities and offices elsewhere in the United States and outside the United States, including facilities in: Tijuana, Mexico; Mitcheldean, Lancing, Newbury, Shipley, Surrey, West Drayton and Watford, England; Cumbernauld and Aberdeen, Scotland; Singapore; Cwmbran, Wales; Kreuztal, Germany; La Gaude, France; Shanghai, China; and Ottawa, Canada. Our corporate executive offices are located at 1049 Camino Dos Rios, Thousand Oaks, California 91360-2362.

 

 

From time to time, we become involved in various lawsuits, claims and proceedings related to the conduct of our business, including those pertaining to product liability, patent infringement, commercial, employment and employee benefits. While we cannot predict the outcome of any lawsuit, claim or proceeding, our management does not believe that the disposition of any pending matters is likely to have a material adverse effect on our financial condition or liquidity. The resolution in any reporting period of one or more of these matters, however, could have a material adverse effect on the results of operations for that period.

 

 

No matters were submitted to a vote of Teledyne’s stockholders during the fourth quarter of 2008.

 

 

Price Range of Common Stock and Dividend Policy

 

Our Common Stock is listed on the New York Stock Exchange and traded under the symbol “TDY.” The following table sets forth, for the periods indicated, the high and low sale prices for the Common Stock as reported by the New York Stock Exchange.

 

 

On February 24, 2009, the closing sale price of our Common Stock as reported by the New York Stock Exchange was $23.29 per share. As of February 24, 2009, there were 5,595 holders of record of the Common Stock.

 

We currently intend to retain any future earnings to fund the development and growth of our businesses, including through acquisitions. Therefore, we do not anticipate paying any cash dividends in the foreseeable future.

 

The following table presents our summary consolidated financial data. We derived the following historical selected financial data from our audited consolidated financial statements. Our fiscal year is determined based on a 52 or 53-week convention ending on the Sunday nearest to December 31. The five-year summary of selected financial data should be read in conjunction with the discussion under “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

 

Five-Year Summary of Selected Financial Data

 

 

Teledyne Technologies Incorporated is a leading provider of sophisticated electronic components and subsystems, instrumentation and communications products, including defense electronics, monitoring and control instrumentation for marine, environmental and industrial applications, harsh environment interconnect products, data acquisition and communications equipment for air transport and business aircraft, and components and subsystems for wireless and satellite communications. We also provide engineered systems and information technology services for defense, space and environmental applications, manufacture general aviation engines and components, and supply energy generation, energy storage and small propulsion products.

 

We serve niche market segments where performance, precision and reliability are critical. Our customers include government agencies, aerospace prime contractors, energy exploration and production companies, major industrial companies, and airlines and general aviation companies.

 

Strategy

 

Our strategy continues to emphasize growth in our core markets of instrumentation, defense electronics and government engineered systems. Our core markets are characterized by high barriers to entry and include specialized products and services not likely to be commoditized. We intend to strengthen and expand our core businesses with targeted acquisitions. We aggressively pursue operational excellence to continually improve our margins and earnings. At Teledyne, operational excellence includes the rapid integration of the businesses we acquire. Over time, our goal is to create a set of businesses that are truly superior in their niches. We intend to continue to evaluate our product lines to ensure that they are aligned with our strategy.

 

Recent Acquisitions

 

The table below summarizes the acquisitions we made during fiscal years 2008, 2007 and 2006. See also Note 3 to our Consolidated Financial Statements for additional information about these acquisitions.

 

 

 

Financial Highlights

 

Our fiscal year is determined based on a 52 or 53-week convention ending on the Sunday nearest to December 31. The following is our financial information for 2008, 2007 and 2006 (in millions, except per-share amounts):

 

 

 

 

Our businesses are divided into and managed as four business segments; namely, Electronics and Communications, Engineered Systems, Aerospace Engines and Components and Energy and Power Systems. Our four business segments and their respective contributions to our total sales in 2008, 2007 and 2006 are summarized in the following table:

 

Results of Operations

 

2008 Compared with 2007 (in millions)

 

 

 

 

We reported 2008 sales of $1,893.0 million, compared with sales of $1,622.3 million for 2007, an increase of 16.7%. Net income was $111.3 million ($3.05 per diluted share) for 2008, compared with $98.5 million ($2.72 per diluted share) for 2007, an increase of 13.0%.

