Teledyne
Annual Report 2004

Plain-text annual report

32765_text 3/18/05 10:37 AM Page 3 T E L E D Y N E T E C H N O L O G I E S I N C O R P O R A T E D 2 0 0 4 A N N U A L R E P O R T 32765_text 3/18/05 10:37 AM Page 4 Markets Served by Teledyne Technologies Approximate Percent of Sales in 2004 1. Defense Electronics 2. Electronic Instruments 17% 18% 3. Other Commercial Electronics 21% 4. Government Engineering Services 26% 5. Aerospace Engines and Components 18% Teledyne Technologies is a leader in defense and regulated commercial niche markets that have significant barriers to entry. 1. Defense Electronics products and services include traveling wave tubes and microwave assemblies for electronic warfare, satellite communication and radar applications; microelectronic modules for a variety of applications including secure communications; high voltage connectors and cable assemblies sold under the Teledyne Reynolds name; ejection seat sequencers; rigid-flex printed circuit boards, and contract manufacturing of military electronic assemblies. 2. We manufacture a range of Electronic Instruments used in environmental analysis and emissions monitoring, industrial process control, petrochemical manufacturing, semiconductor manufacturing, drug discovery and energy exploration and production. Environmental and laboratory instruments include Teledyne Advanced Pollution Instrumentation and Teledyne Monitor Labs air quality monitoring instruments and systems, Teledyne Isco wastewater samplers and flash chromatography equipment, Teledyne Tekmar gas chromatography sample concentrators and total organic carbon analyzers and Teledyne Leeman Labs elemental spectrometers and mercury analyzers. Industrial instruments include geophysical sensors for offshore petrochemical exploration, Teledyne Hastings vacuum gauges and mass flow controllers and Teledyne Analytical Instruments oxygen sensors. 3. Other Commercial Electronics is comprised of specialized avionics, sold under the Teledyne Controls name, which include data acquisition and communication products for air transport and business aircraft. In addition, we also manufacture electronic components, including relays and connectors, for commercial aviation, telecommunications, data storage and semiconductor test markets, and we provide manufacturing services for subassemblies used in medical instruments and in implantable medical devices. 4. Our Government Engineering Services, provided by Teledyne Brown Engineering, Inc., Teledyne Solutions, Inc. and Teledyne Energy Systems, Inc., apply the skills of our extensive staff of engineers and scientists to provide innovative systems engineering, advanced technology, and manufacturing solutions to defense, space, environmental, and homeland security customers. Significant markets include a number of national missile defense programs, microgravity science activities, environmental services related to the destruction of hazardous chemical and biological materiel and power generation systems for defense and space applications. 5. Our Aerospace Engines and Components, represented by Teledyne Continental Motors, Inc., is one of two primary worldwide original equipment producers of piston engines for the general aviation marketplace. We also design, develop and manufacture small turbine engines primarily used in tactical missiles, such as the Joint Air-to-Surface Standoff Missile (JASSM) and Harpoon cruise missiles. 32765_text 3/18/05 10:37 AM Page 5 TELEDYNE TECHNOLOGIES INCORPORATED ANNUAL REPORT 2004 2 0 0 4 H I G H L I G H T S Selected Consolidated Financial Data (In millions, except per-share data) Summary Financial Information Sales Net income Diluted earnings per-share Weighted average diluted common shares outstanding 2 0 0 4 2 0 0 3 2 0 0 2 $1,016.6 $ 840.7 $ 772.7 $ $ 41.7 1.24 $ 29.7 $ 0.91 $ $ 33.7 32.7 25.4 0.77 32.9 Summary Balance Sheet Data 2 0 0 4 2 0 0 3 2 0 0 2 Cash and cash equivalents $ 11.4 $ 37.8 $ 19.0 Working capital Total assets Long-term debt and capital lease obligations 124.4 624.8 74.4 129.5 433.6 102.6 398.9 — — Stockholders’ equity $ 262.1 $ 221.0 $ 176.8 Sales (In millions) Sales by Segment Earnings per Share Free Cash Flow (1) (In millions) Electronics and Communications Systems Engineering Solutions Energy Systems Aerospace Engines and Components (1) Free Cash Flow defined as Cash Flow from Operating Activities less purchases of property, plant and equipment. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Notes to Consolidated Financial Statements” in this 2004 Annual Report on Form 10-K for additional information regarding Teledyne Technologies Incorporated financial data. 1 Page 1 32765_text 3/18/05 10:37 AM Page 6 TELEDYNE TECHNOLOGIES INCORPORATED ANNUAL REPORT 2004 T O O U R S T O C K H O L D E R S Introduction 2004 was a transformational year for Teledyne, one in which we made exceptional progress towards our goal of high quality revenue and earnings growth. Robert Mehrabian Chairman, President and Chief Executive Officer • • • • We closed five acquisitions, including our three largest to date. • Revenues increased 20.9% to just over $1.0 billion compared to $841 million in 2003. Earnings per share increased 36.3% to $1.24 compared to $0.91 in 2003. Total operating margin1 improved by 124 basis points. Cash from operations was a record $84.9 million, and free cash flow of $66.1 million was 159% of net income. Given our strong free cash flow, we ended 2004 with only $66.2 million in net debt, despite spending approximately $177 million for acquisitions. Our balance sheet remains strong, with a debt/capital ratio of 22.8 percent, which provides flexibility for future acquisitions in our strategic businesses. Finally, I’m proud that our strong financial performance rewarded stockholders with an increase in the market value of our stock by 56 percent from year-end 2003 to year-end 2004. Strategy As we grow both organically and through acquisitions, we are working to become a simpler and more integrated operating company. Over time, our goal is to continue on our path of high quality revenue and earnings growth and create a more focused set of businesses that are truly superior in their niches. We do this by executing on two focused fronts; first, by strengthening and expanding specific platforms in our core electronics, instruments and systems engineering businesses through organic growth and targeted acquisitions; and second, by pursuing operational excellence and margin expansion initiatives to continuously improve earnings. In addition, operational excellence to Teledyne means the rapid integration of the businesses we acquire. Growth through Acquisition In last year’s letter to stockholders, I noted our goal to increase both the number and size of acquisitions. In 2004 we made five targeted bolt-on acquisitions, three in defense electronics and two in instruments, and we felt positive in our ability to efficiently integrate the acquired operations. For almost forty years, Teledyne has provided systems engineering and technical assistance to the U.S. Army Space and Missile Defense Command Page 2 1 Operating margin defined as segment operating profit and other segment income less corporate expense, divided by sales. 32765_text 3/18/05 10:37 AM Page 7 Teledyne pioneered the development of tri-band traveling wave tubes that can operate at multiple frequencies, greatly simplifying military satellite communication TELEDYNE TECHNOLOGIES INCORPORATED ANNUAL REPORT 2004 In defense electronics, we built on our already strong position in the defense microwave market by acquiring Filtronic Solid State and the defense assets of Celeritek, Inc., both of which design and manufacture specialized microwave components and subassemblies for electronic warfare, radar and military communication applications. These products not only share design and manufacturing technology with our existing microwave business, but also serve the same customers and military platforms as Teledyne’s industry leading line of high power helix traveling wave tubes. Both of these businesses were located within a few miles of our existing Microwave facility in Mountain View, California, allowing us to combine all of our acquired solid state microwave operations under a single roof. The sharing of administrative and operational resources, combined with the ability of our technical staff members to interact on a daily basis, should contribute significantly to operational efficiency. With the additional product lines and a unified sales force, we are now in a much better position to provide our customers with a wide variety of microwave assemblies that combine multiple functions into a single integrated module. Reynolds Industries, Incorporated, a leading supplier of specialized high voltage connectors and subassemblies, was another key acquisition in defense electronics in 2004. One of Teledyne Reynolds’ most exciting products is the quick-release cable assembly used on the Joint Helmet Mounted Cueing System. Using the cueing system, the pilot of a tactical aircraft such as an F/A-18 or F-16 needs only to point his head at the target and the weapons will be directed to where the pilot is looking. Some pilots have described this advanced targeting system as the single greatest increase in the war fighting ability of the F/A-18, and we are proud to support this program. While Reynolds Industries is new to the Teledyne family, we have known the company for decades as the preferred supplier of high voltage connectors and cables for our traveling wave tubes. Also, its facility is located less than one mile from one of our other defense electronic facilities in Los Angeles. I am also pleased to report that we made significant progress this year in the expansion of our lines of instruments used for ensuring the safety of our environment. Starting with our long-standing expertise in industrial gas monitoring, we began to systematically acquire environmental gas analysis capabilities, first in 2001, with ambient air monitoring, and then in 2002, with continuous emissions monitoring for smokestacks. In 2003, we entered the water quality market by acquiring laboratory instruments capabilities that are used in the detection of organic compounds. Teledyne Microwave designs and produces integrated subsystems used in the modernization of electronic warfare systems Teledyne Reynolds developed proprietary high-voltage connectors and subassemblies for the Joint Helmet Mounted Cueing System, which gives pilots the ability to designate a target simply by looking at it Page 3 Page 3 32765_text 3/18/05 10:37 AM Page 8 TELEDYNE TECHNOLOGIES INCORPORATED ANNUAL REPORT 2004 Teledyne Advanced Pollution Instrumentation provides gas analyzers for a number of hazardous compounds including Sulfur Dioxide, Carbon Monoxide and Ozone (shown) In the first quarter of 2004, we added inorganic analysis to our environmental capabilities by acquiring Leeman Labs, a well-regarded manufacturer of inductively coupled plasma (ICP) optical emission spectrometers that provide accurate detection and precise classification of low levels of contaminants in drinking water, wastewater and soil. The analysis of mercury in the environment is taking on increased importance, and Teledyne Leeman Labs’ Hydra AF instruments can detect mercury at levels as low as 0.05 parts per trillion. Our most recent environmental water quality instrumentation acquisition, and our largest to date, was Isco, Inc., a leading supplier of portable and fixed automated samplers for wastewater monitoring. Teledyne Isco has continually expanded its sampler line as water monitoring requirements have become more demanding. The operation also has a broad line of open channel flow meters that detect leaks in sewer systems and monitor runoff in storm drains. Speeding up the process of bringing new drugs to market is a major focus for pharmaceutical companies worldwide. Teledyne Isco is a market leader in flash chromatography instruments and consumables used by medicinal chemists to purify new chemical entities before they are tested for effectiveness. The Companion® personal purification system, introduced in mid-2003, experienced excellent sales in 2004 and is the most successful new instrument in Teledyne Isco’s history. Not only is this a highly successful new product, but it provides an important foothold for Teledyne in the high growth drug discovery market. I am very pleased with the progress we made in 2004 and believe that these targeted acquisitions have not only helped us become one of the leading suppliers of environmental monitoring instruments, but also strengthened our core industrial process control instrument lines and created new opportunities for Teledyne in the attractive life sciences market. H I G H L I G H T S F R O M O P E R A T I O N S Defense Electronics During 2004 our defense electronics product lines continued to support military platforms ranging from legacy aircraft such as the B-52 Stratofortress to the most modern aircraft such as the F-35 Joint Strike Fighter. Current military operations in Iraq and Afghanistan have driven the demand for spare parts and replenishment orders for traveling wave tubes, microwave modules and electronic assemblies used in the F-15, F-16, B-52, B-1B aircraft and the Cobra helicopter. We successfully Teledyne Tekmar’s gas chromatography introduction systems allow automated testing for organic contaminants in water and wastewater Teledyne Leeman Lab’s Hydra AF analyzers, used to monitor water quality, are capable of detecting mercury at levels of less than 0.05 part per trillion Teledyne Isco’s CombiFlash Companion flash chromatography systems provide easy-to- use automated purification of organic compounds to research chemists involved in drug discovery Page 4 32765_text 3/18/05 10:38 AM Page 9 Teledyne Relays latest high frequency RF relay operates at microwave frequencies up to 10GHz 5 TELEDYNE TECHNOLOGIES INCORPORATED ANNUAL REPORT 2004 completed qualification testing of a military fiber optic transceiver module for the F-35 and began delivery of production flight units in the second half of 2004. In addition, we were awarded major development programs for new traveling wave tubes to be used on systems being developed for international F-16 sales and U.S. Navy F-18’s. In May 2004, we began to occupy an 80,000 square foot addition to our Teledyne MEC facility in Rancho Cordova, California, doubling the floor space to handle the increased demand. Electronic Instruments While our sales of environmental monitoring instruments have grown significantly, we also serve a range of other market applications including industrial process control, petrochemical manufacturing, semiconductor manufacturing, drug discovery and energy exploration and production. In 2004, year-over-year total sales of electronic instruments increased approximately 75%. This was largely due to organic sales growth of over 21%, the 2004 acquisitions of Leeman Labs and Isco, Inc., and the full- year impact of the 2003 acquisition of Tekmar. With continued strong worldwide demand for environmental instrumentation, 2004 was another successful year at Teledyne Advanced Pollution Instrumentation (API). In overseas environmental markets, Teledyne API maintained its leading position in ambient air monitoring applications. Additionally, in 2004, significant orders in a number of ancillary markets, including ozone monitoring, allowed Teledyne API to continue its diversification into non-environmental gas monitoring markets including semiconductor fabrication, water purification and other industrial processes. Strong demand and increased prices for oil and natural gas, along with the introduction of new advanced acoustic sensor arrays, contributed to revenue growth of more than 100% at Teledyne Geophysical Instruments. In addition to significant growth in the energy exploration markets, Teledyne Geophysical Instruments continued to extend its product offerings for defense applications such as harbor security. Teledyne Tekmar continued to improve its business performance throughout its first full year as a Teledyne company. Orders and sales grew over last year, driven by increased international demand, especially in Asia. Sales to Japan were particularly robust as new drinking water regulations created demand for Teledyne Tekmar’s laboratory organic compound analysis systems. Teledyne Controls’ Electronic Flight Bag provides pilots with paperless information access Teledyne Microelectronic Technologies provides electronic packaging of products requiring extreme reliability and miniaturization, such as implantable medical devices 5 Page 5 32765_text 3/18/05 10:38 AM Page 10 TELEDYNE TECHNOLOGIES INCORPORATED ANNUAL REPORT 2004 Teledyne Microwave manufactures microwave and millimeterwave transceivers used in wireless communications infrastructure Teledyne Brown Engineering and Teledyne Solutions develop complex software solutions for government customers, including cyber security software Page 6 Teledyne Brown Engineering has established an alliance with Rheinmetall Defence Electronics to develop state-of-the-art Unmanned Aerial Vehicles (UAVs) solutions for the U.S. Departments of Defense and Homeland Security Other Commercial Electronics Following the integration of Aviation Information Solutions (AIS), acquired in 2003, into our Teledyne Controls avionics business, we were selected by Airbus in 2004 as the sole supplier of their On-board Information Terminal (an Electronic Flight Bag system originally developed by AIS) for the A320 and A330/340 aircraft families. We expect to begin shipments in 2005, and we are excited to be the standard equipment provider of this new product for use on the vast majority of OEM and aftermarket Airbus air transport aircraft. Our facility that produces high reliability military microelectronics also produces microelectronic modules for implantable medical devices. The medical device product line experienced its best growth in years, primarily attributable to a manufacturing agreement with a leading medical device manufacturer whereby Teledyne became a primary supplier of certain electronics for pacemakers and defibrillators. Demand for up-down frequency converters used in point-to-point radios for cellular telephone infrastructure increased significantly in 2004, resulting in a doubling of production rates during the year. A strong wireless infrastructure market also contributed to the significantly improved performance at Teledyne Relays, whose RF relays are designed to provide fail-safe switching in cellular systems. Systems Engineering Solutions Financial