News Column

TELEDYNE TECHNOLOGIES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

July 31, 2014

Teledyne Technologies Incorporated provides enabling technologies for industrial growth markets. We have evolved from a company that was primarily focused on aerospace and defense to one that serves multiple markets that require advanced technology and high reliability. These markets include deepwater oil and gas exploration and production, oceanographic research, air and water quality environmental monitoring, factory automation and medical imaging. Our products include monitoring instrumentation for marine and environmental applications, harsh environment interconnects, electronic test and measurement equipment, digital imaging sensors and cameras, aircraft information management systems, and defense electronic and satellite communication subsystems. We also supply engineered systems for defense, space, environmental and energy applications. We differentiate ourselves from many of our direct competitors by having a customer and company sponsored applied research center that augments our product development expertise. Strategy/Overview Our strategy continues to emphasize growth in our core markets of instrumentation, digital imaging, aerospace and defense electronics and 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 and through product development. We aggressively pursue operational excellence to continually improve our margins and earnings. Operational excellence includes the rapid integration of the businesses we acquire. Using complementary technology across our businesses and internal research and development, we seek to create new products to grow our company and expand our addressable markets. We continue to evaluate our businesses to ensure that they are aligned with our strategy. Our second quarter 2014 sales were $597.1 million, compared with sales of $601.0 million for the same period of 2013, a decrease of 0.6%. Net income attributable to Teledyne was $56.1 million ($1.47 per diluted share) for the second quarter of 2014, compared with $42.9 million ($1.13 per diluted share) for the second quarter of 2013, an increase of 30.8%. Our Recent Acquisitions On March 31, 2014, a subsidiary of Teledyne acquired Photon Machines, Inc. ("Photon") for an initial payment of $3.3 million. Teledyne expects to pay an additional $0.7 million in equal installments over the next three years. In October 2013, a subsidiary of Teledyne acquired C.D. Limited ("CDL") for $21.8 million in cash, net of cash acquired. In August 2013, a subsidiary of Teledyne acquired the assets of SD Acquisition, Inc. d/b/a CETAC Technologies ("CETAC") for $26.4 million. Teledyne paid a $0.4 million purchase price adjustment in the fourth quarter. In July 2013, a subsidiary of Teledyne purchased the remaining 49% interest in Nova Research, Inc. ("Nova Sensors") that it did not already own for $4.9 million. In May 2013, a subsidiary of Teledyne acquired Axiom IC B.V. ("Axiom") for an initial payment of $4.0 million, net of cash acquired, with an additional $1.3 million expected to be paid in equal installments over three years. The first of the three installments was made in May 2014. In March 2013, a subsidiary of Teledyne acquired all the outstanding shares of RESON A/S ("RESON") for $69.7 million, net of cash acquired. CDL, CETAC and RESON are part of the Instrumentation segment and Nova Sensors and Axiom are part of the Digital Imaging segment. Teledyne funded the purchases from borrowings under its credit facility and cash on hand. The results of these acquisitions have been included in Teledyne's results since the dates of the respective acquisitions. For a further description of the Company's acquisition activity for the fiscal year ended December 29, 2013, please refer to Note 3 of our 2013 Form 10-K ("2013 Form 10-K"). 18



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Table of Contents Results of Operations Second Quarter Six Months (in millions) 2014 2013 2014 2013 Net Sales $ 597.1$ 601.0$ 1,170.6$ 1,170.4 Costs and expenses Cost of sales 368.4 383.6 720.1 749.0 Selling, general and administrative expenses 154.4 152.5 310.2 297.6 Total costs and expenses 522.8 536.1 1,030.3 1,046.6 Operating income 74.3 64.9 140.3 123.8 Other income/(expense), net 8.2 - 8.8 (0.5 ) Interest and debt expense, net (4.6 ) (5.1 ) (9.3 ) (10.5 ) Income before income taxes 77.9 59.8 139.8 112.8 Provision for income taxes 22.1 16.5 38.0 29.7 Net income 55.8 43.3 101.8 83.1 Noncontrolling interest 0.3 (0.4 ) 0.1 0.2