 

The increase in sales in 2008, compared with 2007, reflected improvement in the Electronic and Communications, Engineered Systems and Energy and Power Systems segments. The largest increase in sales was in the Electronic and Communications segment which grew both organically and through strategic acquisitions made in 2008 and in 2007. The incremental increase in revenue in 2008 from businesses acquired since 2006 was $142.9 million (see “Recent Acquisitions” table).

 

The increase in segment operating profit and other segment income for 2008, compared with 2007, reflected the impact of higher sales. Operating profit and other segment income was higher in each operating segment except the Aerospace Engines and Components segment. The $39.8 million increase in operating profit in the Electronics and Communications segment included incremental operating profit from acquisitions and related synergies of $17.8 million. The Aerospace Engines and Components segment includes the impact of an $18.0 million estimated charge for a voluntary product recall and replacement program.

Cost of sales in total dollars was higher in 2008, compared with 2007, primarily due to higher sales which resulted from organic growth and acquisitions. Fiscal year 2008 included $0.9 million in LIFO expense, compared with $1.3 million in LIFO expense in 2007. Cost of sales as a percentage of sales for 2008 was 70.8%, compared with 70.0% for 2007. The higher cost of sales percentage reflects the impact of the estimated $18.0 million voluntary product recall and replacement charge for the Aerospace Engines and Components segment. Of the total $18.0 million charge, $15.8 million was related to the costs associated with the return and replacement of product and $1.4 million was related to the disposal and write-off of inventory which were recorded as cost of sales; $0.8 million was related to estimated customer returns and was recorded as a reduction to sales.

 

Selling, general and administrative expenses, including research and development and bid and proposal expense, in total dollars were higher in 2008 compared with 2007. This $41.0 million increase was primarily due to higher sales which resulted from organic growth and acquisitions and also reflected higher acquired intangible asset amortization of $15.8 million in 2008, compared with $6.4 million in 2007. Corporate administrative expense in 2008 was lower by $3.0 million compared with 2007 and reflected lower employee compensation and relocation expense and lower professional fee expenses. For fiscal year 2008, we recorded a total of $7.5 million in stock option expense, of which $2.5 million was recorded as corporate expense and $5.0 million was recorded in the operating segment results. For fiscal year 2007, we recorded a total of $6.8 million in stock option expense, of which $2.3 million was recorded as corporate expense and $4.5 million was recorded in the operating segment results. Selling, general and administrative expenses for 2008, as a percentage of sales, were 19.3%, compared with 19.9% for 2007, which reflected the impact of higher sales while controlling general and administrative expenses.

 

Included in operating profit in 2008 was pension expense of $9.6 million, in accordance with the pension accounting requirements of SFAS No. 87, “Employers’ Accounting for Pensions,” (“SFAS No. 87”) offset by $9.8 million recoverable in accordance with U.S. Government Cost Accounting Standards (“CAS”) from certain government contracts. Included in operating profit in 2007 was pension expense of $11.9 million, of which $10.2 million was recoverable in accordance with CAS. Pension expense determined under CAS can generally be recovered through the pricing of products and services sold to the U.S. Government.

 

The Company’s effective tax rate for 2008 was 36.9%, compared with 34.1% for 2007. The effective tax rate for 2008 reflects the impact of expected research and development income tax credits of $2.5 million and also reflects the reversal of $0.8 million in income tax contingency reserves that were determined to be no longer needed due to the expiration of applicable statutes of limitations. Excluding these items the effective tax rate for 2008 would have been 38.7%. The effective tax rate for 2007 reflects the impact of expected research and development income tax credits of $4.4 million and also reflects the reversal of $1.1 million in income tax contingency reserves. The reserves were determined to be no longer needed due to the completion of state tax audits and the expiration of applicable statutes of limitations. Excluding these items the effective tax rate for 2007 would have been 37.7%.

 

Sales under contracts with the U.S. Government were approximately 40% of sales in 2008 and 41% of sales in 2007. Sales to international customers represented approximately 24% of sales in 2008, compared with 22% of sales in 2007.

 

Total interest expense, including credit facility fees and other bank charges, was $11.7 million in 2008 and $13.1 million in 2007. Interest income was $0.8 million in 2008 and $0.6 million in 2007. The decrease in interest expense in 2008 primarily reflected lower average interest rates, partially offset by higher outstanding debt levels due to acquisitions.