performance in 2004 for our Systems Engineering Segment was again very impressive, as sales and operating profit reached record levels. During the year, Teledyne Brown Engineering, Inc. (TBE) continued its long-standing support of several missile defense and space programs, while pursuing a number of new initiatives designed to position the company to meet our nation’s evolving defense and security needs. This Segment is playing a major role in responding to the growing threat of a missile attack on the United States. TBE is providing support for the new systems fielded in 2004, as well as software-based test and evaluation, data analysis, and modeling and simulation for developing systems. Programs where TBE has major involvement include the Ground- based Midcourse Defense (GMD) program, as well as the Missile Defense Agency’s new Targets and Countermeasures program. We are pleased to continue our efforts in support of our nation’s defense against evolving ballistic missile threats. Five years ago, we formed Teledyne Solutions, Inc. within the Systems Engineering Segment specifically to continue our Systems Engineering and Technical Assistance (SETA) tasks for our Department of Defense 32765_text 3/18/05 10:38 AM Page 11 From Skylab to the present International Space Station, Teledyne Brown Engineering has designed, developed, and manufactured complex hardware for space systems TELEDYNE TECHNOLOGIES INCORPORATED ANNUAL REPORT 2004 customers. SETA contracts assist government agencies with highly technical evaluations of strategy, program management and operational performance. During 2004 Teledyne Solutions continued to win additional task orders with existing missile defense clients, and developed new work in information assurance and security, and the fusion of information for emergency responders. After September 11, 2001, the aviation community began to consider access to real-time information about the condition of an aircraft in the event of an in-flight emergency. Teledyne responded to this concern, and the FAA awarded a contract to Teledyne Brown Engineering for the development of the Automated Airborne Flight Alert System. This system, developed in conjunction with Teledyne Controls, enables an aircraft to automatically detect irregular flight conditions and transmit relevant information to the ground over existing communications links. In November 2004 we signed an alliance with Rheinmetall Defence Electronics GmbH to market unmanned aerial vehicles (UAVs) to the U.S. defense market. Rheinmetall is the primary supplier of UAV systems for German forces, and under the agreement TBE would manufacture adaptations of Rheinmetall’s two UAV systems at our facilities in Huntsville, Alabama. Teledyne Technologies’ involvement with environmental safety extends beyond air and water quality instruments and includes direct destruction of hazardous materials for the U.S. military. In 1997, the United States, along with 64 other nations, ratified the Chemical Weapons Convention, which calls for the destruction of all chemical weapons by 2007. As the prime contractor for the U.S. Army’s Non-Stockpile Chemical Materiel Program, TBE plays a pivotal role in the destruction of chemical samples and chemical weapons that are recovered from test sites. TBE’s environmental business grew by almost 60% in 2004. TBE continued to operate the Rapid Response System, a mobile laboratory developed for the on-site destruction of chemical agents. Furthermore, in August of 2004, TBE won a contract with the U.S. Army’s Edgewood Chemical and Biological Center that calls for us to perform Engineering, Development and Technical Management in the areas of Chemical and Biological Defense. This Indefinite Delivery/Indefinite Quantity contract, which has a five-year term and a $100 million ceiling, broadens our work into the biological defense market with the nation’s premier chemical and biological defense research, development and acquisition center. In addition to its software engineering and simulation capabilities, Teledyne Brown Engineering manufactures highly accurate structures for military, space and environmental applications A Teledyne Brown Engineering crew member processes hazardous chemicals in the U.S. Army’s Rapid Response System, a mobile system designed to treat recovered chemical warfare materiel Page 7 Page 7 32765_text 3/18/05 10:38 AM Page 12 TELEDYNE TECHNOLOGIES INCORPORATED ANNUAL REPORT 2004 For seventy-five years, Teledyne Continental Motors has been a recognized world leader in the development of general aviation piston engines Energy Systems Solid execution in both its government and commercial products businesses allowed Teledyne Energy Systems, Inc. to achieve strong gains in revenue and profitability in 2004. We completed the initial design and began construction of an operational prototype of the Multi-Mission Radioisotope Thermoelectric Generator (MMRTG), a power plant to be used on future deep space probes. Like our power plant for Pioneer 10, which lasted over 30 years and has traveled over 8 billion miles, the MMRTG is designed for exceptionally long-life power on several planned spacecraft that will explore the outer reaches of our galaxy. We also started fabrication of an operational prototype of a Proton Exchange Membrane (PEM) fuel cell power system for use in the Second Generation Reusable Launch Vehicle, a concept vehicle designed as a replacement for the Space Shuttle. Teledyne Energy Systems also introduced new commercial products for the alternative energy market in 2004. We broadened our line of fuel cell test stations with the introduction of the MedusaTM LS, which can test fuel cell stacks at power levels up to 10 kilowatts. In addition, Energy Systems launched its largest capacity high-purity hydrogen generator, the TitanTM EC 1000. Applications for our hydrogen generators range from semiconductor fabrication and metals processing to emerging markets such as fuel cell vehicle refueling stations. Aerospace Engines and Components The general aviation industry experienced a recovery in 2004 with OEM shipments of piston engine powered aircraft up 8.2% compared with 2003. Teledyne’s sales of engines for new OEM piston engine aircraft, however, increased almost 30%, due to a growing customer preference for new composite aircraft that are powered by our engines. In addition, despite greater fuel costs and high pilot insurance costs, our aftermarket sales during 2004 also increased compared to 2003. During 2004, operating profit was aided by a $2.5 million payment pursuant to an agreement with Honda Motor Co., Ltd., and in 2005 we expect to receive $5.0 million from similar payments. We continue to work with Honda to explore the development of a new piston aircraft engine primarily targeted at the lower power markets, such as smaller recreational aircraft not currently served by our base business. A mix of both legacy defense programs and new programs resulted in growth in our small turbine engine business. In 2004 we celebrated the production of the 8,000th U.S. Navy Harpoon missile engine. Advanced Teledyne Perry NGX PEM Fuel Cell Stack developed for use in the Second Generation Reusable Launch Vehicle Concept Second Generation Reusable Launch Vehicle Concept Design courtesy of the National Aeronautics and Space Administration Teledyne Energy Systems new Medusa LS fuel cell test station can test fuel cell stacks at power levels up to 10 kilowatts, a common test range for developers of automotive power systems Page 8 32765_text 3/18/05 10:38 AM Page 13 Teledyne Continental Motors’ state-of- the-art Computer Numeric Controlled manufacturing equipment repeatedly produces precise, high quality aircraft engine parts TELEDYNE TELEDYNE TECHNOLOGIES TECHNOLOGIES INCORPORATED INCORPORATED ANNUAL REPORT ANNUAL REPORT 2004 2004 Furthermore, production of the JASSM missile engine reached 167 units in 2004, and we expect to ship over 300 units in 2005 as full rate production of the missile begins. In 2004 our turbine engine business unit won three contracts, including a contract from Redstone Arsenal related to the U.S. Army’s Future Combat System, for the development of new or derivative turbine engines for UAVs and other future aircraft. In concert with the University of Toledo and the NASA Glenn Research Center, we also announced the formation of the Small Turbine Institute to explore engineering and manufacturing technologies as well as potential applications for the company’s advanced small turbine engines. Closing Finally, I would like to thank those people who made our success possible. Our strong performance in 2004 was the direct result of our employees’ extraordinary efforts. We also worked diligently and invested a considerable amount to implement the processes required under Section 404 of the Sarbanes-Oxley Act. Furthermore, the guidance from our Board of Directors, again, proved invaluable as we executed our growth strategy. In 2004 we welcomed Simon Lorne to our Board of Directors. Sy’s experience as General Counsel with the Securities and Exchange Commission, as well as his extensive background in corporate governance, will further assist us in navigating today’s increasingly complex legal and regulatory environment. As we look ahead, our focus and our strategy remain the same. We hope to build on the momentum in high quality revenue and earnings growth achieved in 2004 by continuing to drive operational excellence and margin expansion programs, while we seek, and successfully integrate, acquisitions in defense and regulated commercial markets. Chairman, President and Chief Executive Officer, Teledyne Technologies Incorporated February 22, 2005 Teledyne Continental Motors has produced 8,000 turbine engines for Harpoon, SLAM and SLAM-ER cruise missiles Photo of Standoff Land Attack Missile Expanded Response (SLAM-ER) uploaded on an F/A-18 Hornet courtesy of The Boeing Company Page 3 Page 9 32765_text 3/18/05 10:38 AM Page 14 TELEDYNE TECHNOLOGIES INCORPORATED ANNUAL REPORT 2004 EXECUTIVE MANAGEMENT DIRECTORS ROBERT MEHRABIAN* Chairman, President and Chief Executive Officer JOHN T. KUELBS* Senior Vice President, General Counsel and Secretary DALE A. SCHNITTJER* Vice President and Chief Financial Officer SUSAN L. MAIN* Vice President and Controller ALDO PICHELLI* Senior Vice President and Chief Operating Officer, Electronics and Communications Segment JAMES M. LINK* President, Teledyne Brown Engineering, Inc. BRYAN L. LEWIS President, Teledyne Continental Motors, Inc. RHETT C. ROSS President, Teledyne Energy Systems, Inc. ROBERT W. STEENBERGE Chief Technology Officer IVARS R. BLUKIS Chief Business Risk Assurance Officer ROBYN E. MCGOWAN Vice President of Administration, Human Resources and Assistant Secretary MELANIE S. CIBIK Vice President, Associate General Counsel and Assistant Secretary SHELLEY D. GREEN Treasurer ROBERT L. SCHAEFER Associate General Counsel, Electronics and Communications General Counsel and Assistant Secretary * Section 16 Officer Page 10 ROBERT P. BOZZONE (1)(3) Former Chairman, Allegheny Technologies Incorporated FRANK V. CAHOUET (1)(2) Retired Chairman and Chief Executive Officer, Mellon Financial Corporation DIANE C. CREEL (2)(3) Chairwoman, President and Chief Executive Officer, Ecovation, Inc. CHARLES CROCKER (2)(3) Chairman and Chief Executive Officer, BEI Technologies, Inc. SIMON M. LORNE (1)(2) Vice Chairman and Chief Legal Officer Millennium Partners, L.P. STOCKHOLDER INFORMATION Corporate Offices Teledyne Technologies Incorporated 12333 West Olympic Boulevard Los Angeles, CA 90064-1021 Telephone: (310) 893-1600 Fax: (310) 893-1669 www.teledyne.com Transfer Agent and Registrar Mellon Investor Services LLC P.O. Box 3315 South Hackensack, NJ 07606 (800) 356-2017 Stockholder Publications - Form 10-K Annual reports (including Form 10-K) and proxy statements are mailed to all stockholders of record. Copies of our SEC periodic reports, corporate governance guidelines, code of ethics and committee charters are also available on our web site at www.teledyne.com. For additional information, contact Corporate Communications or Investor Relations. ROBERT MEHRABIAN Chairman, President and Chief Executive Officer, Teledyne Technologies Incorporated PAUL D. MILLER (1)(2) Chairman, Alliant Techsystems, Inc. CHARLES J. QUEENAN, JR.(1)(3) Senior Counsel, Kirkpatrick & Lockhart Nicholson Graham LLP MICHAEL T. SMITH (2)(3) Retired Chairman and Chief Executive Officer, Hughes Electronics Corporation (1) Audit Committee (2) Nominating and Governance Committee (3) Personnel and Compensation Committee Stock Exchange Listing The common stock of Teledyne Technologies Incorporated is traded on the New York Stock Exchange (symbol TDY). Annual Meeting The annual meeting of stockholders will be held on Wednesday, April 27, 2005, at 9:00 a.m., at Teledyne Technologies Incorporated, 12333 West Olympic Boulevard, Los Angeles, CA 90064-1021. Independent Auditors Ernst & Young LLP Los Angeles, California Current News and General Information Information about Teledyne is available at www.teledyne.com. 32765_text 3/18/05 10:38 AM Page 15 TELEDYNE TECHNOLOGIES INCORPORATED F O R M 1 0 - K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Ñscal year ended January 2, 2005 OR n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission Ñle number: 1-15295 Teledyne Technologies Incorporated (Exact name of registrant as speciÑed in its charter) Delaware (State or other jurisdiction of incorporation or organization) 25-1843385 (I.R.S. Employer IdentiÑcation Number) 12333 West Olympic Boulevard Los Angeles, California 90064-1021 (Address of principal executive oÇces) (Zip Code) Registrant's telephone number, including area code: (310) 893-1600 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, par value $.01 per share Preferred Share Purchase Rights Name of each exchange on which registered New York Stock Exchange New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has Ñled all reports required to be Ñled 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 Ñle such reports), and (2) has been subject to such Ñling requirements for the past 90 days. Yes ¥ No n Indicate by check mark if disclosure of delinquent Ñlers 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 deÑnitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¥ Indicate by check mark whether the registrant is an accelerated Ñler (as deÑned in Rule 12b-2 of the Act). Yes ¥ No n The aggregate market value of the registrant's Common Stock held by non-aÇliates was $618.7 million, based on the closing price of a share of Common Stock on June 25, 2004 ($20.09), which is the last business day of the registrant's most recently completed Ñscal second quarter. Shares of Common Stock known by the registrant to be beneÑcially owned by the registrant's directors and the registrant's executive oÇcers 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 ""aÇliates'' within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934. At February 28, 2005, there were 33,175,623 shares of the registrant's Common Stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Selected portions of the registrant's proxy statement for its 2005 Annual Meeting of Stockholders (the ""2005 Proxy Statement'') are incorporated by reference in Part III of this Report. Information required by paragraphs (a) and (b) of Item 306 of Regulations S-K and by paragraphs (k) and (l) of Item 402 of Regulation S-K is not incorporated by reference in this Form 10-K or in any other Ñling of the registrant. Such information shall not be deemed ""soliciting material'' or to be Ñled with the Commission as permitted by paragraph (c) of Item 306 and paragraph (a)(9) to Item 402 of Regulation S-K. INDEX PART I Item 1. Item 2. Item 3. Item 4. PART II Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Submission of Matters to a Vote of Security Holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuers Purchase of Equity Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 6. Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 7A. Quantitative and Qualitative Disclosure About Market RiskÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 8. Item 9. Financial Statements and Supplementary Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Changes in and Disagreements with Accountants on Accounting and Financial DisclosureÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 9A. Controls and ProceduresÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 9B. Other Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PART III Item 10. Directors and Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 11. Executive Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 12. Security Ownership of Certain BeneÑcial Owners and Management and Related Stockholder Matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 13. Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 14. Principal Accountant Fees and Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PART IV Item 15. Exhibits and Financial Statement Schedules ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ INDEX TO FINANCIAL STATEMENTS AND RELATED INFORMATION ÏÏÏÏÏÏÏÏÏÏÏ SIGNATURES EXHIBIT INDEX Page Number 1 25 26 26 27 28 29 52 52 52 52 53 53 53 54 54 55 55 56 DeÑned Terms In this Annual Report on Form 10-K, Teledyne Technologies Incorporated is sometimes referred to as the ""Company'' or ""Teledyne''. References to ""ATI'' mean Allegheny Technologies Incorporated, formerly known as Allegheny Teledyne Incorporated, the company from which we were spun-oÅ on November 29, 1999. i Item 1. Business. Who We Are PART I Teledyne Technologies Incorporated is a leading provider of sophisticated electronic components, instruments and communications products, including defense electronics, data acquisition and communica- tions equipment for airlines and business aircraft, monitoring and control instruments for industrial and environmental applications and components, and subsystems for wireless and satellite communications. We also provide systems engineering solutions and information technology services for defense, space and environmental applications, and manufacture general aviation and missile engines and components, as well as on-site gas and power generation systems. We serve niche market segments where performance, precision and reliability are critical. Our customers include major industrial and communications companies, government agencies, aerospace prime contractors and general aviation companies. Total sales in 2004 were $1,016.6 million, compared with $840.7 million and $772.7 million in 2003 and 2002, respectively. Our aggregate segment operating proÑts were $89.2 million, $61.9 million and $57.3 million in 2004, 2003 and 2002, respectively. Approximately 57% of our total sales in 2004 were to commercial customers and the balance was to the U.S. Government, as a prime contractor or subcontractor. Approximately 43% of these U.S. Government sales were attributable to Ñxed price-type contracts and the balance to cost plus fee-type contracts. International sales accounted for approximately 19% of total sales in 2004. Our four business segments and their respective contributions to our total sales in 2004, 2003 and 2002 are summarized in the following table: Segment Percentage of Sales 2003 2002 2004 Electronics and Communications ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Systems Engineering Solutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Aerospace Engines and Components ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Energy SystemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56% 24% 18% 2% 53% 25% 20% 2% 50% 27% 21% 2% 100% 100% 100% Our principal executive oÇces are located at 12333 West Olympic Boulevard, Los Angeles, California 90064-1021. Our telephone number is (310) 893-1600. Strategy As we grow both organically and through acquisitions, we are working to become a simpler and more integrated operating company. Over time, our goal is to continue on our path of high quality revenue and earnings growth and create a more focused set of businesses that are truly superior in their niches. We do this by executing on two focused fronts: Ñrst, by strengthening and expanding speciÑc platforms in our core electronics, instruments and systems engineering businesses through organic growth and targeted acquisitions; and second, by pursuing operational excellence and margin expansion initiatives to continuously improve earnings. In addition, operational excellence to Teledyne means the rapid integration of the businesses we acquire. We continually evaluate our product lines to ensure that they are aligned with our strategy. Our Recent Acquisitions After completing one acquisition in each of 2001 and 2002, and two acquisitions in 2003, we completed Ñve acquisitions during our Ñscal year ended 2004. 1 We furthered our strategy to expand our presence in the environmental instrumentation market. On February 27, 2004, we acquired assets of Hudson, New Hampshire-based Leeman Labs, Inc., a manufacturer of spectrometers used by environmental and quality control laboratories to detect low levels of inorganic contaminants in water and other environmental samples, which products complement the organic analysis instruments of Teledyne Tekmar Company, a Mason, Ohio-based company acquired in 2003. On June 18, 2004, we acquired Isco, Inc., located in Lincoln, Nebraska and a leading producer of water quality monitoring instruments, including samplers, Öow meters and on-line process analyzers, which are complementary to our existing environmental instrumentation product lines. Our acquisitions have also focused on enhancing our defense electronics businesses. On July 2, 2004, we completed the acquisition of Reynolds Industries, Incorporated, a supplier of specialized high voltage connectors and subassemblies for defense, aerospace and industrial applications, with operations in California and the United Kingdom. Reynolds Industries had historically supplied its high voltage connectors and cables to our traveling wave tubes. Two of our 2004 acquisitions furthered our strategy to develop a broader line of microwave products for our defense customers. On December 31, 2003, we acquired assets of the Filtronic Solid State business located in Santa Clara, California. This business, which was subsequently moved over a short time period to our facility in Mountain View, California, designs and manufactures customized microwave subassemblies for electronic warfare, radar and other military applications. Its precision YIG-based oscillators, Ñlters and ampliÑers serve some of the same customers of, and are used on some of the same military programs, as those of our longer-standing Teledyne Wireless and Teledyne Microwave Electronic Components (MEC) business units. On October 22, 2004, we acquired the assets of the defense electronics business of Celeritek, Inc., based in Santa Clara, California. The solid state ampliÑers and microwave subassemblies of this defense electronics business utilize design and manufacturing technology similar to Teledyne Microwave and are complementary with Teledyne MEC's line of high power helix traveling wave tubes used on military, electronic warfare, radar and communications applications. Like the Filtronic Solid State acquisition, to obtain various synergies, the operations of this business have been moved to and consolidated with our facility in Mountain View, California. On January 3, 2005, in an eÅort to streamline operations and reduce costs, the businesses principally operating as Teledyne Microwave, located in Mountain View, California, and Teledyne MEC, located in Rancho Cordova, California, were consolidated into one legal entity, Teledyne Wireless, Inc., a wholly- owned subsidiary of the Company. Teledyne Wireless, Inc. had been the subsidiary that bought the defense electronics assets of each of Filtronic Solid State and Celeritek, Inc. Each of the acquired businesses is part of our Electronics and Communications segment. Their results are included in our consolidated Ñnancial statements since their respective dates of acquisition. Available Information Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K, and any amendments to these reports, are available on our Internet website as soon as reasonably practicable after we electronically Ñle such materials with, or furnish them to, the SEC. In addition, our Corporate Governance Guidelines, our Corporate Objectives and Guidelines for Employee Conduct and the charters of the standing committees of our Board of Directors are available on our website. Our website address is www.teledyne.com. You will be responsible for any costs normally associated with electronic access, such as usage and telephone charges. Alternatively, if you would like a paper copy of any such SEC report (without exhibits) or document, please write to John T. Kuelbs, Senior Vice President, General Counsel and Secretary, Teledyne Technologies Incorporated, 12333 West Olympic Blvd., Los Angeles, California 90064-1021, and a copy of such requested document will be provided to you, free of charge. 2 Our Business Segments Electronics and Communications Our Electronics and Communications segment, sometimes referred to as Teledyne Electronic Technologies, provides a wide range of specialized electronic systems, instruments, components and services that address niche market applications in defense, commercial aerospace, communications, industrial and medical markets. Defense Electronics Traveling Wave Tubes. Our helix traveling wave tubes are used to provide broadband power ampliÑcation of microwave signals. Military applications include radar, electronic warfare and satellite communication. We were the Ñrst company to oÅer multi-band tubes that permit a satellite communication earth station to quickly switch from one satellite system to another without the need for transmitter replacement. Sales of triband traveling wave tubes have increased as the U.S. military adds additional capacity for various satellite communication systems. Commercial applications for traveling wave tubes include electromagnetic compatibility test equipment and satellite communication terminals for mobile newsgathering. Microwave Components and Subsystems. We design, develop, and manufacture microwave compo- nents used in aerospace and defense applications. With the acquisition of the assets of Filtronic Solid State on December 31, 2003, we expanded our microwave products to include customized microwave subassemblies for electronic warfare, radar and other military applications. With the acquisition of the defense electronics business of Celeritek, Inc. on October 22, 2004, we design and manufacture gallium arsenide-based RF and microwave components and subassemblies for electronic warfare, radar and other military applications. High Voltage Connectors and Subassemblies. On July 2, 2004, through the acquisition of Reynolds Industries, Incorporated, we became a supplier of specialized high voltage connectors and subassemblies for defense, aerospace and industrial applications. We also now produce pilot helmet mounted display components and subsystems for the Joint Helmet Cueing System, which is designed to give military pilots the ability to designate a target just by looking at it. Microelectronic Modules. We develop and manufacture custom microelectronic modules that provide both high reliability and extremely dense packaging for military applications. Our microelectronic modules are used for optical communications on the F-22 Raptor and the F-35 Joint Strike Fighter. We also develop custom tamper-resistant microcircuits designed to provide enhanced security in military communication. Rigid-Flex Printed Circuit Boards. Our patented rigid-Öex printed circuit boards permit our customers to assemble reliable high-density electronic modules that are used in a variety of military and commercial aerospace applications. Our VME-FlexTM products have been designed into two major defense programs. Sequencers. Teledyne Electronic Safety Products continues to provide microprocessor-controlled aircraft ejection seat sequencers and related support elements to military aircraft programs, including the F/A-18E/F and F/A-22. We are currently developing a new sequencer in support of the F-35 Joint Strike Fighter program. Relays and Switches. Teledyne Relays supplies electromechanical relays, solid-state power relays and coaxial switching devices to military and aerospace markets. Electronics Manufacturing Services. We serve the market for high-mix, low-volume manufacturing of sophisticated military electronics equipment principally from our facility in Tennessee. 3 Electronic Instruments During 2001, we formed Teledyne Instruments, a group of business units drawn from our Electronics and Communications segment and our Systems Engineering Solutions segment, to focus on monitoring and process control instrumentation. Since then, through acquisitions, we have greatly expanded our presence in the environmental instrumentation markets. In addition to environmental monitoring instruments, we also serve a range of other market applications including industrial process control, petrochemical manufacturing, semiconductor manufacturing, drug discovery and energy exploration and production. Environmental Instruments. As a result of our acquisitions, we oÅer a wide range of products for environmental monitoring. Teledyne Advanced Pollution Instrumentation, Inc. manufactures a broad line of instruments for monitoring low levels of gases such as sulfur dioxide, carbon monoxide and ozone. Teledyne Monitor Labs, Inc. supplies environmental monitoring systems for the detection, measurement and reporting of air pollutants. Teledyne Tekmar Company manufactures instruments that automate the preparation and concentration of drinking water and wastewater samples for the analysis of volatile organic compounds in gas chromatographs. It also provides laboratory analytical systems for the detection of total organic carbon. On February 27, 2004, we added inorganic analysis to our environmental capabilities by acquiring the assets of Leeman Labs, Inc. Leeman Lab's inductively coupled plasma laboratory spectrometers are used by environmental and quality control laboratories to detect low levels of inorganic contaminants in water and other environmental samples, and complement Teledyne Tekmar Company's organic analysis instrumentation. Since our acquisition of Isco, Inc. on June 18, 2004, we produce water quality monitoring products such as wastewater samplers and open channel Öow meters. Flow meters detect leaks in sewer systems and monitor run oÅ in storm drains. Teledyne Isco, Inc. also manufactures chromatography instruments and accessory for puriÑcation of organic compounds. Its liquid chromatography customers include pharmaceuti- cal laboratories involved in drug discovery and development. Additionally, Teledyne Isco manufactures chemical separation instruments for industrial and research use. Gas Analysis. Teledyne Analytical Instruments was a pioneer in the development of precision oxygen analyzers and now oÅers a broad range of products with various sensitivities for petrochemical, semiconductor manufacturing and other industrial applications. We also manufacture analyzers for a variety of other gases for such market applications. In 2003, we began selling gas analyzers to a leading supplier of carbon dioxide to the food and beverage market. Vacuum and Flow Measurement. Teledyne Hastings Instruments manufactures a broad line of instruments for precise measurement and control of vacuum and gas Öows. Our instruments are used in such varied applications as semiconductor manufacturing, refrigeration, metallurgy and food processing. Geophysical Instruments. We manufacture geophysical streamer cables, hydrophones and specialty products used in oÅshore hydrocarbon exploration (to locate oil and gas reserves beneath the ocean Öoor). We have been adapting this technology for the military market, where these products can be used to detect submarines, surface ships and torpedoes. Test Services. We manufacture torque sensors and provide technical services for such critical applications as monitoring valves in nuclear power plants. Other Commercial Electronics Aircraft Information Management. Our aircraft information management solutions are designed to increase the safety and eÇciency of airline transportation. Through Teledyne Controls, we are a leading supplier of digital Öight data acquisition and Öight safety systems to civil aviation customers. These systems acquire data for use by the aircraft's Öight data recorder, and record additional data for the airline's operation, such as performance and engine condition monitoring. We have provided these systems to our airline customers for over one-half of Boeing aircraft models in existing airline Öeets. We have been 4 increasingly providing our systems to the Airbus A320 and A330/340 family aircraft, and we estimate that our forward Ñt market share was approximately 60% at the end of 2004. In addition, our Aviation Information Solutions (AIS) business designs and manufactures aerospace data acquisition devices, networking products, and Öight deck and cabin displays. Although our data acquisition, recording and communications products are primarily used on commercial aircraft, we have been pursuing military applications. Teledyne Controls' Optical Quick Access Recorder is used on the U.S. Air Force's C-17 Globemaster III military transport aircraft. Teledyne Controls' communications software has been embedded in aircraft Öight management systems for the C-130 Transport and B-767 Tanker aircraft of the U.S. Air Force. Microelectronic Modules. In addition to military microelectronic modules, we develop and manufacture custom microelectronic modules that provide both high reliability and extremely dense packaging for implantable medical devices, such as pacemakers and deÑbrillators, and commercial communication products. Relays and Switches. In addition to military and aerospace markets, Teledyne Relays supplies electromechanical relays, solid-state power relays and coaxial switching devices to industrial and commercial markets. Applications include microwave and wireless communication infrastructure, RF and general broadband test equipment, test equipment used in semiconductor manufacturing, and industrial and commercial machinery and control equipment. Wireless Transceivers and AmpliÑers. Our line of integrated transceiver modules provides high data rate point-to-point connectivity in cellular telephone infrastructure. We also supply solid-state microwave power ampliÑers used in satellite uplink terminals for corporate networking and to provide two-way internet access via satellite for both consumer and commercial customers. Connectors. We manufacture custom surface mount connectors for applications in computer disk drives and consumer medical electronic devices. Teledyne Interconnect Devices also manufactures high- density land grid array connectors for high-end microprocessors and Digital Micromirror Device sockets. Electronics Equipment and Printed Circuit Card Assembly. We serve the market for high-mix, low- volume manufacturing of electronic products principally through facilities in Tennessee and Mexico. We manufacture, principally for one customer, key subsystems in medical equipment such as magnetic resonance imaging (MRI) and x-ray systems. Systems Engineering Solutions Our Systems Engineering Solutions segment, principally through Teledyne Brown Engineering, Inc., applies the skills of its extensive staÅ of engineers and scientists to provide innovative systems engineering, advanced technology, and manufacturing solutions to defense, space, environmental, and homeland security requirements. Defense Teledyne Brown Engineering is a well-recognized full-service missile defense contractor with over 50 years of experience in missile defense and related systems integration. Our diverse customer base in this Ñeld includes the U.S. Army Aviation and Missile Command (""AMCOM''), the U.S. Army's Space and Missile Defense Command (""SMDC''), the Missile Defense Agency (""MDA'') and Defense Department major prime contractors. Our Technologies Group plays signiÑcant roles in diverse missile defense areas, which range from targets and countermeasures, systems engineering, modeling and simulation, to test and evaluation, as well as other related areas. Our engineering and technological services include systems design, development, integration and testing, with specialization in real-time distributed systems. During 2004, we continued our long-standing support of several missile defense programs, including the Ground-based Midcourse Defense (""GMD'') Program, Missile Defense Systems Exerciser and, as part 5 of the Lockheed Martin team, the Targets and Countermeasures program. This program involves the test and veriÑcation of ballistic missile defense system performance on a large number of major programs, including the Airborne Laser, the Kinetic Energy Interceptor, the Ground-based Midcourse Defense, the Aegis Ballistic Missile Defense, the Patriot Advanced Capability 3, and the