Net income attributable to Teledyne$ 56.1$ 42.9$ 101.9$ 83.3

Second quarter of 2014 compared with the second quarter of 2013 Our second quarter 2014 sales were $597.1 million, compared with sales of $601.0 million for the second quarter of 2013, a decrease of 0.6%. Net income attributable to Teledyne was $56.1 million ($1.47 per diluted share) for the second quarter of 2014, compared with $42.9 million ($1.13 per diluted share) for the second quarter of 2013, an increase of 30.8%. The second quarter of 2014, compared with the second quarter of 2013, reflected higher sales in the Instrumentation segment, offset by lower sales in the Aerospace and Defense Electronics, Digital Imaging and the Engineered Systems segments. Second quarter 2014 sales included the impact of acquisitions, as well as higher organic sales in the Instrumentation segment. Incremental revenue in the second quarter of 2014 from recent acquisitions was $10.7 million. The second quarter of 2014, compared with the second quarter of 2013, reflected higher operating profit in each business segment, despite lower sales in three of the segments. Operating income increased to $74.3 million for the second quarter of 2014, from $64.9 million for the second quarter of 2013, an increase of 14.5%. Operating income reflected lower costs as a result of the cost reduction actions taken in 2013 and the impact of pension income. Operating income in the second quarter of 2014 included $0.6 million in severance and facility consolidation costs, compared with $2.2 million of similar costs in the second quarter of 2013. The incremental operating profit included in the results for the second quarter of 2014 from recent acquisitions was $0.1 million which included $0.4 million in additional intangible asset amortization expense. The second quarter of 2014 included pension income of $0.4 million, compared with pension expense of $4.4 million in the second quarter of 2013. The change to pension income in 2014 from pension expense in 2013, primarily reflected the impact of using a 5.4 percent discount rate to determine the benefit obligation for the domestic plan in 2014 compared with a 4.4 percent discount rate used in 2013. Pension expense allocated to contracts pursuant to U.S. Government Cost Accounting Standards ("CAS") was $3.4 million in the second quarter of 2014, compared with $3.6 million in the second quarter of 2013. Pension expense determined allowable under CAS can generally be recovered through the pricing of products and services sold to the U.S. Government. In the second quarter of 2014 and 2013, we recorded a total of $3.6 million and $2.8 million, respectively, in stock option compensation expense. Employee stock option grants are expensed evenly over the three year vesting period. 19



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The table below presents sales and cost of sales by segment and total company: Second Quarter (Dollars in millions) 2014 2013 Instrumentation Sales $ 276.6$ 257.7 Cost of sales $ 155.1$ 142.7 Cost of sales % of sales 56.1 % 55.4 % Digital Imaging Sales $ 103.7$ 104.3 Cost of sales $ 64.2$ 64.6 Cost of sales % of sales 61.9 % 61.9 % Aerospace and Defense Electronics Sales $ 152.2$ 169.5 Cost of Sales $ 96.6$ 118.2 Cost of sales % of sales 63.5 % 69.7 % Engineered Systems Sales $ 64.6$ 69.5 Costs of sales $ 52.5$ 58.1 Cost of sales % of sales 81.3 % 83.6 % Total Company Sales $ 597.1$ 601.0 Costs of sales $ 368.4$ 383.6 Cost of sales % of sales 61.7 % 63.8 % Cost of sales decreased by $15.2 million in the second quarter of 2014, compared with the second quarter of 2013, which primarily reflected lower costs as a result of the cost reduction actions taken in 2013 and pension income in 2014 compared with pension expense in 2013. Cost of sales as a percentage of sales for the second quarter of 2014 decreased to 61.7% from 63.8% in the second quarter of 2013 and reflected lower costs as a result of the cost reduction actions taken in 2013 and also reflected pension income in 2014 compared with pension expense in 2013. Certain contracts are accounted for under the percentage of completion ("POC") method and related contract cost and revenue estimates for significant contracts are generally reviewed and reassessed quarterly. The aggregate effects of these changes in estimates on contracts accounted for under the POC accounting method, in the second quarter of 2014 and 2013, were $5.8 million and $4.1 million of favorable operating income and $5.7 million and $5.1 million of unfavorable operating income, respectively. Selling, general and administrative expenses, including research and development and bid and proposal expense, increased by $1.9 million in the second quarter of 2014, compared with the second quarter of 2013, and primarily included higher research and development expenses. Selling, general and administrative expenses for the second quarter of 2014, as a percentage of sales, increased slightly to 25.9%, compared with 25.4% in the second quarter of 2013 and primarily reflected the impact of higher research and development expenses. Corporate expense was $10.9 million for the second quarter of 2014, compared with $10.4 million for the second quarter of 2013 and primarily reflected higher compensation expense. Interest expense, net of interest income, was $4.6 million for the second quarter of 2014, compared with $5.1 million for the second quarter of 2013. The decrease in interest expense primarily reflected the impact of lower outstanding debt levels. Other income and expense was income of $8.2 million for the second quarter of 2014, compared with income of less than $0.1 million for the second quarter of 2013. The 2014 amount included a net gain on legal settlements of $8.6 million. The income tax provision is calculated using an estimated annual effective tax rate, based upon estimates of annual income, permanent items, statutory tax rates and planned tax strategies in the various jurisdictions in which we operate except that certain loss jurisdictions and discrete items, such as the resolution of uncertain tax positions, are treated separately. The Company's effective income tax rate for the second quarter of 2014 was 28.3% compared with 27.6% for the second quarter of 2013. 20