 

Minority interest reflects the minority ownership interests in Ocean Design, Inc. and Teledyne Energy Systems, Inc. The minority interest ownership percentage in ODI decreased to 14% at year-end 2008 since the initial 51% purchase of ODI in August 2006.

 

Fiscal years 2008 and 2007 include sublease rental income and royalty income in other income. Other income in 2007 included $0.8 million received for the early return of leased property.

2007 Compared with 2006 (in millions)

 

 

 

 

We reported 2007 sales of $1,622.3 million, compared with sales of $1,433.2 million for 2006, an increase of 13.2%. Net income was $98.5 million ($2.72 per diluted share) for 2007, compared with $80.3 million ($2.26 per diluted share) for 2006, an increase of 22.7%.

 

The increase in sales in 2007, compared with 2006, reflected improvement in the Electronic and Communications and Engineered Systems segments. The largest increase in sales was in the Electronic and Communications segment which grew both organically and through strategic acquisitions. The increase in sales for the Engineered Systems segment included the acquisition of CollaborX in August 2006. The incremental increase in revenue in 2007 from businesses acquired since 2005 was $161.5 million (see “Recent Acquisitions” table).

 

The increase in segment operating profit and other segment income for 2007, compared with 2006, reflected the impact of higher sales. Operating profit and other segment income was higher in each operating segment. The $33.9 million increase in operating profit in the Electronics and Communications segment, included incremental operating profit from acquisitions and related synergies of $15.5 million. Fiscal year 2006 included the receipt of $2.5 million pursuant to an agreement that expired in 2006 with Honda Motor Co., Ltd.

Cost of sales in total dollars was higher in 2007, compared with 2006, primarily due to higher sales which resulted from organic growth and acquisitions. Fiscal year 2007 included $1.3 million in LIFO expense, compared with $0.7 million in LIFO expense in 2006. Cost of sales as a percentage of sales for 2007 was 70.0%, compared with 71.2% for 2006. The lower cost of sales percentage in 2007 primarily reflected sales mix differences and a continued emphasis on margin improvement and cost control.

 

Selling, general and administrative expenses, including research and development and bid and proposal expense, in total dollars were higher in 2007 compared with 2006. This $35.7 million increase was primarily due to higher sales which resulted from organic growth and acquisitions and also reflected higher corporate expense of $4.9 million compared with 2006 due to higher employee compensation and relocation expense and higher professional fee expenses. For fiscal year 2007, we recorded a total of $6.8 million in stock option expense, of which $2.3 million was recorded as corporate expense and $4.5 million was recorded in the operating segment results. For fiscal year 2006, we recorded a total of $5.9 million in stock option expense, of which $2.2 million was recorded as corporate expense and $3.7 million was recorded in the operating segment results. Selling, general and administrative expenses for 2007, as a percentage of sales, decreased slightly to 19.9%, compared with 20.1% for 2006.

 

Included in operating profit in 2007 was pension expense of $11.9 million, in accordance with the pension accounting requirements of SFAS No. 87, of which $10.2 million was recoverable in accordance with CAS from certain government contracts. Included in operating profit in 2006 was pension expense of $15.4 million, of which $10.5 million was recoverable in accordance with CAS. The decrease in pension expense in 2007, compared with 2006, reflects, in part, pension contributions made in 2006, the impact of favorable market returns on plan assets in 2006 and changes to the Company’s pension assets and liabilities resulting from the merger of the Teledyne Scientific & Imaging pension plan with Teledyne Technologies pension plan.

 

The Company’s effective tax rate for 2007 was 34.1%, compared with 34.0% for 2006. The Company completed an analysis of research and development spending for 2000 through 2006, as well as the base period years, and anticipates the receipt of income tax refunds for those years. The effective tax rate for 2007 reflects the impact of expected research and development income tax refunds of $4.4 million and also reflects the reversal of $1.1 million in income tax contingency reserves which were determined to be no longer needed due to the completion of state tax audits and the expiration of applicable statutes of limitations. Excluding these items the effective tax rate for 2007 would have been 37.7%. The effective tax rate for the 2006 reflects the impact of the reversal of income tax contingency reserves of $3.3 million which were determined to be no longer needed due to the expiration of applicable statutes of limitations. Excluding the impact of the reversal, the effective tax rate for 2006 would have been 36.7%.