Terminal High Altitude Area Defense (""THAAD''). Aerospace We have been active in U.S. space programs for almost 50 years and continue to be a signiÑcant contributor to NASA programs. Our Systems Group plays a key role in the International Space Station (""ISS''), one of the most complex scientiÑc endeavors ever undertaken, and has had roles in the Space Shuttle program. We have provided 24-hour-per-day service for the payload operation cadre for the ISS Payload Operations and Integration Center, located at NASA's Marshall Space Flight Center. We have also manufactured more than 50 Öight-qualiÑed hardware items for use on cargo integration on the ISS. As a subcontractor to Lockheed Martin, we also continued our work on the International Space Station Cargo Mission Contract at the Johnson Space Center in 2004. This six-year contract, which began in 2003, involves providing services related to planning, preparation and execution of cargo missions to the ISS. We have been the prime contractor for the Propellants, Pressurants and Calibration Services Contract at Marshall Space Flight Center since 1971. We furnish management, personnel, equipment and materials to operate and maintain the propellant and pressurant generating systems, storage and distribution systems, including work on the Space Shuttle and ISS, as well as management and operation of the calibration facilities at the Marshall Space Flight Center. Environmental Systems We support the U.S. Government's eÅorts to clean up dangerous materials and waste. Since 1996, we have supported the U.S. Army's Non-Stockpile Chemical Materiel Program and we continue to operate the Rapid Response System, a mobile chemical waste treatment system used to process chemical agents for disposal. These chemical agents had been used in the past to train military personnel in the detection, measurement and decontamination of dangerous chemicals. During 2004, we continued our work on the U.S. Army's Non-Stockpile Chemical Material Program in support of the destruction of binary chemical warfare materiel stored at the Pine BluÅ Arsenal in Arkansas. We also produce canisters for the processing, stabilization and storage of nuclear-waste products. In addition, we use detonation chambers in the disposal of both chemical weapons and conventional munitions. We operate a Department of Energy-certiÑed radiological analysis services laboratory in Knoxville, Tennessee. This laboratory has received certiÑcation from the National Environmental Laboratory Accreditation Program in 13 states, including Utah where the Department of Energy maintains its primary waste depository. With its Nuclear Utilities Procurement Issues Committee certiÑcation, the laboratory can serve commercial utilities. Homeland Security Since the 1950s, we have worked to defend the nation from ballistic missiles, and we are now working to leverage our environmental capabilities into the Homeland Defense market, where expertise in the destruction of small lots of hazardous material may be required. As part of homeland security initiatives, we are supporting the Federal Aviation Administration in the development of an Automated Airborne Flight Alert System. This system, developed in conjunction with Teledyne Controls, is designed to detect Öight irregularities by providing selected aircraft Öight data and situational awareness data to ground agencies over existing communications links. 6 Teledyne Solutions, Inc. Through Teledyne Solutions, Inc., we are a primary Ballistic Missile Defense (""BMD'') systems engineering and technical assistance contractor for the U.S. Army. Teledyne Solutions has responsibility for the Systems Engineering and Technical Assistance Contract (""SETAC'') in support of the U.S. Army Space and Missile Defense Command. We also provide engineering and services support to other major Department of Defense customers including the Missile Defense Agency, the Program Executive OÇce for Missiles and Space, the Defense Threat Reduction Agency, the Mobile Corps of Engineers and the Army Environmental Center. Aerospace Engines and Components Our Aerospace Engines and Components segment focuses on the design, development and manufacture of piston engines, turbine engines, electronic engine controls and aviation batteries. Piston Engines Principally through Teledyne Continental Motors, Inc., we design, develop and manufacture piston engines and ignition systems for major general aviation airframe manufacturers and provide spare parts and engine rebuilding services. We are one of two primary worldwide original equipment producers of piston engines for the general aviation marketplace. Our product lines include engines powering the Raytheon Beech Bonanza and Baron aircraft, the Mooney Aircraft line of advanced single engine aircraft, and the popular New Piper Seneca V twin-engine aircraft. In addition to these long-standing products, our engines power new high-speed composite aircraft, including the Cirrus SR-20 and SR-22, the Diamond C1, and the Lancair Columbia 300, 350 and 400 series. We are also continuing to work with Honda Motor Company to explore the development of a new aircraft piston engine primarily targeted at lower power markets not currently served by our existing business. In addition to the sales of new aircraft engines to aircraft producers, we actively support the aircraft engine aftermarket. Piston aircraft engines are produced with a Ñnite utilization life generally expressed as time between overhauls. Our aftermarket support includes building and rebuilding of complete engines, as well as providing a full complement of spare parts such as cylinders, crankcases, fuel systems, crankshafts, camshafts and ignition products. In addition, through Teledyne Mattituck Services, Inc., located in Long Island, New York, and our Fairhope, Alabama service center, we serve as an aftermarket supplier and piston engine overhauler to the general aviation marketplace. Through Aerosance, Inc., we developed the Ñrst production full authority digital electronic controls for piston aircraft engines. These controls, known as PowerLinkTM FADEC (Full Authority Digital Electronic Control), are designed to automate many functions that currently require manual control, such as fuel Öow and power management. This system also saves fuel as a result of improved engine management. We continue the development of FADEC-equipped engines targeted at the most popular models of four and six cylinder piston aircraft engines in use throughout the world. We continue to believe that these control systems will become standard equipment on selected new aircraft and will be retroÑtted on higher-end, piston engine general aviation aircraft. In addition, our GillTM line of lead acid batteries is widely recognized as the premier power source for general aviation. We are also continuing to develop sealed recombinant batteries for business jet and helicopter applications. Teledyne Battery Products, in conjunction with Teledyne Controls, jointly developed an onboard charging and cockpit display kit that permits existing NiCad battery systems to be replaced with GillTM sealed lead acid batteries. Turbine Engines We design, develop and manufacture small turbine engines primarily used in tactical missiles for military markets. 7 Our J402 engine powers the Harpoon missile system. Derivatives of this engine power the StandoÅ Land Attack Missile and the StandoÅ Land Attack Missile-Expanded Response. Lockheed Martin Corporation selected a derivative of the J402 engine to power the Joint Air-to-Surface StandoÅ Missile (""JASSM''). We are the sole source provider of engines for the baseline JASSM system. In 2004, we shipped 167 JASSM missile engines, and during 2005, we expect to ship approximately 280 engines as full rate production of the missile begins. Our J700 engine provides the turbine power for the Improved Tactical Air Launched Decoy (""ITALD'') built for the U.S. Navy. The ITALD system enhances combat aircraft survivability by both serving as a decoy and identifying enemy radar sources. In 2004, we entered into a contract related to the U.S. Army's Future Combat System for the development of new and derivative turbine engines for unmanned air vehicles, commonly called UAVs, and other future aircraft. Energy Systems Our Energy Systems segment, through Teledyne Energy Systems, Inc., provides hydrogen gas generators and thermoelectric and fuel cell-based power sources. Teledyne Energy Systems, Inc., a majority owned subsidiary of Teledyne, was formed in 2001 by combining Teledyne Brown Engineering's Energy Systems business unit with assets and intellectual properties of Florida-based Energy Partners, Inc. Our energy systems activities include a 50-year history of supplying high reliability energy conversion devices and gas generation products based on thermoelectric and electrochemical processes. We provided the thermoelectric power systems for several successful deep-space missions such as the Viking 1 and Viking 2 Mars Landers and the Pioneer 10 and 11 missions to Jupiter and Saturn. In 2004, in partnership with Boeing and under a ten-year $57 million contract signed in 2003 with the U.S. Department of Energy we completed the initial design and began construction of an operational prototype of the new Multi- Mission Radioisotope Thermoelectric Generator (""MMRTG'') capable of supporting planetary landing and deep space probe missions. If selected for Öight, the Ñrst of two production units could be used to power the Mars Science Lander scheduled to launch in 2009. We also manufacture hydrogen/oxygen gas generators that utilize the principle of electrolysis to convert water into high purity hydrogen gas at useable pressures. Our Teledyne TitanTM gas generators are used worldwide in electrical power generation plants, semiconductor manufacture, optical Ñber production, chemical processing and other industrial processes. We have a line of fuel cell test stations designed to provide a completely integrated system for fuel cell testing for the PEM fuel cell development market. Our Medusa line of fuel cell test systems provides high quality, simple to use automated test stations for fuel cell and fuel cell stack testing up to 10 kilowatts. We continue to focus our PEM fuel cell development eÅorts on high reliability, long endurance power systems for the immediate needs of military and aerospace customers. For example, in 2004 we started fabrication of an operation prototype of a PEM fuel cell power system for use in the Second Generation Reusable Launch Vehicle, a concept vehicle designed as a replacement for the Space Shuttle. Customers We have hundreds of customers in the electronics, communications, aerospace and defense industries. No commercial customer accounted for more than 10% of our total sales during 2004, 2003 or 2002. Approximately 43%, 46%, and 46% of our total sales for 2004, 2003 and 2002, respectively, were derived from contracts with agencies of, and prime contractors to, the U.S. Government. Our principal U.S. Government customer is the U.S. Department of Defense. In 2004, 2003 and 2002, our largest program with the U.S. Government, The Boeing Company Ì Ground-based Midcourse Defense contract, 8 represented 5.4%, 5.8%, and 7.5% of total sales, respectively. Set forth below are sales by our segments to agencies and prime contractors to the U.S. Government for the periods presented: U.S. Government Sales 2004 Electronics and Communications ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $147.3 240.4 Systems Engineering Solutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26.0 Aerospace Engines and Components ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19.4 Energy SystemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total U.S. Government salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $433.1 2003 (in millions) $142.0 210.3 24.7 10.7 $387.7 2002 $115.2 202.4 25.5 9.3 $352.4 Our total backlog of conÑrmed orders was approximately $471.3 million at January 2, 2005, $369.7 million at December 28, 2003, and $324.1 million at December 29, 2002. We expect to fulÑll 96% of such backlog of conÑrmed orders during 2005. Sales and Marketing Our sales and marketing approach varies by segment and by products within our segments. A shared fundamental tenet is the commitment to work closely with our customers to understand their needs, with an aim to secure preferred supplier and longer-term relationships. Our business segments use a combination of internal sales forces, distributors and commissioned sales representatives to market and sell our products and services. During 2004, as part of on-going acquisition integration eÅorts, some of our Teledyne Instruments companies began reviewing and joining internal sales and servicing eÅorts. Products are also advertised in appropriate trade journals and by means of various websites. To promote our products and other capabilities, our personnel regularly participate in relevant trade shows and professional associations. Many of our government contracts are awarded after a competitive bidding process in which we seek to emphasize our ability to provide superior products and technical solutions in addition to competitive pricing. Principally through Teledyne Technologies International Corp., the Company has established branch oÇces in foreign countries to facilitate international sales for various businesses. Competition We believe that technological capabilities and innovation and the ability to invest in the development of new and enhanced products are critical to obtaining and maintaining leadership in our markets and the industries in which we compete generally. Although we have certain advantages that we believe help us compete in our markets eÅectively, 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 Ñnancial, technological and personnel resources than we do. Research and Development Our research and development eÅorts primarily involve engineering and design related to improving product lines and developing new products and technologies in the same or similar Ñelds. We spent a total of $263.3 million, $218.1 million, and $196.8 million on research and development and bid and proposal costs for 2004, 2003, and 2002, respectively. Customer-funded research and development, most of which 9 was attributable to work under contracts with the U.S. Government, represented approximately 88%, 87%, and 87% of total research and development costs for 2004, 2003, and 2002, respectively. In 2004, approximately 71% of the $32.6 million in Company-funded research and development and bid and proposal costs were incurred in our electronics and communications businesses. We expect the level of Company-funded research and development and bid and proposal costs to be approximately $33.0 million in 2005. Intellectual Property While we own and control various intellectual property rights, including patents, trade secrets, conÑdential 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 eÅect on our business, results of operations or Ñnancial condition. In connection with our spin-oÅ in 1999, an aÇliate of ATI granted us an exclusive license to use the ""Teledyne'' name and related logos, symbols and marks in connection with our operations, at an annual fee of $100,000. In November 2004, we exercised our option to purchase all rights and interests in the Teledyne marks for $412,000. Employees Our total current workforce consists of approximately 6,600 employees. The International Union of United Automobile, Aerospace and Agricultural Implement Workers of America represents approximately 300 employees in Mobile, Alabama under a collective bargaining agreement that expires by its terms on February 20, 2007. This union also represents approximately 29 of our employees in Toledo, Ohio under a collective bargaining agreement that expires by its terms on November 8, 2006. In addition, this union represents approximately 35 employees in Abbeville, Alabama under a collective bargaining agreement that has been extended and expires on April 16, 2005. We consider our relations with our employees to be good. 10 Executive Management Teledyne's executive management includes: Name and Title Executive OÇcers: Robert Mehrabian* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chairman, President and Chief Executive OÇcer; Director Age 63 John T. Kuelbs*ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Senior Vice President, General Counsel and Secretary 62 Dale A. Schnittjer* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Vice President and Chief Financial OÇcer 60 Principal Occupations Last 5 Years Dr. Mehrabian is the Chairman, President and Chief Executive OÇcer of Teledyne. He has been the President and Chief Executive OÇcer of Teledyne since its formation in 1999. Dr. Mehrabian became Chairman of the Board of Directors on December 14, 2000. Prior to the spin-oÅ, he was the President and Chief Executive OÇcer of ATI's Aerospace and Electronics segment since July 1999 and had served ATI at various senior executive capacities since July 1997. Before joining ATI, Dr. Mehrabian served as President of Carnegie Mellon University. He is a director of Teledyne, Mellon Financial Corporation and PPG Industries, Inc. Mr. Kuelbs has been the Senior Vice President, General Counsel and Secretary of Teledyne since November 29, 1999, having joined ATI's Aerospace and Electronics segment in October 1999. Mr. Kuelbs was Senior Vice President Ì Acquisition Policy for Raytheon Company from November 1998 to September 1999 and Senior Vice President Ì Legal of Raytheon Systems Company from January 1998 to November 1998. Before Raytheon's acquisition of Hughes Aircraft Company, Mr. Kuelbs spent 17 years at Hughes Aircraft Company where he served as Senior Vice President, General Counsel and Secretary from 1994 to 1998. Mr. Schnittjer has been Vice President and Chief Financial OÇcer of the Company since January 27, 2004. He had served as interim Chief Financial OÇcer since July 7, 2003. Mr. Schnittjer Ñrst became a Vice President on December 19, 2001, and had been the Controller of Teledyne from November 29, 1999 to January 27, 2004. Mr. Schnittjer also served as Acting Chief Financial OÇcer and Treasurer of Teledyne from June 1, 2000 to October 3, 2000. From 1998 to the spin-oÅ, Mr. Schnittjer served as a Ñnancial executive to the Aerospace and Electronics and Industrial Segments of ATI. Prior to that, he was Vice President Ì Finance of Teledyne Wah Chang from 1997 to 1998 and Vice President Ì Finance of Teledyne Specialty Equipment from 1995 to 1997. Mr. Schnittjer has held various senior Ñnancial positions with several of Teledyne's aerospace and electronics companies since 1971. 