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The second quarter of 2014 reflected net tax expense for discrete items of $0.2 million. Excluding the net discrete tax expense, the effective tax rate would have been 28.1% for the second quarter of 2014. The second quarter of 2013 reflected $0.9 million in net discrete tax benefits primarily related to an expiration of the statute of limitations. Excluding the net discrete tax benefits the effective tax rate would have been 29.1% for the second quarter of 2013. The Company's effective tax rate for 2014 is expected to be 28.7%, based on the projected mix of earnings before tax by jurisdiction, excluding the impact of any matters that would be treated as discrete. The decrease in the effective tax rates, excluding discrete items, primarily reflected a change in the proportion of domestic and foreign income. First six months of 2014 compared with the first six months of 2013 Teledyne's first six months of 2014 sales increased slightly to $1,170.6 million, compared with sales of $1,170.4 million for the same period of 2013. Net income attributable to Teledyne was $101.9 million ($2.67 per diluted share) for the first six months of 2014, compared with $83.3 million ($2.20 per diluted share) for the first six months of 2013, an increase of 22.3%. The first six months of 2014, compared with the same period in 2013, reflected higher sales in the Instrumentation segment, mostly offset by lower sales in the Aerospace and Defense Electronics, Digital Imaging and the Engineered Systems segments. Incremental revenue in the first six months of 2014 from recent acquisitions was $30.1 million. Operating profit increased to $140.3 million for the first six months of 2014, from $123.8 million for the same period of 2013, and reflected improved results in each business segment, despite lower sales in three business segments. Operating profit reflected lower costs as a result of the cost reduction actions taken in 2013 and the impact of pension income. Operating income in the first six months of 2014 included $0.8 million in severance and facility consolidation costs, compared with $4.4 million of similar costs in the first six month of 2013. The incremental operating profit included in the results for the first six months of 2014 from recent acquisitions was $0.6 million which included $0.8 million in additional intangible asset amortization. The first six months of 2014 included pension income of $0.7 million, compared with pension expense of $8.7 million in the first six months of 2013. Pension expense allocated to contracts pursuant to CAS was $6.9 million in the first six months of 2014, compared with $7.2 million in the first six months of 2013. The change to pension income in 2014 from pension expense in 2013 primarily reflected the impact of using a 5.4 percent discount rate to determine the benefit obligation for the domestic plan in 2014 compared with a 4.4 percent discount rate used in 2013. In the first six months of 2014 and 2013, we recorded a total of $6.2 million and $4.6 million, respectively, in stock option compensation expense. The table below presents sales and cost of sales by segment and total company: Six Months (Dollars in millions) 2014 2013 Instrumentation Sales $ 535.5$ 490.4 Cost of sales $ 299.7$ 269.1 Cost of sales % of sales 55.9 % 54.9 % Digital Imaging Sales $ 205.6$ 206.7 Cost of sales $ 127.7$ 131.7 Cost of sales % of sales 62.1 % 63.7 % Aerospace and Defense Electronics Sales $ 305.5$ 332.6 Cost of Sales $ 192.2$ 230.9 Cost of sales % of sales 62.9 % 69.4 % Engineered Systems Sales $ 124.0$ 140.7 Costs of sales $ 100.5$ 117.3 Cost of sales % of sales 81.1 % 83.4 % Total Company Sales $ 1,170.6$ 1,170.4 Costs of sales $ 720.1$ 749.0 Cost of sales % of sales 61.5 % 64.0 % 21