 

Sales under contracts with the U.S. Government were approximately 41% of sales in 2007 and 40% of sales in 2006. Sales to international customers represented approximately 22% of sales in 2007, compared with 21% of sales in 2006.

 

Total interest expense, including credit facility fees and other bank charges, was $13.1 million in 2007 and $7.7 million in 2006. Interest income was $0.6 million in 2007 and $0.3 million in 2006. The higher interest expense in 2007 primarily reflected higher outstanding debt levels due to acquisitions.

 

Minority interest reflects the minority ownership interests in Ocean Design, Inc. and Teledyne Energy Systems, Inc. The minority interest ownership percentage in ODI decreased to 38% at year-end 2007, since the initial 51% purchase of ODI in August 2006.

 

Other income for 2006 included the receipt of $2.5 million pursuant to an agreement that expired in 2006 with Honda Motor Co., Ltd. which is included as part of the Aerospace Engines and Components segment operating profit and other segment income for segment reporting purposes. Fiscal years 2007 and 2006 also include sublease rental income and royalty income in other income. Other income in 2007 included $0.8 million received for the early return of leased property.

Segments

 

The following discussion of our four segments should be read in conjunction with Note 13 to the Notes to Consolidated Financial Statements.

 

Electronics and Communications

 

 

Our Electronics and Communications segment provides sophisticated electronic components and subsystems, instrumentation and communications products, including defense electronics, monitoring and control instrumentation for marine, environmental, laboratory and industrial applications, harsh environment interconnect products, data acquisition and communications equipment for air transport and business aircraft, and components and subsystems for wireless and satellite communications.

 

2008 compared with 2007

 

Our Electronics and Communications segment sales were $1,276.6 million in 2008, compared with sales of $1,071.6 million in 2007, an increase of 19.1%. Operating profit was $183.0 million in 2008, compared with $143.2 million in 2007, an increase of 27.8%.

 

The 2008 sales growth of $205.0 million resulted primarily from revenue growth in electronic instruments and defense electronics, partially offset by lower sales of other commercial electronics. The revenue growth of $141.9 million in electronic instruments was driven by organic sales growth and the acquisitions, including DGO, Impulse, Storm, TSS, Webb and Cormon. Organic sales growth in electronic instruments reflected increased sales of geophysical sensors for the energy exploration market, other marine instruments and environmental instruments for the air and water monitoring markets. We currently expect a contraction in the second half of 2009 in sales of marine instruments that serve the offshore exploration market. The incremental increase in revenue from acquisitions in electronic instruments for 2008, compared with 2007, was $98.0 million. The revenue growth of $66.9 million in defense electronics was driven by organic sales growth and acquisitions, including Storm, Judson and the Defense Electronics business of Filtronic PLC. The increase in revenue from acquisitions in defense electronics products for 2008, compared with 2007, was $44.9 million. Organic growth of defense electronics for 2008 was primarily due to higher sales of defense manufacturing services, as well as increased sales of imaging sensors and subsystems and greater sales of microwave components and subsystems. Revenue in avionics and other commercial electronics decreased by $3.8 million and primarily reflected decreased sales of medical electronic manufacturing services. In 2008, for the Electronics and Communications segment, revenues increased by $142.9 million and operating profit, including synergies, increased by $17.8 million due to the incremental impact of acquisitions that we acquired since 2006. Segment operating profit was favorably impacted by the increase in revenue and sales mix. Segment operating profit was negatively impacted by $3.5 million of stock option compensation expense in 2008 compared with $3.1 million of stock option compensation expense in 2007. Fiscal year 2008 also reflected lower LIFO expense of $1.0 million compared with fiscal year 2007. Pension expense, in accordance with the pension accounting requirements of SFAS No. 87, was $3.5 million in 2008 compared with $4.0 million in 2007. Pension expense allocated to contracts pursuant to CAS was $1.9 million in 2008, compared with $1.7 million for 2007.

2007 compared with 2006

 

Our Electronics and Communications segment sales were $1,071.6 million in 2007, compared with sales of $899.4 million in 2006, an increase of 19.1%. Operating profit was $143.2 million in 2007, compared with $109.3 million in 2006, an increase of 31.0%.