11 Name and Title Age Principal Occupations Last 5 Years Susan L. Main* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46 Vice President and Controller Segment Management: James M. Link* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 62 President, Teledyne Brown Engineering, Inc. Aldo Pichelli*ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Senior Vice President and Chief Operating OÇcer, Electronics and Communications Segment 53 Bryan L. LewisÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ President, Teledyne Continental Motors, Inc. 55 Rhett Ross ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40 President, Teledyne Energy Systems, Inc. Ms. Main has been Vice President and Controller of the Company since March 2004. Prior to joining the Company, Ms. Main served as Vice President Controller of Water Pik Technologies, Inc. from its spin-oÅ from ATI in November 1999 to March 2004. Prior to that, Ms. Main has held numerous Ñnancial roles with government, industrial and commercial segments of ATI and Teledyne, Inc. Retired Lieutenant General Link has been the President of Teledyne Brown Engineering since July 2001. Prior to that, Mr. Link served as Senior Vice President of Science Applications International Corporation (SAIC) Applied Technology Group in Huntsville, Alabama. Before joining SAIC, Mr. Link had a distinguished 33-year career with the U.S. Army where he last served as Deputy Commanding General of the U.S. Army Materiel Command. Mr. Link is a director of Dewey Electronics Corporation. Mr. Pichelli has been Senior Vice President and Chief Operating OÇcer of Teledyne's Electronics and Communications segment since July 22, 2003. Prior to that, he served as Vice President and General Manager of Teledyne Instruments since its formation in 2001. Mr. Pichelli held various management and Ñnancial positions with several Teledyne companies (including former companies) since 1980, having been the Vice President and General Manager of Teledyne Analytical Instruments from 1997 to 2000 and the General Manager of Teledyne Hastings Instruments from 1996 to 1997. Mr. Lewis has been the President of Teledyne Continental Motors since 1992. From 1990 to 1992, he was President of the turbine engine operations of Teledyne, Inc. Mr. Lewis has held various technical and general management positions during his more than 21 years with Teledyne and its predecessors. Mr. Ross has been President of Teledyne Energy Systems, Inc. since its formation in June 2001 for the purposes of the transaction with Energy Partners, Inc. Prior to that, he was General Manager of the Teledyne Energy Systems business unit. Before joining the Company in July 2000, Mr. Ross operated R4 Energy, a consulting business specializing in energy technologies. From 1993 to 1999, Mr. Ross was Vice President Ì Product Development of Energy Partners, Inc., a fuel cell development company. 12 Name and Title Other OÇcers: Robert W. Steenberge ÏÏÏÏÏÏÏÏÏÏÏÏÏ Chief Technology OÇcer Age 57 Ivars R. Blukis ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chief Business Risk Assurance OÇcer 62 Robyn E. McGowan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Vice President-Administration and Human Resources and Assistant Secretary 40 Melanie S. Cibik ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Vice President, Associate General Counsel and Assistant Secretary 45 Shelley D. Green ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46 Treasurer Robert L. Schaefer ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59 Associate General Counsel, General Counsel of the Electronics and Communications Segment Principal Occupations Last 5 Years Mr. Steenberge has been Teledyne's Chief Technology OÇcer since March 2000. Prior to that, he had been Vice President of Advanced Development at Teledyne Electronic Technologies since 1991. Since joining Teledyne in 1976, Mr. Steenberge has held various management positions with several of its aerospace and electronics companies. Mr. Blukis has been Chief Business Risk Assurance OÇcer since January 2002 and is responsible for the internal audit function. Prior to that, Mr. Blukis was the Vice President, Finance and Administration, for Teledyne Electronics Technologies. Since joining Teledyne in 1976, Mr. Blukis has held various Ñnancial and administrative positions with its microwave electronics components business unit. Ms. McGowan has been Vice President Ì Administration and Human Resources of the Company since April 2003 and Vice President Ì Administration since December 2000. Prior to becoming a Vice President, she served as Director of Administration. She has been an Assistant Secretary of Teledyne since the spin-oÅ. Prior to joining ATI's Aerospace and Electronics segment in August 1999, she was Director of the President's OÇce and Secretary of the Corporation at Carnegie Mellon University. Miss Cibik has been Vice President of the Company since December 2000, Associate General Counsel since the spin- oÅ, and an Assistant Secretary since October 1999. From April 1998 to the spin-oÅ, Miss Cibik was Counsel Ì Corporate and Securities at ATI. Prior to joining ATI, she was Senior Counsel at PNC Bank Corp., now known as The PNC Financial Services Group, Inc., and had previously been associated with Kirkpatrick & Lockhart LLP, now known as Kirkpatrick & Lockhart Nicholson Graham LLP. Ms. Green has been the Treasurer of Teledyne since October 2000, and served as Assistant Treasurer since the spin-oÅ. Prior to joining ATI's Aerospace and Electronics segment in October 1999, she spent 16 years at Occidental Petroleum Corporation serving its treasury operations and debt administration, having last served as Assistant Treasurer Ì Financial Operations. Mr. Schaefer has been an Associate General Counsel of Teledyne and the General Counsel of Teledyne's Electronics and Communications segment since June 2000. He has served as an Assistant Secretary since April 2002. Prior to joining Teledyne, he was Director of Legal for Raytheon Missile Systems. * Such oÇcers are subject to the reporting and other requirements of Section 16 of the Securities Exchange Act of 1934, as amended. 13 Dr. Mehrabian has an Amended and Restated Employment Agreement with Teledyne, which provides that we will employ him as the Chairman, President and Chief Executive OÇcer. The agreement terminates on December 31 of each year, but will be extended annually unless either party gives the other written notice prior to October 31 of the year of such term that it will not be extended. Starting September 1, 2004, Dr. Mehrabian's annual base salary was $631,350. The agreement provides that Dr. Mehrabian is entitled to participate in Teledyne's annual incentive bonus plan and other executive compensation and beneÑt programs. The agreement provides Dr. Mehrabian with a non-qualiÑed pension arrangement, under which Teledyne will pay him following his retirement, as payments supplemental to any accrued pension under our qualiÑed pension plan, an amount equal to 50% of his base compensation as in eÅect at retirement. The number of years for which such annual amount shall be paid will be equal to the number of years of his service to Teledyne (including service to ATI), but not more than 10 years. Fifteen current members of management have entered into Change in Control Severance Agreements with Teledyne. The agreements have a three-year, automatically renewing term. Under the agreements, the executive is entitled to severance beneÑts 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 beneÑts'' consist of: ‚ A cash payment equal to three times (in the case of Dr. Mehrabian and Messrs. Kuelbs, Schnittjer and Link and one other executive) or two times (in the case of Mr. Pichelli and nine other executives) the sum of (i) the executive's highest annual base salary within the year preceding the change in control and (ii) the Annual Incentive Plan (""AIP'') bonus target for the year in which the change in control occurs or the year immediately preceding the change in control, whichever is higher. ‚ A cash payment for the current Annual Incentive Plan bonus based on the fraction of the year worked times the Annual Incentive Plan target objectives at 120 percent (with payment of the prior year bonus if not yet paid). ‚ Payment in cash for unpaid Performance Share Plan awards, assuming applicable goals are met at 120 percent of performance. ‚ Continued equivalent health and welfare (e.g., medical, dental, vision, life insurance and disability) beneÑts for a period of up to 36 months (up to 24 months in some agreements) after termination (with the executive bearing any portion of the cost the executive bore prior to the change in control); provided, however, such beneÑts would be discontinued to the extent the executive receives similar beneÑts from a subsequent employer. ‚ Immediate vesting of all stock options, with options being exercisable for the full remaining term. ‚ Removal of restrictions on restricted stock issued by us under our Restricted Stock Award Programs. ‚ Full vesting under our pension plans (within legal parameters). ‚ Up to $25,000 ($15,000 in some agreements) reimbursement for actual professional outplacement services. ‚ A ""gross-up-payment'' to cover any excise and federal income taxes imposed on the executive as a result of the payments constituting a ""golden parachute'' as deÑned in Section 280G of the Internal Revenue Code. 14 Risk Factors; Cautionary Statement as to Forward-Looking Statements The following text highlights various risks and uncertainties associated with Teledyne. These factors could materially aÅect ""forward-looking statements'' (within the meaning of the Private Securities Litigation Reform Act of 1995) that we may from time to time make, including forward-looking statements contained in ""Item 1. Business'' and ""Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations'' of this Form 10-K and in Teledyne's 2004 Annual Report to Stockholders. Our dependence on revenue from government contracts subjects us to many risks, including the risk that we may not be successful in bidding for future contracts and the risk that U.S. Government funding for our existing contracts may be diverted to other uses or delayed. We perform work on a number of contracts with the Department of Defense and other agencies and departments of the U.S. Government including sub-contracts with government prime contractors. Sales under contracts with the U.S. Government as a whole, including sales under contracts with the Department of Defense, as prime contractor or subcontractor, represented approximately 43% of our total revenue for 2004. Performance under government contracts has certain inherent risks that could have a material eÅect on our business, results of operations and Ñnancial condition. Government contracts are conditioned upon the continuing availability of Congressional appropria- tions. Congress typically appropriates funds for a given program on a Ñscal-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 Ñscal years. While U.S. defense spending has increased as a result of the September 11th terrorist attacks and the war in Iraq, it is currently expected to moderate over the next few years. Continued defense spending does not necessarily correlate to continued business for the Company, because not all the programs in which Teledyne participates or has current capabilities may be provided with continued funding. Each of the Middle East and the North Korean situations could result in a diversion of funds from programs in which Teledyne participates and redirection of those funds to pay for costs associated with either situation or programs more closely related to it. Our Electronics and Communications segment provides a variety of products for newer military platforms such as the F/A-22 and F-35 aircraft. Development and production of these aircrafts are very expensive, and there is no guarantee that the Department of Defense, as it balances priorities, will continue to provide funding to manufacture and support these platforms. Also, over time, programs can evolve and aÅect the extent of our participation. For example, one of Teledyne Brown Engineering's programs was restructured in 2003 to change the emphasis from a focus on test and evaluation to a focus on deployment and sustainment, which resulted in a nearly 16% decline in revenues from this contract compared to 2002 (from $58 million to $49 million). Then, in 2004, revenues related to this program totaled approximately $54 million with the increase over 2003 resulting from unanticipated ground tests. The Company expects revenues from this program to decline in 2005. The Company, principally and traditionally through its Systems Engineering Solutions segment, has been a signiÑcant contributor to NASA programs. The centerpiece of our current NASA activities is the International Space Station. While the Company anticipates contributing to President Bush's announced vision for NASA that includes lunar and interplanetary exploration, funding for this vision may be reduced in the near term due to additional funding needs to return the Space Shuttle to Öight. Furthermore, we obtain many U.S. Government prime contracts and subcontracts through the process of competitive bidding. We may not be successful in having our bids accepted. Until November 29, 2004, under one of our spin-oÅ agreements, we were not able to charge pension costs to the U.S. Government under our various government contracts. Since such date, we are able to so 15 charge pension costs. While this might help reduce our pension expense, the addition of such costs in a bid for U.S. Government contracts, which is in essence an increase to the contract price to be paid, may itself negatively aÅect an award decision being made in favor of the Company. Most of our U.S. Government contracts are subject to termination by the U.S. Government either at its convenience or upon the default of the contractor. Termination-for-convenience provisions provide only for the recovery of costs incurred or committed, settlement expenses, and proÑt on work completed prior to termination. Termination-for-default clauses impose liability on the contractor for excess costs incurred by the U.S. Government in reprocuring undelivered items from another source. There is no guarantee that U.S. Government contracts will be proÑtable. A number of our U.S. Government prime contracts and subcontracts are Ñxed price-type contracts (43% in 2004 as compared to 44% in 2003 and 41% in 2002). Under these types of contracts, we bear the inherent risk that actual performance cost may exceed the Ñxed contract price. This is particularly true where the contract was awarded and the price Ñnalized in advance of Ñnal completion of design. We continue to believe that the U.S. Government is increasingly requesting proposals for Ñxed price-type contracts. Certain fees under some of our U.S. Government contracts are linked to meeting development or testing deadlines. Fees may also be inÖuenced or dependent on the collective eÅorts and success of other defense contractors over which we had no or limited control. We, like other government contractors, are subject to various audits, reviews and investigations (including private party ""whistleblower'' lawsuits) relating to our compliance with federal and state laws. In addition, we have a compliance program designed to surface issues that may lead to voluntary disclosures to the U.S. Government. Generally, claims arising out of these U.S. Government inquiries and voluntary disclosures can be resolved without resorting to litigation. However, should the business unit or division involved be charged with wrongdoing, or should the U.S. Government determine that the unit or division is not a ""presently responsible contractor,'' that unit or division, and conceivably our Company as a whole, could be temporarily suspended or, in the event of a conviction, could be debarred for up to three years from receiving new government contracts or government-approved subcontracts. In addition, we could expend substantial amounts in defending against such charges and in damages, Ñnes and penalties if such charges are proven or result in negotiated settlements. In October 2002, the Company was informed that the U.S. Government had declined to intervene in a lawsuit Ñled under seal pursuant to the False Claims Act more than four years before. The Company believes that its Electronic Safety Products unit's involvement in the civil action is over, as the plaintiÅ's appeal of Company's motion to dismiss this action has been denied and the plaintiÅ's petition for a rehearing en banc by the Court of Appeals of the DC Circuit has also been denied. Should the plaintiÅ Ñle a petition for certiorari with the United States Supreme Court by March 21, 2005, the Company intends to continue its vigorous defense. A declining stock market and lower interests rates negatively aÅect the value of our pension assets and could have a material adverse Ñnancial eÅect on us. We have a deÑned beneÑt pension plan covering most of our employees. At year-end 2004, notwithstanding improved market conditions, because of signiÑcant declines in the stock market over the last few years and low interest rates, the value of the pension assets was less than our accumulated pension beneÑt obligation. The accounting rules applicable to our pension plan require that amounts recognized in Ñnancial statements to be determined on an actuarial basis, rather than as contributions are made to the plan. Two signiÑcant elements in determining our pension income or pension expense are the expected return on plan assets and the discount rate used in projecting pension beneÑt obligations. We have assumed, based on the type of securities in which the plan assets are invested and the long-term historical returns of these investments, that the long-term expected return on pension assets will continue to be 8.5% in 2005, as it was in 2004 and 2003, and the assumed discount rate will be 6.25% in 2005, compared to 6.5% in 2004 and 7.0% in 2003. Since the spin-oÅ through 2002, we recorded pension income. In 2003, we began to incur pension expense and we expect to continue to incur pension expense. The decline in pension income and the start 16 of pension expense in 2003 is due to the completion, in 2001, of income amortization associated with the transition assets recorded pursuant to Statement of Financial Accounting Standards No. 87 Ì ""Employee's Accounting for