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Cost of sales decreased by $28.9 million in the first six months of 2014, compared with the first six months of 2013, which primarily reflected lower costs as a result of the cost reduction actions taken in 2013 and the impact of pension income. Cost of sales as a percentage of sales for the first six months of 2014, was 61.5%, compared with 64.0% for the first six months of 2013 and reflected lower costs as a result of the cost reduction actions taken in 2013, the impact of pension income and product mix differences. The aggregate effects of changes in estimates on contracts accounted for under the POC accounting method, in the first six months of 2014 and 2013 were $11.3 million and $9.2 million of favorable operating income and $12.8 million and $11.2 million of unfavorable operating income, respectively. Selling, general and administrative expenses, including research and development and bid and proposal expense, in total dollars were higher by $12.6 million in the first six months of 2014, compared with the first six months of 2013, and primarily included higher research and development expenses. Selling, general and administrative expenses for the first six months of 2014, as a percentage of sales, increased to 26.5%, compared with 25.4% in the first six months of 2013 and primarily reflected the impact of higher research and development expenses. Corporate expense was $22.0 million for the first six months of 2014, compared with $19.9 million for the first six months of 2013, and reflected higher compensation expense. Interest expense, net of interest income, was $9.3 million in the first six months of 2014, compared with $10.5 million for the first six months of 2013. The decrease in interest expense primarily reflected the impact of lower outstanding debt levels. Other income and expense was income of $8.8 million for the first six months of 2014, compared with expense of $0.5 million for the first six months of 2013. The 2014 amount included a net gain on legal settlements of $8.6 million. The Company's effective income tax rate for the first six months of 2014 was 27.2%, compared with 26.3% for the first six months of 2013. The first six months of 2014 included net tax benefits for discrete items of $2.1 million compared with net tax benefits for discrete items of $3.6 million for the first six months of 2013. The net tax benefits in 2014 included the remeasurement of uncertain tax positions due to a favorable resolution of a tax matter. The net tax benefits in 2013 primarily related to the retroactive reinstatement of certain tax benefits and credits from the enactment of the American Taxpayer Relief Act of 2012 signed into law on January 2, 2013. Excluding net tax benefits in both periods, the effective tax rates would have been 28.7% for the first six months of 2014 and 29.5% for the first six months of 2013. The decrease in the effective tax rates, excluding discrete items, primarily reflected a change in the proportion of domestic and foreign income. Segment Results The following table sets forth the sales and operating profit for each segment (dollars in millions): Second Quarter % Six Months % 2014 2013 Change 2014 2013 Change Net sales: Instrumentation $ 276.6$ 257.7 7.3 % $ 535.5$ 490.4 9.2 % Digital Imaging 103.7 104.3 (0.6 )% 205.6 206.7 (0.5 )% Aerospace and Defense Electronics 152.2 169.5 (10.2 )% 305.5 332.6 (8.1 )% Engineered Systems 64.6 69.5 (7.1 )% 124.0 140.7 (11.9 )% Total net sales $ 597.1$ 601.0 (0.6 )% $ 1,170.6$ 1,170.4 - % Segment operating profit: Instrumentation $ 43.8$ 41.1 6.6 % $ 81.3$ 77.7 4.6 % Digital Imaging 11.7 7.9 48.1 % 21.4 13.1 63.4 % Aerospace and Defense Electronics 22.9 20.6 11.2 % 46.7 40.8 14.5 % Engineered Systems 6.8 5.7 19.3 % 12.9 12.1 6.6 % Segment operating profit 85.2 75.3 13.1 % 162.3 143.7 12.9 % Corporate expense (10.9 ) (10.4 ) 4.8 % (22.0 ) (19.9 ) 10.6 % Operating income 74.3 64.9 14.5 % 140.3 123.8 13.3 % Other income/(expense), net 8.2 - * 8.8 (0.5 ) * Interest expense, net (4.6 ) (5.1 ) (9.8 )% (9.3 ) (10.5 ) (11.4 )% Income before income taxes 77.9 59.8 30.3 % 139.8 112.8 23.9 % Provision for income taxes 22.1 16.5 33.9 % 38.0 29.7 27.9 % Net income 55.8 43.3 28.9 % 101.8 83.1 22.5 % Noncontrolling interest 0.3 (0.4 ) * 0.1 0.2 (50.0 )% Net income attributable to Teledyne $ 56.1$ 42.9 30.8 % $ 101.9$ 83.3 22.3 % * not meaningful 22



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Table of Contents Instrumentation Second Quarter Six Months (Dollars in millions) 2014 2013 2014 2013 Sales $ 276.6$ 257.7$ 535.5$ 490.4 Cost of sales $ 155.1$ 142.7$ 299.7$ 269.1 Selling, general and administrative expenses $ 77.7$ 73.9$ 154.5$ 143.6 Operating profit $ 43.8$ 41.1$ 81.3$ 77.7 Cost of sales % of sales 56.1 % 55.4 % 55.9 % 54.9 % Selling, general and administrative expenses % of sales 28.1 % 28.7 % 28.9 % 29.3 % Operating profit % of sales 15.8 % 15.9 % 15.2 % 15.8 % Second quarter of 2014 compared with the second quarter of 2013 The Instrumentation segment's second quarter 2014 sales were $276.6 million, compared with $257.7 million in the second quarter of 2013, an increase of 7.3%. Second quarter 2014 operating profit was $43.8 million, compared with operating profit of $41.1 million in the second quarter of 2013, an increase of 6.6%. The second quarter 2014 sales increase resulted from higher sales in the marine instrumentation and environmental instrumentation product lines, partially offset by lower sales of electronic test and measurement instrumentation. The higher sales of $14.5 million for marine instrumentation primarily reflected increased sales of interconnect systems used in offshore energy production, and also included $3.6 million in sales from the acquisition of C.D. Limited. Sales for environmental instrumentation increased $6.4 million and included $7.1 million in sales from recent acquisitions. Sales of electronic test and measurement instrumentation decreased $2.0 million. The increase in operating profit reflected the impact of higher sales and a $0.7 million bad debt recovery. The incremental operating profit included in the results for the second quarter of 2014 from recent acquisitions was breakeven, which included $0.4 million in additional intangible asset amortization expense. Second quarter 2014 cost of sales increased by $12.4 million, compared with the second quarter of 2013, and primarily reflected the impact of higher sales. The increase in the cost of sales percentage to 56.1% from 55.4% reflected the impact of product mix differences. Second quarter 2014 selling, general and administrative expenses, including research and development and bid and proposal expense, increased by $3.8 million, compared with the second quarter of 2013, and primarily reflected the impact of higher sales. The selling, general and administrative expense percentage decreased slightly to 28.1% in the second quarter of 2014 from 28.7% in the second quarter of 2013. First six months of 2014 compared with the first six months of 2013 The Instrumentation segment's first six months of 2014 sales were $535.5 million, compared with $490.4 million for the first six months of 2013, an increase of 9.2%. First six months of 2014 operating profit was $81.3 million, compared with operating profit of $77.7 million for the first six months of 2013, an increase of 4.6%. The first six months of 2014 sales increased $45.1 million, which resulted from higher sales in the marine instrumentation and environmental instrumentation product lines. The higher sales of $38.0 million for marine instrumentation reflected increased sales of marine acoustic sensors and systems, as well as interconnect systems used in offshore energy production, and also included a total of $16.2 million in incremental revenue from recent acquisitions. Sales for environmental instrumentation increased $7.6 million and included $13.6 million from recent acquisitions. Sales for electronic test and measurement instrumentation decreased by $0.5 million. The increase in operating profit reflected the impact of higher sales, partially offset by $0.6 million in higher intangible asset amortization. The incremental operating profit included in the results for the first six months of 2014 from recent acquisitions was $0.9 million, which included $0.8 million in additional intangible asset amortization. The first six months of 2014 cost of sales increased by $30.6 million, compared with the first six months of 2013, and reflected the impact of higher sales and product mix differences. The increase in the cost of sales percentage primarily reflected product mix differences. The first six months of 2014, selling, general and administrative expenses, including research and development and bid and proposal expense, increased by $10.9 million, compared with the first six months of 2013, and primarily reflected the impact of higher sales. The selling, general and administrative expense percentage decreased slightly to 28.9 percent in the first six months of 2014 from 29.3 percent in the first six months of 2013. 23