 

The 2007 sales growth of $172.2 million resulted primarily from revenue growth in defense electronics and electronic instruments, partially offset by lower sales of other commercial electronics. The revenue growth of $98.0 million in defense electronics was primarily driven by the acquisition of Teledyne Scientific & Imaging. The increase in revenue from acquisitions in defense electronics products for 2007, compared with 2006, was $89.7 million. Organic growth of defense electronics for 2007 was due to higher sales of microwave components and subsystems. The revenue growth of $88.6 million in electronic instruments was driven by acquisitions and organic growth. Revenue growth in electronic instruments included the acquisition of the majority interest in ODI, Benthos and DGO. The increase in revenue from acquisitions in electronic instruments for 2007, compared with 2006, was $63.1 million. Sales of electronic instruments for 2007 increased due to organic sales growth of instruments for the industrial and environmental monitoring instrumentation markets. Revenue in avionics and other commercial electronics decreased by $14.4 million and primarily reflected decreased sales of medical electronic manufacturing services. In 2007, for the Electronics and Communications segment, revenues increased by $152.8 million and operating profit, including synergies, increased by $15.5 million due to the incremental impact of acquisitions that we acquired since 2005. Segment operating profit was favorably impacted by the increase in revenue and margin improvement from cost control initiatives. Segment operating profit was negatively impacted by $3.1 million of stock option compensation expense in 2007 compared with $2.4 million of stock option compensation expense in 2006. Fiscal year 2007 also reflected higher LIFO expense of $0.2 million compared with fiscal year 2006. Pension expense, in accordance with the pension accounting requirements of SFAS No. 87, was $4.0 million in 2007, compared with $3.8 million in 2006. Pension expense allocated to contracts pursuant to CAS was $1.7 million in 2007, compared with $1.6 million for 2006. Fiscal year 2006 also included $0.7 million in charges in our commercial electronics business for warranty reserves and inventory obsolescence related to the termination of a product line.

 

Engineered Systems

 

 

Our Engineered Systems segment, principally through Teledyne Brown Engineering, Inc., applies the skills of its extensive staff of engineers and scientists to provide innovative engineered and information technology services for defense, space, environmental and nuclear applications.

 

2008 compared with 2007

 

Our Engineered Systems segment sales were $361.2 million in 2008, compared with sales of $301.7 million in 2007, an increase of 19.7%. Operating profit was $35.0 million in 2008, compared with $26.2 million in 2007, an increase of 33.6%.

 

Sales for 2008, compared with 2007, reflected revenue growth in aerospace and defense programs and higher environmental sales. The revenue growth of $51.1 million in aerospace and defense programs primarily reflected revenue growth in certain manufacturing programs including gas centrifuge service modules for nuclear power applications, as well as other aerospace programs and specialized engineering and project

support for NASA. The revenue growth in environmental programs reflected engineering support for the gas centrifuge service modules program. Operating profit for 2008 reflected the impact of higher revenue and higher margins in aerospace programs and certain manufacturing programs, increased award fees and improved overhead rates. Segment operating profit also included pension expense under SFAS No. 87 of $5.0 million in 2008 compared with $6.4 million of pension expense in 2007. Pension expense allocated to contracts pursuant to CAS was $7.7 million in 2008 compared with $8.1 million in 2007.

 

2007 compared with 2006

 

Our Engineered Systems segment sales were $301.7 million in 2007, compared with sales of $283.0 million in 2006, an increase of 6.6%. Operating profit was $26.2 million in 2007, compared with $24.5 million in 2006, an increase of 6.9%.

 

Sales for 2007, compared with 2006, reflected revenue growth in aerospace and defense programs, partially offset by lower environmental sales. The revenue growth of $31.7 million in aerospace and defense programs included $8.7 million in incremental revenue from the acquisition of CollaborX. The revenue growth in aerospace programs was primarily due to increased support for NASA. The revenue decrease of $13.0 million in environmental programs was primarily due to decreased support of the U.S. Army at Pine Bluff Arsenal. Operating profit for 2007, compared with 2006, was favorably impacted by higher segment revenue in 2007, and incremental operating profit of $0.5 million from CollaborX, partially offset by lower margins in certain defense programs. Segment operating profit also included pension expense under SFAS No. 87 of $6.4 million in 2007 compared with $9.5 million of pension expense in 2006. Pension expense allocated to contracts pursuant to CAS was $8.1 million in 2007 compared with $8.6 million in 2006. Fiscal year 2006 included a favorable overhead claim settlement of $1.3 million.