Pensions'', as well as the decline in the value of our pension assets, coupled with reductions in our expected rate of return and discount rate assumptions used for pension plan calculations as described above. We currently expect net pension expense of approximately $6.0 million in 2005, compared to net pension expense of $8.2 million in 2004 and $6.9 million for 2003. The expected reduced pension expense in 2005 relates to the termination on November 29, 2004, of one of our spin-oÅ requirements that prohibited us from charging pension costs to the U.S. Government under various government contracts until such date. Given our pension plan's current underfunded status, in 2004, we began making required cash contributions to our pension plan. Declines in the stock market and lower rates of return could increase future years required contributions to our pension plan. EÅective January 1, 2004, in an eÅort to help alleviate additional pension expense in future years, new non-union employee hires do not participate in the deÑned beneÑt Pension Plan, but participate in an enhanced Teledyne Technologies Incorporated 401(k) Plan. United States' and global responses to terrorism, the Middle East situation and perceived nuclear threats increase uncertainties with respect to many of our businesses and may adversely aÅect the Company's business and results of operations. United States' and global responses to terrorism, the Middle East situation and perceived nuclear threats from North Korea and others increase uncertainties with respect to U.S. and other business and Ñnancial markets. Several factors associated, directly or indirectly, with terrorism, the Iraq situation and perceived nuclear threats and responses may adversely aÅect the Company. While some of our businesses that provide products or services to the U.S. Government experienced greater demand for their products and services as a result of increased U.S. Government defense spending, various responses could realign government programs and aÅect the composition, funding or timing of our government programs. Government spending could shift to defense or Homeland Security programs in which we may not participate or may not have current capabilities and curtail less pressing non-defense programs in which we do participate, including Department of Energy or NASA programs. The eÅect of the decline in air travel on the Ñnancial condition of many of our commercial airline and aircraft manufacturer customers, resulting from terrorism, another SARS scare and other factors, could adversely aÅect our Electronics and Communications segment. Deterioration of Ñnancial performance of airlines could result in a further reduction of discretionary spending for upgrades of avionics and in-Öight communications equipment, which would adversely aÅect our Electronics and Communications segment. The government continues to evaluate potential security issues associated with general aviation. Increased government regulations, including but not limited to increased airspace regulations, could lead to an overall decline in air travel and have an adverse aÅect on our Aerospace Engines and Components segment. As happened after the September 11th terrorist attacks, reinstatement of Öight restrictions would negatively impact the market for general aviation aircraft piston engines and components and would also adversely aÅect our Aerospace Engines and Components segment. Potential reductions in the need for general aviation aircraft maintenance due to declines in air travel could also adversely aÅect our Aerospace Engines and Components segment. Acquisitions involve inherent risks that may adversely aÅect our operating results and Ñnancial condition. Our growth strategy includes acquisitions. Acquisitions involve various inherent risks, such as: ‚ our ability to assess accurately the value, strengths, weaknesses, internal controls, contingent and other liabilities and potential proÑtability of acquisition candidates; ‚ the potential loss of key personnel of an acquired business; 17 ‚ our ability to integrate acquired businesses and to achieve identiÑed Ñnancial, operating and other synergies anticipated to result from an acquisition; ‚ our ability to assess, integrate and implement internal controls of acquired businesses in accordance with Section 404 of the Sarbanes-Oxley Act of 2002; and ‚ unanticipated changes in business and economic conditions aÅecting an acquired business. While the Company conducts Ñnancial and other due diligence in connection with its acquisitions and generally seeks some form of protection, including indemniÑcation from a seller and sometimes an escrow of a portion of the purchase price to cover potential issues, such acquired companies may have weaknesses or liabilities that are not accurately assessed or brought to our attention at the time of the acquisition. Further, such indemnities or escrows may not fully cover such matters. In July 2004, we acquired Reynolds Industries, Incorporated, a private company that did not have formal internal controls and compliance systems in place. While the Company required the sellers to take certain compliance actions prior to the closing of the acquisition, including with respect to export controls, there is no assurance that we identiÑed all issues. In June 2004, we acquired Isco, Inc. While this company's products and customer base are complementary to Teledyne's existing instrumentation businesses, there is no assurance that we will achieve all identiÑed Ñnancial, operating and distribution synergies. In connection with acquisitions, we may consolidate one or more acquired facilities with other Teledyne facilities to obtain synergies and cost-savings. For example, we have recently relocated the manufacturing operations of the acquired defense electronics assets of Celeritek, Inc. to our Mountain View, California facility. Despite planning, relocation of manufacturing operations has inherent risks, as it tends to involve, among other things, change of personnel and learning or adaptation of manufacturing processes and techniques. Production delays at the new operating location could result. Except for the Filtronic Solid State assets acquisition, as permitted by SEC rules, our management's report as to our assessment of the eÅectiveness of internal controls over Ñnancial reporting excludes our 2004 acquisitions from its scope and coverage. We plan to evaluate the internal controls of these acquired companies in 2005, and implement a formal and rigorous system of internal controls. The Company can provide no assurance that we will be able to provide a report that contains no signiÑcant deÑciencies or material weaknesses with respect to these acquired companies or other acquisitions. We may not have suÇcient resources to fund all future research and development and capital expenditures or possible acquisitions. In order to remain competitive, we must make substantial investments in research and development to develop new and enhanced products and continuously upgrade our process technology and manufacturing capabilities. Although we believe that anticipated cash Öows from operations and available borrowings under our $280.0 million credit facility will be suÇcient to satisfy our anticipated working capital, research and development and capital investment needs, we may be unable to fund all of these needs or possible acquisitions. Our ability to raise additional capital will depend on a variety of factors, some of which will not be within our control, including resurgence of the public oÅering 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-eÅective basis could have a material adverse eÅect on our business, results of operations and Ñnancial condition. We may be unsuccessful in our eÅorts to increase our participation in certain new markets. We intend to both adapt our existing technology and develop new products to expand into new market segments. For example, we are developing new fuel cell related technologies. The market for fuel cell 18 technologies is not well established and there are a number of companies that have announced intentions to develop and market fuel cell products. Some of these companies have greater Ñnancial and/or technological resources than we do. We are also developing new electronic products, including electronic Öight bags and high-density microprocessor connectors, which are intended to access markets in which Teledyne does not currently participate or has limited participation. We may be unsuccessful in accessing these markets if our products do not meet our customers' requirements, due to either changes in technology and industry standards or because of actions taken by our competitors. We may be unable to successfully introduce new and enhanced products in a timely and cost-eÅective manner. Our operating results depend in part on our ability to introduce new and enhanced products on a timely basis. Successful product development and introduction depend on numerous factors, including our ability to anticipate customer and market requirements, changes in technology and industry standards, our ability to diÅerentiate our oÅerings from oÅerings of our competitors, and market acceptance. We may not be able to develop and introduce new or enhanced products in a timely and cost-eÅective manner or to develop and introduce products that satisfy customer requirements. Our new products also may not achieve market acceptance or correctly anticipate new industry standards and technological changes. Technological change and evolving industry standards could cause certain of our products or services to become obsolete or non-competitive. The markets for a number of our products and services are generally characterized by rapid technological development, evolving industry standards, changes in customer requirements and new product introductions and enhancements. A faster than anticipated change in one or more of the technologies related to our products or services or in market demand for products or services based on a particular technology could result in faster than anticipated obsolescence of certain of our products or services and could have a material adverse eÅect on our business, results of operation and Ñnancial condition. Currently accepted industry standards are also subject to change, which may contribute to the obsolescence of our products or services. The Company is currently working to make sure that certain of its electronic products sold in European member states comply with a directive not to contain impermissible levels of lead, mercury, cadmium, hexavalent chromium, polybrominated biphenyls or polybrominated diphenyl ethers on or after July 1, 2006. Although many of our products are exempt from the European directive, we expect that over time component manufacturers may discontinue selling components that have the restricted substances. This will, in turn, require Teledyne to accommodate changes in parameters, such as the way parts are soldered, and may in some cases require redesign of certain products. Product liability claims or recalls could have a material adverse eÅect on our reputation, business, results of operations and Ñnancial condition. As a manufacturer and distributor of various products, our results of operations are susceptible to adverse publicity regarding the quality or safety of our products. In part, product liability claims challenging the safety of our products may result in a decline in sales for a particular product, which could adversely aÅect our results of operations. This could be the case even if the claims themselves are proven untrue or settled for immaterial amounts. While we have general liability and other insurance policies concerning product liabilities, we have self-insured retentions or deductibles under such policies with respect to a portion of these liabilities. For example, our current annual self-insured retention for general aviation aircraft liabilities incurred in 19 connection with products manufactured by Teledyne Continental Motors, Inc., is $25.0 million. Our existing aircraft product liability insurance policy expires in May 2005. Product recalls and Ñeld service actions could also have a material adverse eÅect on our business, results of operations and Ñnancial condition. For example, Teledyne Continental Motors had been engaged in a product recall of piston engine crankshafts whereby the Company recorded a $12.0 million pretax charge in the second quarter of 2000. Product recalls have the potential for tarnishing a company's reputation and could have a material adverse eÅect on the sales of our products. In 2002, we reached a monetary settlement related to the 2000 recall with two of three companies that manufactured and processed allegedly defective steel subsequently made into aircraft engine crankshafts. We failed to win a jury verdict against a third company involved in making the steel. The Company continues to pursue cost recovery through litigation against one other materials supplier as a result of the 2000 product recall program. There is no assurance that the Company will recover any costs or the negative impact on its reputation. The Company has been joined, among a number of defendants (often over 100), in lawsuits alleging injury or death as a result of exposure to asbestos. We have not incurred material liabilities in connection with these lawsuits. The Ñlings typically do not identify any of the Company's products as a source of asbestos exposure, and the Company has been dismissed from cases for lack of product identiÑcation, but only after some defense costs have been incurred. Also, because of the prominent ""Teledyne'' name, we may be mistakenly joined in lawsuits involving a company or business that was not spun oÅ or otherwise assumed by us as part of our 1999 spin-oÅ. The Company's historic insurance coverage, including that of its predecessors, may not fully cover such claims and defense of such matters, as coverage depends on the year of purported exposure and other factors. Nonetheless, the Company intends to defend these claims vigorously. Congress has been considering tort reform to deal with asbestos-related claims and has recently passed legislation addressing class action lawsuits. The gas generators manufactured by Teledyne Energy Systems, Inc. currently contain a sealed, wetted asbestos component. While the company has begun transitioning to a replacement material, has placed warning labels on its products and takes care in handling of this material by employees, there is no assurance that the Company will not face product liability claims involving this component. Our Teledyne Brown Engineering's laboratory in Knoxville, Tennessee performs radiological analyses. While the laboratory is certiÑed by the Department of Energy, has other nuclear-related certiÑcations, and has internal quality controls in place, errors and omissions in analyses may occur. We currently have errors and omissions insurance coverage and nuclear liability insurance coverage that might apply depending on the circumstances. We also have sought indemnities from some of our customers. Our insurance coverage or indemnities, however, may not be adequate to cover potential problems associated with faulty radiological analyses. We cannot assure that we will not have additional product liability claims or that we will not recall any additional products. We may have diÇculty obtaining product liability and other insurance coverages, or be subject to increased costs for such coverage. Insurance costs have increased greatly over the last few years. As a manufacturer of a variety of products including aircraft engines used in general aviation aircraft, we have general liability and other insurance policies that provide coverage beyond self-insured retentions or deductibles. We cannot assure that, for 2005 and in future years, insurance carriers will be willing to renew coverage or provide new coverage for product liability, especially as it relates to general aviation. If such insurance is available, we may be required to pay substantially higher prices for coverage and/or increase our levels of self-insured retentions or reserves. The Company's current aircraft product liability insurance policy expires in May 2005. In connection with the last renewal, based on more recent favorable claims experience and changes to the claims management process, the Company lowered its insurance premium costs and increased its annual self-insured retention to $25.0 million from $15.0 million. To alleviate aircraft product liability 20 insurance costs, the Company continues to try to reduce manufacturing and other costs and also to pass on such insurance costs through price increases on its aircraft engines and spare parts. The Company cannot provide assurances that further cost reduction eÅorts will prove successful or that customers will accept additional price increases. For certain electronic components for medical applications that we manufacture, such as those that go into cochlear implants, we have asked for indemnities from our customers and/or to be included under their insurance policies. We cannot, however, provide any assurance that such indemnities or insurance will oÅset potential liabilities that we may incur as a result of our manufacture of such components. Aside from the uncertainties created by external events, such as September 11th and subsequent activities, our ability to obtain product liability insurance and the cost for such insurance are aÅected by our historical claims experience. We cannot assure that, for 2005 and in future years, our ability to obtain insurance, or the cost for such insurance, or the amount of self-insured retentions or reserves will not be negatively impacted by our experience in prior years. Increasing competition could reduce the demand for our products and services. Although we believe that we have certain advantages that help us compete in our markets, each of our markets is highly competitive. Many of our competitors have, and potential competitors could have, greater name recognition, a larger installed base of products, more extensive engineering, manufacturing, marketing and distribution capabilities and greater Ñnancial, technological and personnel resources than we do. New or existing competitors may also develop new technologies that could adversely aÅect the demand for our products and services. Industry consolidation trends, particularly among aerospace and defense contractors, could adversely aÅect demand for our products and services if prime contractors seek to control more