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Table of Contents Digital Imaging Second Quarter Six Months (Dollars in millions) 2014 2013 2014 2013 Sales $ 103.7$ 104.3$ 205.6$ 206.7 Cost of sales $ 64.2$ 64.6$ 127.7$ 131.7 Selling, general and administrative expenses $ 27.8$ 31.8$ 56.5$ 61.9 Operating profit $ 11.7$ 7.9$ 21.4$ 13.1 Cost of sales % of sales 61.9 % 61.9 % 62.1 % 63.7 % Selling, general and administrative expenses % of sales 26.8 % 30.5 % 27.5 % 30.0 % Operating profit % of sales 11.3 % 7.6 % 10.4 % 6.3 % Second quarter of 2014 compared with the second quarter of 2013 The Digital Imaging segment's second quarter 2014 sales were $103.7 million, compared with $104.3 million in the second quarter of 2013, a decrease of 0.6%. Operating profit was $11.7 million for the second quarter of 2014, compared with operating profit of $7.9 million in the second quarter of 2013, an increase of 48.1%. The second quarter 2014 sales primarily reflected increased sales of sensors and cameras for commercial machine vision applications, offset by lower sales of infrared imaging sensors for government applications. Operating profit in 2014 reflected improved margins across most product lines and a greater mix of higher margin commercial sales. Second quarter 2014 cost of sales decreased slightly by $0.4 million, compared with the second quarter of 2013. The cost of sales percentage in 2014 remained at 61.9%. Selling, general and administrative expenses, including research and development and bid and proposal expense, decreased to $27.8 million in 2014, from $31.8 million in 2013 and reflected lower expense in each major category of selling, general and administrative expense. The decrease in the selling, general and administrative expense percentage to 26.8% in the second quarter of 2014 from 30.5% in the second quarter of 2013, reflected the impact of lower expense in each major category of selling, general and administrative expense. First six months of 2014 compared with the first six months of 2013 The Digital Imaging segment's first six months of 2014 sales were $205.6 million, compared with $206.7 million for the first six months of 2013, a slight decrease of 0.5%. Operating profit increased by 63.4% to $21.4 million for the first six months of 2014, compared with operating profit of $13.1 million for the first six months of 2013. The first six months of 2014 sales increase reflected increased sales of sensors and cameras for commercial machine vision applications, offset by lower sales of infrared imaging sensors for government applications. The increase in operating profit reflected improved margins across most product lines. Cost of sales decreased by $4.0 million in the first six months of 2014, compared with the first six months of 2013, and primarily reflected lower costs as a result of cost reduction actions taken in 2013 and a greater mix of higher gross margin commercial sales. The decrease in the cost of sales percentage primarily reflected lower costs as a result of cost reduction actions taken in 2013 and a greater mix of higher gross margin commercial sales. The first six months of 2014, selling, general and administrative expenses, decreased to $56.5 million, compared with $61.9 million in the first six months of 2013, and reflected lower research and development expenses. The decrease in the selling, general and administrative expense percentage to 27.5% in the first six months of 2014 from 30.0% in the first six months of 2013, reflected lower expense in each major category of selling, general and administrative expense. 24



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Aerospace and Defense Electronics