 

Aerospace Engines and Components

 

 

Our Aerospace Engines and Components segment, principally through Teledyne Continental Motors, Inc., focuses on the design, development and manufacture of piston engines, aftermarket support and electronic engine controls.

 

2008 compared with 2007

 

Our Aerospace Engines and Components segment sales were $171.0 million in 2008, compared with sales of $180.7 million in 2007, a decrease of 5.4%. The 2008 operating loss was $9.7 million, compared with operating income of $19.2 million in 2007. We currently expect sales in this segment to decrease further in 2009.

 

Sales for 2008, compared with 2007, reflected reduced OEM piston engine and spare parts sales. The decrease in operating profit in 2008, compared with 2007, reflected an estimated charge of $18.0 million for product recall and replacement costs, the impact of lower sales and higher defense and settlement fees. The charge was required to replace certain aircraft piston engine cylinders produced since November 2007. The replacement program should be completed by the end of 2009. Operating profit in 2007 included the receipt of a litigation settlement of $1.4 million, net of expenses and the $1.7 million writedown of accounts receivable related to a customer bankruptcy. Segment operating profit also included pension expense, under SFAS No. 87 of $0.6 million in 2008 compared with $0.7 million for 2007. Segment operating profit for 2008 also reflected higher LIFO expense of $0.5 million.

2007 compared with 2006

 

Our Aerospace Engines and Components segment sales were $180.7 million in 2007, compared with sales of $181.6 million in 2006, a decrease of 0.5%. Operating profit was $19.2 million in 2007, compared with $15.5 million in 2006, an increase of 23.9%.

 

Sales for 2007, compared with 2006, reflected slightly lower OEM engine sales. The improvement in operating profit in 2007, compared with 2006 reflected the impact of improved operating performance including lower aircraft product liability expense, the receipt of a litigation settlement of $1.4 million, net of expenses, partially offset by a $1.7 million writedown of accounts receivable related to a customer bankruptcy. Segment operating profit for 2006, included the receipt of $2.5 million, pursuant to an agreement that expired in 2006 with Honda Motor Co., Ltd. related to the piston engine business. Segment operating profit also included pension expense, under SFAS No. 87 of $0.7 million in 2007, compared with $1.2 million for 2006. Segment operating profit for 2007 also reflected lower LIFO expense of $0.5 million.

 

Energy and Power Systems

 

 

Our Energy and Power Systems segment provides hydrogen gas generators, thermoelectric and fuel cell-based power sources, turbine engines and aviation batteries.

 

2008 compared with 2007

 

Our Energy and Power Systems segment sales were $84.2 million in 2008, compared with sales of $68.3 million in 2007, an increase of 23.3%. Operating income was $10.2 million in 2008, compared with $6.3 million in 2007, an increase of 61.9%.

 

The increase in sales for 2008, compared with 2007, primarily resulted from higher government power systems sales and higher turbine engine sales, primarily due to Joint Air-to-Surface Standoff Missile (“JASSM”) engines. Commercial hydrogen generator sales increased slightly. Operating profit reflected the impact of higher sales, higher margins in the turbine engine business and the reversal of $1.3 million for environmental reserves no longer needed due to a final settlement.

 

2007 compared with 2006

 

Our Energy and Power Systems segment sales were $68.3 million in 2007, compared with sales of $69.2 million in 2006, a decrease of 1.3%. Operating income was $6.3 million in 2007, compared with $6.0 million in 2006, an increase of 5.0%.

 

The decrease in sales for 2007, compared with 2006, primarily resulted from higher commercial hydrogen generator sales and higher aviation battery sales, which were more than offset by lower turbine engine sales. Operating profit reflected higher margins and sales in the hydrogen generator business, which were partially offset by the impact of lower sales and lower margins in the turbine engine business. Segment operating profit for 2007 also reflected higher LIFO expense of $0.9 million. Turbine engine sales and operating profit for 2007 were unfavorable, compared with 2006, due to lower JASSM engine sales, partially offset by higher research and development sales.