aspects of vertically integrated projects. We sell products and services to customers in industries that are cyclical and sensitive to changes in general economic activity. We derive signiÑcant revenues from the commercial aerospace industry. Domestic and international commercial aerospace markets are cyclical in nature. Historic demand for new commercial aircraft has been related to the stability and health of domestic and international economies. Delays or changes in aircraft and component orders could impact the future demand for our products and have a material adverse eÅect on our business, results of operations and Ñnancial condition. While the market for commercial aircraft has improved since the downturn triggered by the events of September 11th and the Iraqi war, another such event would increase the level of uncertainty regarding future orders for aircraft. In addition, we sell products and services to customers in industries that are sensitive to the level of general economic activity and in mature industries that are sensitive to capacity. Adverse economic conditions aÅecting these industries may reduce demand for our products and services, which may reduce our proÑts, or our production levels, or both. We develop and manufacture products for customers in the energy exploration market, which has been cyclical and suÅered from over capacity in prior years. Strong demand and increased prices for oil and natural gas contributed to substantial revenue growth during 2004 at Teledyne Geophysical Instruments, which is not expected to be sustained. We sell products to customers in industries that may undergo rapid and unpredictable changes. We develop and manufacture products for customers in industries that have undergone rapid changes in the past. For example, we manufacture products and provide manufacturing services to companies that serve telecommunications markets. During 2001, many segments of the telecommunications market experienced a dramatic and rapid downturn that resulted in cancellations or deferrals of orders for our products and services. This market segment, or others that we serve, may exhibit rapid changes in the future and may adversely aÅect our operating results, or our production levels, or both. 21 We are subject to the risks associated with international sales. During 2004, international sales accounted for approximately 19% of our total revenues. We anticipate that future international sales will continue to account for a signiÑcant percentage of our revenues. Risks associated with these sales include: ‚ political and economic instability; ‚ international terrorism; ‚ export controls; ‚ changes in legal and regulatory requirements; ‚ U.S. and foreign government policy changes aÅecting the markets for our products; ‚ changes in tax laws and tariÅs; ‚ convertibility and transferability of international currencies; and ‚ exchange rate Öuctuations. Any of these factors could have a material adverse eÅect on our business, results of operations and Ñnancial condition. Exchange rate Öuctuations may negatively aÅect the cost of our products to international customers and therefore reduce our competitive position. Given the current exchange rate between the U.S. Dollar and the British Pound Sterling, European contracts for which we are paid in U.S. Dollars could be negatively aÅected to the extent the underlying costs to the Company to fulÑll the contract are paid in Pounds Sterling. In prior years, weak conditions in Asian economies have aÅected our results of operations adversely. The September 11th terrorist attacks, as well as fears of an international arms race, have resulted in increased export scrutiny of sales of some of our products to international customers. Travel restrictions to Middle Eastern and other countries may negatively aÅect continuing international sales or service revenues from such regions. Compliance with increasing environmental regulations and the eÅects of potential environmental liabilities could have a material adverse Ñnancial eÅect on us. We, like other industry participants, are subject to various federal, state, local and international environmental laws and regulations. We may be subject to increasingly stringent environmental standards in the future. Future developments, administrative actions or liabilities relating to environmental matters could have a material adverse eÅect on our business, results of operations or Ñnancial condition. While the Company has an environmental management system and compliance program applicable to its operating facilities, including a ""review and audit'' program to monitor compliance where each facility is reviewed and audited by an internal environmental team every three years, such internal control is designed to reduce environment risk, it does not eliminate potential environmental liabilities. In addition, as the Company continues to pursue acquisitions, while it conducts environmental-related due diligence and generally seeks some form of protection, including indemniÑcation from a seller, such acquired companies may have environmental liabilities that are not accurately assessed or brought to our attention at the time of the acquisition. Some of our businesses work with highly dangerous substances that require heightened standards of care. For example, as a systems contractor for the U.S. Army's Program Manager for Non-Stockpile Chemical Materiel, we conduct research, development, manufacturing, test and evaluation and site operations related to the safe and environmentally protective disposal of small caches of chemical munitions and materiel located in over 30 states and territories. The destruction of chemical weapons is an inherently dangerous activity. Except for a contained Ñre during a demonstration testing of a process designed to access rockets in a former program, we have not experienced any accidents or other adverse consequences as a result of our participation in weapon destruction programs. We cannot, however, assure that we will not experience any problems in the future. Although the federal government provides certain 22 indemnities to contractors in these programs, these indemnities may be insuÇcient to oÅset liabilities that we may incur in connection with our participation in these programs. For additional discussion of environmental matters, see the discussion under the caption ""Other Matters Ì Environmental'' of ""Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition'' and Notes 2 and 16 to Notes to Consolidated Financial Statements. Our inability to attract and retain key personnel could have a material adverse eÅect on our future success. Our future success depends to a signiÑcant extent upon the continued service of our executive oÇcers and other key management and technical personnel and on our ability to continue to attract, retain and motivate qualiÑed personnel. Recruiting and retaining skilled technical personnel is highly competitive. The loss of the services of one or more of our key employees or our failure to attract, retain and motivate qualiÑed personnel could have a material adverse eÅect on our business, Ñnancial 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 proÑtable niche businesses, we continually evaluate our product lines to ensure that they are aligned with our strategy. For example, we determined that the on-line process control instruments business of the German subsidiary of Isco, Inc. was not aligned with our strategy, and in February 2005, we entered into an agreement to sell this non- strategic business. Our ability to dispose of product lines that may no longer be aligned with our strategy will depend on many factors, including the terms and conditions of any asset purchase and sale agreement, as well as industry, business and economic conditions. We cannot provide any assurance as to when, if or on what terms any non-strategic product lines will be sold. Also, we cannot provide any assurance as to the availability, timing, terms or conditions of alternative courses of action, including closure, or the sale of any non-strategic product line cannot be consummated. Provisions of our governing documents, applicable law, and our Change in Control Severance Agreements could make an acquisition of Teledyne more diÇcult. Our Restated CertiÑcate of Incorporation, Amended and Restated Bylaws and Rights Agreement and the General Corporation Law of the State of Delaware contain several provisions that could make the acquisition of control of Teledyne in a transaction not approved by our board of directors more diÇcult. We have also entered into Change in Control Severance Agreements with 15 members of our management, which could have an anti-takeover eÅect. The market price of our Common Stock has Öuctuated signiÑcantly since our spin-oÅ from ATI, and could continue to do so. Since the spin-oÅ on November 29, 1999, the market price of our Common Stock has ranged from a low of $7.6875 to a high of $31.97 per share. At February 28, 2005, our closing stock price was $30.58. Fluctuations in our stock price could continue. Among the factors that could aÅect our stock price are: ‚ quarterly variations in our operating results; ‚ strategic actions by us or our competitors, such as acquisitions; ‚ adverse business developments, such as the engine recall by Teledyne Continental Motors in 2000; ‚ war in the Middle East or elsewhere; ‚ additional terrorist activities; 23 ‚ increased military or homeland defense activities; ‚ changes to the Federal budget; ‚ improvements in the semiconductor, telecommunications, commercial aviation and electronic manufacturing services markets; ‚ general market conditions; and ‚ general economic factors unrelated to our performance. The stock markets in general, and the markets for high technology companies in particular, have experienced a high degree of volatility not necessarily related to the operating performance of particular companies. We cannot provide assurances as to our stock price. While the Company believes its control systems are eÅective, there are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected. The Company continues to take action to assure compliance with the internal controls, disclosure controls and other requirements of the Sarbanes-Oxley Act of 2002. Our management, including our Chief Executive OÇcer and Chief Financial OÇcer, 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 reÖect the fact that there are resource constraints and the beneÑt 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-eÅective control system, misstatements due to error or fraud may occur and not be detected. A serious earthquake in California could adversely aÅect our business, results of operations and Ñnancial condition. Several of our facilities could be subject to a catastrophic loss caused by earthquake due to their locations. Many of our production facilities and our headquarters are located in California and thus are in areas with above average seismic activity. If any of these facilities or our California headquarters were to experience a catastrophic earthquake loss and notwithstanding our disaster recovery plans (including relating to information technology systems), it could disrupt our operations, delay production, shipments and revenue and result in large expenses to repair or replace the facility or facilities. 24 Item 2. Properties. Our principal facilities as of January 2, 2005 are listed below. Although the facilities vary in terms of age and condition, our management believes that these facilities have generally been well maintained and are adequate for current operations. Facility Location Principal Use Owned/Leased Electronics and Communications Segment Defense Electronics Rancho Cordova, CaliforniaÏÏÏÏÏÏ Development and production of traveling wave tubes Los Angeles, California ÏÏÏÏÏÏÏÏÏ Development and production of electronic components and subsystems Northridge, California ÏÏÏÏÏÏÏÏÏÏ Development of electronic seat ejection sequencers Mountain View, CaliforniaÏÏÏÏÏÏÏ Production of microwave integrated circuits and systems Los Angeles, California ÏÏÏÏÏÏÏÏÏ Development and production of high voltage connectors and subassemblies and pilot helmet mounted display components and subsystems Santa Maria, California ÏÏÏÏÏÏÏÏÏ Development and production of high voltage capacitor products Owned Owned and Leased Leased Owned Leased Leased Tracy, California ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Development and production of precision secondary Leased Hudson, New HampshireÏÏÏÏÏÏÏÏ Production of printed circuit boards explosive components including initiators and detonators Instrumentation Products City of Industry, California ÏÏÏÏÏÏ Development and production of precision oxygen analyzers San Diego, California ÏÏÏÏÏÏÏÏÏÏÏ Development and production of environmental monitoring instruments Englewood, Colorado ÏÏÏÏÏÏÏÏÏÏÏ Development and production of environmental monitoring systems Lincoln, NebraskaÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Development and production of water quality monitoring products, chemical separation instruments and Öash chromatography instruments and consumables Hudson, New HampshireÏÏÏÏÏÏÏÏ Development and production of environmental monitoring instruments Mason, Ohio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Development and production of environmental monitoring instruments Houston, Texas ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Development and production of geophysical streamer cables and hydrophones for seismic monitoring Hampton, Virginia ÏÏÏÏÏÏÏÏÏÏÏÏÏ Development and production of vacuum and Öow measurement instruments Other Commercial Electronics Los Angeles, California ÏÏÏÏÏÏÏÏÏ Development and production of digital data acquisition systems for monitoring commercial aircraft and engines Hawthorne, California ÏÏÏÏÏÏÏÏÏÏ Production of electromechanical relays San Diego, California ÏÏÏÏÏÏÏÏÏÏÏ Development and production of connectors Lewisburg, Tennessee ÏÏÏÏÏÏÏÏÏÏÏ Development and manufacturing of electronic components and subsystems Owned Owned Leased Leased Owned Leased Leased Owned Owned Leased Owned Leased Owned 25 Facility Location Principal Use Owned/Leased Systems Engineering Solutions Segment Huntsville, Alabama ÏÏÏÏÏÏÏÏÏÏÏ Provision of engineering services and products, including systems engineering, optical engineering, software and hardware engineering, and instrumentation technology Owned and Leased Knoxville, Tennessee ÏÏÏÏÏÏÏÏÏÏÏ Laboratories and oÇces in support of environmental Leased services Arlington, Virginia ÏÏÏÏÏÏÏÏÏÏÏÏÏ Defense program oÇces supporting governmental customers Aerospace Engines and Components Segment Mobile, AlabamaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Design, development and production of new and rebuilt piston engines, ignition systems and spare parts for the general aviation market Leased Leased Redlands, California ÏÏÏÏÏÏÏÏÏÏÏÏ Manufacturing of batteries for the general aviation Owned market Mattituck, New York ÏÏÏÏÏÏÏÏÏÏÏ Supply of aftermarket parts, services and engine overhauls for the general aviation market Toledo, Ohio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Design, development and production of small turbine engines for aerospace and military markets Energy Systems Segment Hunt Valley, MarylandÏÏÏÏÏÏÏÏÏÏ Manufacturing, assembling and maintenance of gas generators, power generating systems and fuel cell test stations West Palm Beach, Florida ÏÏÏÏÏÏÏ Research and development of fuel cell components and systems Leased Leased Leased Leased We also own or lease facilities elsewhere in the United States and outside the United States, including facilities in: Tijuana, Mexico; Gloucester, Newbury and West Drayton, England; Cumbernauld, Scotland; Cwmbran, Wales; and Ottawa, Canada. Our corporate executive oÇces are located at 12333 West Olympic Boulevard, Los Angeles, California 90064-1021. Item 3. Legal Proceedings. From time to time, we become involved in various lawsuits, claims and proceedings related to the conduct of our business, including those pertaining to product liability, patent infringement, commercial, employment and employee beneÑts. 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 eÅect on our Ñnancial condition or liquidity. The resolution in any reporting period of one or more of these matters, however, could have a material adverse eÅect on the results of operations for that period. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of Teledyne's stockholders during the fourth quarter of 2004. 26 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities. Price Range of Common Stock and Dividend Policy Our Common Stock is listed on the New York Stock Exchange and traded under the symbol ""TDY.'' The following table sets forth, for the periods indicated, the high and low sale prices for the Common Stock as reported by the New York Stock Exchange. 2003 1st Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2nd Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3rd Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4th Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 1st Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2nd Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3rd Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4th Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ High Low $16.22 $15.20 $15.74 $19.60 $21.75 $20.49 $25.39 $30.90 $10.92 $12.40 $13.07 $14.26 $18.05 $17.00 $18.94 $23.06 2005 1st Quarter (through February 28, 2005) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $31.97 $26.00 On February 28, 2005, the closing sale price of our Common Stock as reported by the New York Stock Exchange was $30.58 per share. As of February 28, 2005, there were approximately 7,069 holders of record of the Common Stock. We currently intend to retain any future earnings to fund the development and growth of our business. Therefore, we do not anticipate paying any cash dividends in the foreseeable future. The Company did not repurchase any of its Common Stock in the fourth quarter of 2004. 