Second Quarter Six Months (Dollars in millions) 2014 2013 2014 2013 Sales $ 152.2$ 169.5$ 305.5$ 332.6 Cost of sales $ 96.6$ 118.2$ 192.2$ 230.9 Selling, general and administrative expenses $ 32.7$ 30.7$ 66.6$ 60.9 Operating profit $ 22.9$ 20.6$ 46.7$ 40.8 Cost of sales % of sales 63.5 % 69.7 % 62.9 % 69.4 % Selling, general and administrative expenses % of sales 21.5 % 18.1 % 21.8 % 18.3 % Operating profit % of sales 15.0 % 12.2 % 15.3 % 12.3 % Second quarter of 2014 compared with the second quarter of 2013 The Aerospace and Defense Electronics segment's second quarter 2014 sales were $152.2 million, compared with $169.5 million in the second quarter of 2013, a decrease of 10.2%. Operating profit was $22.9 million for the second quarter of 2014, compared with operating profit of $20.6 million in the second quarter of 2013, an increase of 11.2%. The second quarter 2014 sales decrease reflected lower sales of $19.7 million from microwave and interconnect systems due to the completion of a program with a foreign government, which impacted the first and second quarters of 2013. Sales for this program were $22.6 million in the second quarter of 2013. The second quarter of 2014 sales also reflected increased sales of $3.6 million from avionics products and electronic relays and lower sales of $1.2 million from electronic manufacturing services products. Operating profit in the second quarter of 2014 reflected pension income of $0.4 million compared with $2.0 million of pension expense, and 2013 included $1.5 million in severance and facility consolidation costs, partially offset by the impact of lower sales. Second quarter 2014 cost of sales decreased by $21.6 million, compared with the second quarter of 2013, and reflected the impact of lower sales as well as lower costs as a result of the cost reduction actions taken in 2013 and also reflected pension income in 2014 compared with pension expense for 2013. Cost of sales as a percentage of sales for the second quarter of 2014 decreased to 63.5% from 69.7% in the second quarter of 2013 and reflected the impact of lower costs as a result of the cost reduction actions taken in 2013 and also reflected pension income in 2014 compared with pension expense for 2013. Selling, general and administrative expenses, including research and development and bid and proposal expense, increased to $32.7 million in the second quarter of 2014, compared with $30.7 million in the second quarter of 2013 and primarily reflected $2.8 million in higher research and development expense. The increase in the selling, general and administrative expense percentage to 21.5% in the second quarter of 2014, compared with 18.1% in the second quarter of 2013 primarily reflected the impact of higher research and development expense. First six months of 2014 compared with the first six months of 2013 The Aerospace and Defense Electronics segment's first six months of 2014 sales were $305.5 million, compared with $332.6 million for the first six months of 2013, a decrease of 8.1%. Operating profit increased to $46.7 million for the first six months of 2014, compared with operating profit of $40.8 million for the first six months of 2013, an increase of 14.5%. The first six months of 2014 sales decrease reflected lower sales of $33.7 million from microwave and interconnect systems due to the completion of a program with a foreign government, which had sales of $44.3 million in the first six months of 2013. The first six months quarter of 2014 sales also reflected increased sales of $9.7 million from avionics products and electronic relays and lower sales of $3.1 million from electronic manufacturing services products. Operating profit in the first six months of 2014 reflected pension income of $0.8 million compared with $4.0 million of pension expense, and 2013 included $3.5 million in severance and facility consolidation costs, partially offset by the impact of lower sales. The first six months of 2014 cost of sales decreased by $38.7 million, compared with the first six months of 2013, and reflected the impact of lower sales as well as lower costs as a result of the cost reduction actions taken in 2013 and also reflected pension income in 2014 compared with pension expense for 2013. Cost of sales as a percentage of sales for the first six months of 2014 decreased to 62.9% from 69.4% in the first six months of 2013 reflected the impact of lower costs as a result of the cost reduction actions taken in 2013 and also reflected pension income in 2014 compared with pension expense in 2013. Selling, general and administrative expenses, including research and development and bid and proposal expense, increased to $66.6 million in the first six months of 2014, compared with $60.9 million for the first six months of 2013 and primarily reflected the impact of higher research and development expense. The increase in the selling, general and administrative expense percentage to 21.8% in the first six months of 2014, compared with 18.3% in the first six months of 2013 reflected the impact of higher research and development expense. 25