Financial Condition, Liquidity and Capital Resources

 

Principal Capital Requirements

 

Our principal capital requirements are to fund working capital needs, capital expenditures, voluntary and required pension contributions and debt service requirements, as well as to fund our stock repurchase program and acquisitions, including the purchase of the remaining minority shares of ODI which we expect to complete by the third quarter of 2009. It is anticipated that operating cash flow, together with available borrowings under the credit facility described below, will be sufficient to meet these requirements and could be used to fund some acquisitions in the year 2009. To support acquisitions, we may need to raise additional capital. Our liquidity is not dependent upon the use of off-balance sheet financial arrangements. We have no off-balance sheet financing arrangements that incorporate the use of special purpose entities or unconsolidated entities.

 

Revolving Credit Agreement

 

On February 8, 2008, Teledyne Technologies entered into a First Amendment to its Amended and Restated Credit Agreement dated as of July 14, 2006. The amended and restated credit facility has lender commitments totaling $590.0 million and expires on July 14, 2011. Excluding interest and fees, no payments are due under the amended and restated credit facility until it matures. The credit agreement requires the Company to comply with various financial and operating covenants, including maintaining certain consolidated leverage and interest coverage ratios, as well as minimum net worth levels and limits on acquired debt. At December 28, 2008, the Company was in compliance with these covenants. Available borrowing capacity under the $590.0 million credit facility, which is reduced by borrowings, outstanding letters of credit and certain guarantees was $254.8 million at December 28, 2008. In February 2009, Teledyne made a pretax $80.0 million voluntary contribution to its pension plan, funded from its credit facility and cash on hand. For a description of some terms of our credit facility, see “Financing Activities” beginning on page 51.

 

Contractual Obligations

 

The following table summarizes our expected cash outflows resulting from financial contracts and commitments at December 28, 2008. We have not included information on our normal recurring purchases of materials for use in our operations. These amounts are generally consistent from year to year, closely reflect our levels of production, and are not long-term in nature (in millions):

 

 

 

 

At December 28, 2008, the Company had a minimum pension plan funding requirement of $13.8 million for 2009. In February 2009, Teledyne made a pretax $80.0 million voluntary contribution to its pension plan, funded primarily from its credit facility. The Company expects to make an additional contribution to its

pension plan of $37.1 million in 2009. Based on current assumptions and actual and expected contributions made in 2009, the Company would not have a minimum pension plan funding requirement, as set forth by ERISA, in 2010. Our minimum funding requirements after 2008 are dependent on several factors as discussed under “Accounting for Pension Plans” in the Critical Accounting Policies section of this Management’s Discussion and Analysis of Financial Condition and Results of Operation. Estimates beyond 2010 have not been provided due to the significant uncertainty of these amounts, which are subject to change until the Company’s SFAS No. 87 assumptions can be updated at the appropriate times. In addition, certain pension contributions are eligible for future recovery through the pricing of products and services to the U.S. government under certain government contracts, therefore, the amounts noted are not necessarily indicative of the impact these contributions may have on the Company’s liquidity. We also have payments due under our other postretirement benefits plans. These plans are not required to be funded in advance, but are pay as you go. See further discussion in Note 12 of the Notes to Consolidated Financial Statements.

 

Pursuant to agreements in connection with our August 2006 acquisition of an initial majority interest in ODI, the ODI minority stockholders have the contractual option to sell their shares to Teledyne Instruments following the end of each quarter through the quarter ended March 31, 2009, at a formula-determined price based principally on ODI’s earnings before interest, taxes, depreciation and amortization (EBITDA) for the twelve months preceding each applicable quarter end. All shares not sold to Teledyne Instruments following the quarter ended March 31, 2009, are required to be purchased by Teledyne Instruments following the quarter ended June 30, 2009, at a same formula-determined price, at which time Teledyne Instruments will own all of the ODI shares held by the participating stockholders. At December 28, 2008, total cash paid, including the initial investment and subsequent share purchases, for Teledyne’s interest in ODI, net of cash acquired, was $73.8 million. Based on the formula-determined purchase price as of the quarter ended December 28, 2008, the aggregate amount of funds required to purchase all the shares held by the remaining minority ODI stockholders would be approximately $24.3 million. However, the actual aggregate amount of funds that we will spend to purchase the shares held by minority stockholders through June 30, 2009, could be significantly higher or lower than this amount, as that amount will depend on when individual stockholders elect to exercise their put options and on the financial performance of ODI. Teledyne Technologies has guaranteed the payment obligation of its subsidiary, Teledyne Instruments.