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Table of Contents Engineered Systems Second Quarter Six Months (Dollars in millions) 2014 2013 2014 2013 Sales $ 64.6$ 69.5$ 124.0$ 140.7 Cost of sales $ 52.5$ 58.1$ 100.5$ 117.3 Selling, general and administrative expenses $ 5.3$ 5.7$ 10.6$ 11.3 Operating profit $ 6.8$ 5.7$ 12.9$ 12.1 Cost of sales % of sales 81.3 % 83.6 % 81.1 % 83.4 % Selling, general and administrative expenses % of sales 8.2 % 8.2 % 8.5 % 8.0 % Operating profit % of sales 10.5 % 8.2 % 10.4 % 8.6 % Second quarter of 2014 compared with the second quarter of 2013 The Engineered Systems segment's second quarter 2014 sales were $64.6 million, compared with $69.5 million in the second quarter of 2013, a decrease of 7.1%. Operating profit was $6.8 million for the second quarter 2014, compared with operating profit of $5.7 million in the second quarter of 2013, an increase of 19.3%. The second quarter 2014 sales decrease primarily reflected lower sales of engineered products and services of $3.4 million, which primarily reflected lower sales of missile defense systems. Sales of turbine engines decreased $2.0 million while energy systems sales increased by $0.5 million. Operating profit in the second quarter of 2014 reflected pension income of $0.4 million compared with $1.7 million of pension expense partially offset by the impact of lower sales. Second quarter 2014 cost of sales decreased by $5.6 million, compared with the second quarter of 2013, and reflected the impact of lower sales and higher pension income. Cost of sales as a percentage of sales for the second quarter of 2014 decreased to 81.3% from 83.6% in the second quarter of 2013 and reflected the impact of pension income in 2014, compared with pension expense in 2013. Selling, general and administrative expenses, including research and development and bid and proposal expense, decreased to $5.3 million for the second quarter of 2014, compared with $5.7 million for the second quarter of 2013, and primarily reflected the impact of lower sales. The selling, general and administrative expense percentage remained at 8.2%. First six months of 2014 compared with the first six months of 2013 The Engineered Systems segment's first six months of 2014 sales were $124.0 million, compared with $140.7 million for the first six months of 2013, a decrease of 11.9%. Operating profit was $12.9 million for the first six months of 2014, compared with operating profit of $12.1 million for the first six months of 2013, an increase of 6.6%. The first six months of 2014 sales decreased $16.7 million, which reflected lower sales of $14.4 million from engineered products and services, lower turbine engines sales of $1.9 million and lower sales of energy systems of $0.4 million. The sales decrease from engineered products and services, primarily reflected lower sales of missile defense systems. The increase in operating profit in the first six months of 2014 reflected the impact of pension income of $0.8 million compared with $3.4 million of pension expense in the first six months of 2013, partially offset by lower sales. The first six months of 2014 cost of sales decreased by $16.8 million, compared with the first six months of 2013, and reflected the impact of lower sales and higher pension income. Cost of sales as a percentage of sales for the first six months of 2014 decreased to 81.1%, compared with 83.4% in the first six months of 2013 and reflected the impact of pension income in 2014 compared with pension expense in 2013. Selling, general and administrative expenses, including research and development and bid and proposal expense, decreased to $10.6 million for the first six months of 2014, compared with $11.3 million for the first six months of 2013, and reflected the impact of lower sales and lower research and development expenses. The increase in the selling, general and administrative expense percentage to 8.5% in the first six months of 2014, compared with 8.0% in the first six months of 2013, primarily reflected the impact of lower sales while selling, general and administrative expense did not decrease in the same proportion. 26



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Financial Condition, Liquidity and Capital Resources Our net cash provided by operating activities was $120.4 million for the first six months of 2014, compared with net cash provided by operating activities of $56.1 million for the first six months of 2013. The higher cash provided by operating activities in the first six months of 2014 reflected the absence of pension contributions in 2014, while in the first six months of 2013 we made a voluntary $83.0 million pre-tax cash contribution to the domestic pension plan, partially offset by higher income tax payments. No cash pension contributions are planned for 2014 for the domestic pension plan. The 2014 amount also reflected the receipt of $10.0 million related to a legal settlement. Our net cash used by investing activities was $23.2 million for the first six months of 2014, compared with net cash used by investing activities of $109.9 million for the first six months of 2013. The 2013 amount includes $73.7 million for acquisitions. Capital expenditures for the first six months of 2014 and 2013 were $20.6 million and $36.3 million, respectively. On March 31, 2014, a subsidiary of Teledyne acquired Photon for an initial payment of $3.3 million. Teledyne expects to pay an additional $0.7 million in equal installments over the next three years. Our goodwill was $1,042.8 million at June 29, 2014 and $1,037.8 million at December 29, 2013. The increase in the balance of goodwill in 2014 resulted from the impact of exchange rate changes and the Photon acquisition. Except for the CETAC acquisition, goodwill resulting from the acquisitions made in fiscal 2014 and 2013 will not be deductible for tax purposes. Teledyne's net acquired intangible assets were $258.4 million at June 29, 2014 and $270.9 million at December 29, 2013. The decrease in the balance of acquired intangible assets in 2014 primarily resulted from amortization, partially offset by acquired intangibles for the Photon acquisition. The Company is in the process of specifically identifying the amounts assigned to certain assets and liabilities, acquired intangible assets and the related impact on goodwill for the Photon acquisition. Financing activities used cash of $59.8 million for the first six months of 2014, compared with cash provided by financing activities of $78.1 million for the first six months of 2013. Financing activities for the first six months of 2014 reflected the net payment of debt of $42.9 million while the first six months of 2013 included net borrowings of $69.9 million. Proceeds from the exercise of stock options were $13.2 million and $7.2 million for the first six months of 2014 and 2013, respectively. In the first six months of 2014, the Company used $35.6 million to repurchase 369,966 shares of its common stock under its stock repurchase program authorized in October 2011. Working capital was $442.6 million at June 29, 2014, compared with $381.0 million at December 29, 2013. The increase in working capital primarily reflected lower accrued payroll liabilities, higher cash balances and higher inventory balances. Our principal cash and capital requirements are to fund working capital needs, capital expenditures, income tax payments, pension contributions, debt service requirements and the stock repurchase program, as well as acquisitions. It is anticipated that operating cash flow, together with available borrowings under the credit facility described below, will be sufficient to meet these requirements over the next twelve months. We may need to raise additional capital to support acquisitions. We currently expect capital expenditures to be approximately $65.0 million in 2014, of which $20.6 million has been spent in the first six months of 2014. Total debt at June 29, 2014 was $509.2 million, which includes $30.0 million outstanding under the $750.0 million credit facility. At June 29, 2014, Teledyne had $15.5 million in outstanding letters of credit. Available borrowing capacity under the $750.0 million credit facility, which is reduced by borrowings and certain outstanding letters of credit, was $705.4 million at June 29, 2014. The credit agreements require the Company to comply with various financial and operating covenants and at June 29, 2014 the Company was in compliance with these covenants. As of June 29, 2014, the Company had a significant amount of margin between required financial covenant ratios and our actual ratios. At June 29, 2014, the required financial ratios and the actual ratios were as follows: $750.0 million Credit Facility expires March 2018 and $200.0 million term loans due through March 2019 Financial Covenants Requirement Actual