 

Operating Activities

 

In 2008, net cash provided from operations was $120.4 million, compared with $166.7 million in 2007 and $78.4 million in 2006.

 

The lower net cash provided for 2008, compared with 2007, was primarily due to higher pretax pension contributions of $52.4 million, higher aircraft product defense and settlement payments of $25.5 million and higher working capital requirements, partially offset by higher net income, the incremental cash contribution from recent acquisitions and lower income tax payments of $22.5 million.

 

The higher net cash provided for 2007, compared with 2006, was primarily due to incremental cash contribution from recent acquisitions, higher net income, higher customer advance payments and deposits, improved accounts receivable collections due to timing and $12.4 million in lower pension contributions.

 

Free cash flow (cash from operating activities less capital expenditures) was $78.5 million compared with $126.4 million in 2007 and $52.0 million in 2006.

 

 

 

Working Capital

 

Working capital increased to $281.3 million at year-end 2008, compared with $213.7 million at year-end 2007. The increase in working capital reflects working capital from businesses acquired in fiscal 2008, higher income taxes receivable, higher accounts receivable due to increased fourth quarter 2008 sales and higher inventory balances.

 

Balance Sheet Changes

 

The changes in the following selected components of Teledyne’s balance sheet are discussed below (in millions):

 

 

The higher balances in accounts receivable, inventory and short-term accrued liabilities reflected the impact of organic sales growth, as well as businesses acquired in fiscal 2008. The higher balance in short-term accrued liabilities also includes $15.8 million in product recall and replacement reserves in 2008. The increase in prepaid expenses and other current assets reflects higher income tax receivables of $19.6 million. Long-term deferred income taxes reflected a $78.5 million increase related to the minimum benefit plan liability adjustment in 2008. The increase in goodwill primarily reflected the acquisitions made in fiscal 2008. The increase in acquired intangible assets primarily reflected the acquisitions made in fiscal 2008, partially offset by current year amortization. The increase in long-term debt and capital lease obligations primarily reflected the use of cash flow to purchase businesses and to make pension contributions. The accrued pension obligation increased primarily as a result of an increase in the unfunded pension liability in 2008 due, in part, to lower returns on pension assets, partially offset by higher pension contributions. The change in the accumulated other comprehensive loss reflected the $121.2 million non-cash adjustment related to the increase in the unfunded pension liability in 2008 and higher foreign currency translation adjustments.

Investing Activities

 

Net cash used in investing activities included capital expenditures as presented below:

 

Capital Expenditures

 

 

During 2009 we plan to invest approximately $45.0 million in capital expenditures, principally to upgrade capital equipment, reduce manufacturing costs and introduce new products. Commitments at December 28, 2008 for capital expenditures were approximately $4.8 million.

 

Investing activities used cash for acquisitions of $285.1 million, $48.1 million and $252.0 million, in fiscal 2008, 2007 and 2006, respectively (see “Recent Acquisitions” table). We received $0.4 million, $0.8 million and $0.7 million, in 2008, 2007 and 2006, respectively, from the sale of assets.

 

Teledyne funded the acquisitions primarily from borrowings under its credit facility and cash on hand.

 

In all acquisitions, the results of operations and cash flows are included in the Company’s consolidated financial statements from the date of each respective acquisition. Each of the companies acquired, except for CollaborX, is part of the Electronics and Communications segment. CollaborX is part of the Engineered Systems segment. During 2008, the Company completed the process of specifically identifying the amount to be assigned to intangible assets, as well as certain assets and liabilities for the Storm, Impulse, Judson and TSS International acquisitions. The Company is in the process of specifically identifying the amount to be assigned to intangible assets, as well as certain assets and liabilities for the Webb, Filtronic, Cormon, Odom and Demo acquisitions made in fiscal 2008. The Company made preliminary estimates as of December 28, 2008, since there was insufficient time between the acquisition dates and the end of the period to finalize the valuations.

 

The following table shows the purchase price, goodwill acquired and intangible assets acquired for the acquisitions made in fiscal 2008 (in millions):

 

 

 

Except for the Storm and Demo acquisitions, goodwill resulting from the acquisitions made in fiscal 2008 will be deductible for tax purposes.

 

The following is a summary at the acquisition date of the estimated fair values of the assets acquired and liabilities assumed for the acquisitions made in fiscal 2008 (in millions):