Measure

Consolidated Leverage Ratio (Net Debt/EBITDA) No more than (a)

3.25 to 1 1.4 to 1 Consolidated Interest Coverage Ratio No less than 3.0 (EBITDA/Interest) (b) to 1 19.7



to 1

$250.0 million Private Placement Notes due 2015, 2017 and 2020 Financial Covenants Requirement Actual



Measure

Consolidated Leverage Ratio (Net Debt/EBITDA) No more than (a)

3.25 to 1 1.4 to 1 Consolidated Interest Coverage Ratio No less than 3.0 (EBITDA/Interest) (b) to 1 19.7



to 1

a) The Consolidated Leverage Ratio is equal to Net Debt/EBITDA as defined in

our private placement note purchase agreement and our $750.0 million credit

agreement. b) The Consolidated Interest Coverage Ratio is equal to EBITDA/Interest as



defined in our private placement note purchase agreement and our $750.0

million credit agreement. 27



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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. Critical Accounting Policies

Our critical accounting policies are those that are reflective of significant judgments and uncertainties, and may potentially result in materially different results under different assumptions and conditions. Our critical accounting policies are the following: revenue recognition; accounting for pension plans; accounting for business combinations, goodwill and other long-lived assets; and accounting for income taxes. For additional discussion of the application of the other critical accounting policies and other accounting policies, see Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Note 2 of the Notes to Consolidated Financial Statements included in Teledyne's 2013 Form 10-K. InMay 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption, with early application not permitted. The Company is currently in the process of determining its implementation approach and assessing the impact on the consolidated financial statements and footnote disclosures. Safe Harbor Cautionary Statement Regarding Forward-Looking Information From time to time we make, and this report contains, forward looking statements, as defined in the Private Securities Litigation Reform Act of 1995, relating to earnings, growth opportunities, product sales, capital expenditures, pension matters, stock option compensation expense, interest expense, severance, facility consolidation and environmental remediation costs, taxes, and strategic plans. Forward-looking statements are generally accompanied by words such as "estimate", "project", "predict", "believes" or "expect", that convey the uncertainty of future events or outcomes. All statements made in this Management's Discussion and Analysis of Financial Condition and Results of Operations that are not historical in nature should be considered forward-looking. Actual results could differ materially from these forward-looking statements. Many factors could change the anticipated results, including: disruptions in the global economy; changes in demand for products sold to the defense electronics, instrumentation, digital imaging, energy exploration and production, commercial aviation, semiconductor and communications markets; funding, continuation and award of government programs; and cuts to defense spending resulting from future deficit reduction measures, including potential automatic cuts to defense spending that may be triggered by the Budget Control Act of 2011. Increasing fuel costs could negatively affect the markets of our commercial aviation businesses. Lower oil and natural gas prices, as well as instability in the Middle East or other oil producing regions, and new regulations or restrictions relating to energy production, including with respect to hydraulic fracturing, could negatively affect the Company's businesses that supply the oil and gas industry. In addition, financial market fluctuations affect the value of the Company's pension assets. Changes in the policies of U.S. and foreign governments, including economic sanctions, could result, over time, in reductions and realignment in defense or other government spending and further changes in programs in which the company participates. While the company's growth strategy includes possible acquisitions, we cannot provide any assurance as to when, if or on what terms any acquisitions will be made. Acquisitions involve various inherent risks, such as, among others, our ability to integrate acquired businesses, retain customers and achieve identified financial and operating synergies. There are additional risks associated with acquiring, owning and operating businesses internationally, including those arising from U.S. and foreign policy changes and exchange rate fluctuations. While we believe our internal and disclosure 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. Readers are urged to read our periodic reports filed with the Securities and Exchange Commission for a more complete description of our Company, its businesses, its strategies and the various risks that we face. Various risks are identified in Teledyne's 2013 Form 10-K and this Form 10-Q. We assume no duty to publicly update or revise any forward-looking statements, whether as a result of new information or otherwise. 28



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