27 Item 6. Selected Financial Data. The following table presents our summary consolidated Ñnancial data. We derived the following historical selected Ñnancial data from our audited consolidated Ñnancial statements. We have reclassiÑed some amounts reported in previous years to conform to our 2004 presentation. Theses reclassiÑcations did not eÅect our reported results of operations or stockholders' equity. Our Ñscal year is determined based on a 52- or 53-week convention ending on the Sunday nearest to December 31. The Ñve-year summary of selected Ñnancial data should be read in conjunction with the discussion under ""Item 7 Ì Management's Discussion and Analysis of Financial Condition and Results of Operations.'' Five-Year Summary of Selected Financial Data Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,016.6 41.7 Income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 41.7 Working capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 124.4 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 624.8 Long-term debt and capital lease obligations ÏÏÏÏÏÏÏÏÏÏ $ 74.4 Stockholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 262.1 Basic earnings per common share Ì continuing 2004 2003 2001 For the Ñscal years 2002 (In millions, except per share amounts) $744.3 $772.7 $840.7 6.8 $ $ 25.4 $ 29.7 $ 6.6 $ 25.4 $ 29.7 $115.3 $102.6 $129.5 $433.6 $355.7 $398.9 $ Ì $ Ì $ 30.0 $173.0 $176.8 $221.0 2000 $795.1 $ 31.9 $ 32.3 $107.6 $357.3 $ Ì $163.1 operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.29 $ 0.92 $ 0.79 $ 0.21 $ 1.12 Diluted earnings per common share Ì continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Diluted earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.24 1.29 1.24 $ 0.91 $ 0.92 $ 0.91 $ 0.77 $ 0.79 $ 0.77 $ 0.21 $ 0.20 $ 0.20 $ 1.08 $ 1.13 $ 1.09 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Teledyne Technologies Incorporated (""Teledyne'') is a leading provider of sophisticated electronic components, instruments and communications products, including defense electronics, data acquisition and communications equipment for airlines and business aircraft, monitoring and control instruments for industrial and environmental applications and components, and subsystems for wireless and satellite communications. We also provide systems engineering solutions and information technology services for space, defense and industrial applications, and manufacture general aviation and missile engines and components, as well as on-site gas and power generation systems. We serve niche market segments where performance, precision and reliability are critical. Our customers include major industrial and communications companies, government agencies, aerospace prime contractors and general aviation companies. Strategy As we grow both organically and through acquisitions, we are working to become a simpler and more integrated operating company. Over time, our goal is to continue on our path of high quality revenue and earnings growth and create a more focused set of businesses that are truly superior in their niches. We do this by executing on two focused fronts: Ñrst, by strengthening and expanding speciÑc platforms in our core electronics, instruments and systems engineering businesses through organic growth and targeted acquisitions; and second, by pursuing operational excellence and margin expansion initiatives to continuously improve earnings. In addition, operational excellence to Teledyne means the rapid integration of the businesses we acquire. We continually evaluate our product lines to ensure that they are aligned with our strategy. Recent Acquisitions After completing one acquisition in each of 2001 and 2002, and two acquisitions in 2003, we completed Ñve acquisitions during our Ñscal year ended 2004. We furthered our strategy to expand our presence in the environmental instrumentation market. On February 27, 2004, we acquired assets of Hudson, New Hampshire-based Leeman Labs, Inc., (""Leeman'') a manufacturer of spectrometers used by environmental and quality control laboratories to detect low levels of inorganic contaminants in water and other environmental samples, which products complement the organic analysis instruments of Teledyne Tekmar Company, a Mason, Ohio-based company acquired in 2003. On June 18, 2004, we acquired Isco, Inc., (""Isco'') located in Lincoln, Nebraska and a leading producer of water quality monitoring instruments, including samplers, Öow meters and on-line process analyzers, which are complementary to Teledyne's existing environmental instrumentation product lines. Our acquisitions have also focused on enhancing our aerospace and defense electronics businesses. On July 2, 2004, we completed the acquisition of Reynolds Industries, Incorporated, (""Reynolds'') a supplier of specialized high voltage connectors and subassemblies for defense, aerospace and industrial applications, with operations in California and the United Kingdom. Reynolds Industries had historically supplied its high voltage connectors and cables to our traveling wave tubes. Two of our 2004 acquisitions furthered our strategy to develop a broader line of microwave products for our defense customers. On December 31, 2003, we acquired assets of the Filtronic Solid State (""Solid State'') business located in Santa Clara, California. This business, which was subsequently moved over a short time period to our facility in Mountain View, California, designs and manufactures customized microwave subassemblies for electronic warfare, radar and other military applications. Its precision YIG-based oscillators, Ñlters and ampliÑers serve some of the same customers of, and are used on some of the same military programs, as those of our longer-standing Teledyne Wireless and Teledyne Microwave Electronic Components (""MEC'') business units. On October 22, 2004, we acquired the assets of the defense electronics business of Celeritek, Inc., (""Celeritek'') based in Santa Clara, California. The solid state ampliÑers and microwave subassemblies of 29 this defense electronics business utilize design and manufacturing technology similar to Teledyne Microwave and are complementary with Teledyne MEC's line of high power helix traveling wave tubes used on military, electronic warfare, radar and communications applications. Like the Solid State acquisition, to obtain various synergies, the operations of this business have been moved to and consolidated with our facility in Mountain View, California. On January 3, 2005, in an eÅort to streamline operations and reduce costs, the businesses principally operating as Teledyne Microwave, located in Mountain View, California, and Teledyne MEC, located in Rancho Cordova, California, were consolidated into one legal entity, Teledyne Wireless, Inc., a wholly- owned subsidiary of the Company. Teledyne Wireless, Inc. had been the subsidiary that bought the defense electronics assets of each of Solid State and Celeritek. All of the acquisitions are part of our Electronics and Communications segment. Their results are included in our consolidated Ñnancial statements since their respective dates of acquisition. Since the acquisition of certain assets of the Filtronic Solid State business occurred after Teledyne's 2003 Ñscal year, this acquisition is not reÖected in the balance sheet or income statement at year-end 2003. Our Ñscal year is determined based on a 52- or 53-week convention ending on the Sunday nearest to December 31. The following is our Ñnancial information for 2004, 2003 and 2002 (in millions, except per- share amounts): Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Costs and Expenses Cost of sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Selling, general and administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Restructuring and other chargesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total costs and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before other income and expense and income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest and debt expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 2003 2002 $1,016.6 $840.7 $772.7 746.3 203.4 Ì 949.7 66.9 1.9 3.0 68.0 26.3 41.7 1.29 1.24 $ $ $ 636.7 157.0 Ì 793.7 47.0 0.8 (1.6) 44.6 14.9 584.9 145.6 (0.7) 729.8 42.9 0.6 (0.2) 42.1 16.7 $ 29.7 $ 25.4 $ 0.92 $ 0.79 $ 0.91 $ 0.77 We operate in four business segments: Electronics and Communications; Systems Engineering Solutions; Aerospace Engines and Components; and Energy Systems. The segments' respective contributions as a percentage of total sales for 2004, 2003 and 2002 are summarized in the following table: Segment Electronics and Communications ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Systems Engineering Solutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Aerospace Engines and Components ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Energy SystemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30 Percentage of Sales 2003 2002 2004 56% 53% 50% 24% 25% 27% 18% 20% 21% 2% 2% 2% 100% 100% 100% Results of Operations 2004 Compared with 2003 Sales 2004 2003 Electronics and Communications ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 567.9 242.2 Systems Engineering Solutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 181.8 Aerospace Engines and Components ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24.7 Energy SystemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $446.9 212.5 165.5 15.8 Total sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,016.6 $840.7 Net Income Electronics and Communications ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 54.4 27.1 Systems Engineering SolutionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.1 Aerospace Engines and Components(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.6 Energy Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 89.2 Segment operating proÑt and other segment incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (19.8) Corporate expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.9) Interest and debt expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.5 Other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 68.0 Income before taxes(b)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26.3 Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 41.7 $ 33.0 23.2 6.4 (0.7) 61.9 (14.9) (0.8) (1.6) 44.6 14.9 $ 29.7 (a) Total year 2004 includes the receipt of $2.5 million pursuant to an agreement with Honda Motor Co., Ltd. related to the piston engine business. (b) Total year 2003 provision for taxes includes a $2.4 million income tax beneÑt from the reversal of an income tax contingency reserve which was determined to be no longer needed during 2003. We reported 2004 net sales of $1,016.6 million, compared with net sales of $840.7 million for 2003. Net income was $41.7 million ($1.24 per diluted share) for 2004, compared with $29.7 million ($0.91 per diluted share) for 2003. The increase in sales in 2004, compared with 2003, reÖected improvement in all four reporting segments. The largest increase in sales was in the Electronic and Communications segment which grew, both organically and through strategic acquisitions, including: Tekmar Company, acquired in May 2003; Spirent's Aviation Information Solutions businesses, acquired in June 2003; Filtronic Solid States' defense assets, acquired in December 2003; Leeman Labs' assets acquired in February 2004; Isco Inc., acquired in June 2004; Reynolds Industries, Inc. acquired in July 2004; and Celeritek's defense assets, acquired in October 2004. The incremental increase in revenue from acquisitions in 2004, compared with 2003, was $98.6 million. The increase in segment operating proÑt and other segment income for 2004, compared with 2003, reÖected improved results in the Electronics and Communications, System Engineering Solutions and Energy Systems segments, partially oÅset by lower operating proÑt in the Aerospace Engines and Components segment. The largest increase was in the Electronic and Communications segment and included incremental operating proÑt from acquisitions and related synergies of $11.8 million. Cost of sales in total dollars was higher in 2004, compared with 2003. The increase was primarily due to higher sales which resulted from organic growth and acquisitions. Fiscal year 2004 included $0.5 million in LIFO expense compared with a $5.1 million in LIFO income in 2003. Cost of sales as a percentage of net sales for 2004 was lower compared with 2003. The lower cost of sales percentage in 2004, reÖected a lower cost of sales percentage for recent acquisitions which due to the nature of their business, carry a 31 lower cost of sales percentage than most of Teledyne's other businesses. The cost of sales percentage for 2004 for Teledyne's existing businesses was relatively Öat compared with 2003. Selling, general and administrative expenses, including research and development and bid and proposal expense, in total dollars were higher in 2004, compared with 2003. This increase was primarily due to higher sales, which resulted from organic growth and acquisitions as well as higher corporate general and administrative expenses, oÅset in part by lower bid and proposal expense in the Systems Engineering Solutions segment. The higher corporate expense was impacted by internal and external costs related to Sarbanes-Oxley Act Section 404 compliance and auditing eÅorts and higher compensation expense. Selling, general and administrative expenses for 2004, as a percentage of sales, were higher compared with 2003, and reÖected higher corporate expenses and also reÖected a higher selling expense percentage for recent acquisitions which due to the nature of their business, carry a higher selling expense percentage than most of Teledyne's existing businesses, partially oÅset by lower bid and proposal spending. Included in operating proÑt in 2004 was pension expense of $8.7 million, of which $0.5 million was recoverable in accordance with U.S. Government Cost Accounting Standards (CAS) from certain government contracts. Included in 2003 operating proÑt was $6.9 million of pension expense of which none was recoverable in accordance with CAS. The increase in pension expense in 2004 compared with 2003, reÖects, in part, a reduction in the discount rate assumption for the Company's deÑned beneÑt plan as well as the decline in the market value of the Company's pension assets during 2002, 2001 and 2000. The Company's eÅective tax rate for 2004 was 38.7%, compared with 33.3% for 2003. Total year 2003 reÖected an income tax beneÑt of $2.4 million due to the reversal of an income tax contingency reserve which was determined to be no longer needed during the third quarter of 2003. Excluding this beneÑt, the Company's eÅective tax rate for 2003 would have been 38.7%. Sales under contracts with the U.S. Government were approximately 43% of net sales in 2004 and 46% in 2003. International sales represented approximately 19% in 2004 and 16% of net sales in 2003. Total interest expense including facility fees and other bank charges was $2.2 million in 2004 and $1.0 million in 2003. Interest income was $0.3 million in 2004 and $0.2 million in 2003. The higher interest expense in 2004 reÖected interest on debt incurred for acquisitions. Other income for 2004 included the receipt of $2.5 million pursuant to an agreement with Honda Motor Co., Ltd. which is included as part of the Aerospace Engines and Components segment operating proÑt and other segment income for segment reporting purposes. In 2003, we recorded a $2.3 million charge, in other expense, for the write-oÅ of the Company's remaining cost-based investment in a private company engaged in manufacturing and development of micro optics and microelectromechanical devices. Fiscal years 2004 and 2003 also include sublease rental income and royalty income in other income. 32 2003 Compared with 2002 Sales 2003 2002 Electronics and Communications ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $446.9 212.5 Systems Engineering SolutionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 165.5 Aerospace Engines and Components ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Energy Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.8 Total salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $840.7 $388.0 206.7 162.9 15.1 $772.7 Net Income Electronics and Communications ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 33.0 23.2 Systems Engineering SolutionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.4 Aerospace Engines and Components ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (0.7) Energy Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61.9 Segment operating proÑt and other segment incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14.9) Corporate expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (0.8) Interest and debt expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.6) Other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44.6 Income before taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.9 Provision for income taxes(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 29.7 $ 35.9 20.6 2.7 (1.9) 57.3 (14.4) (0.6) (0.2) $ 42.1 16.7 $ 25.4 (a) Total year 2003 provision for taxes includes a $2.4 million income tax beneÑt from the reversal of an income tax contingency reserve which was determined to be no longer needed during 2003. We reported 2003 net sales of $840.7 million, compared with net sales of $772.7 million for 2002. Net income was $29.7 million ($0.91 per diluted share) for 2003, compared with $25.4 million ($0.77 per diluted share) for 2002. The increase in sales in 2003, compared with 2002, reÖected improvement in all four reporting segments. The largest sales growth was in the Electronic and Communications segment notwithstanding a diÇcult environment in some of the companies commercial markets. The higher sales in Electronics and Communications segment resulted from both organic growth and strategic acquisitions, including Monitor Labs, acquired in September 2002, Tekmar Company, acquired in May 2003, and Spirent's Aviation Information Solutions businesses, acquired in June 2003. The incremental increase in revenue from acquisitions in 2003, compared with 2002, was $39.9 million. The increase in segment operating proÑt for 2003, compared with 2002, reÖected improved results in the System Engineering Solutions, Aerospace Engines and Components and Energy Systems segments, partially oÅset by lower operating proÑt in the Electronics and Communications segment. The Electronic and Communications segment included incremental operating proÑt from acquisitions and related synergies of $1.9 million. Cost of sales in total dollars was higher in 2003, compared with 2002. The increase was in line with higher sales and also reÖected higher pension expense, partially oÅset by product mix diÅerences. Cost of sales as a percentage of net sales for 2003 was relatively Öat compared with 2002. While the percentages were comparable, the 2003 percentage reÖected the impact of pension expense compared with pension income in 2002. The impact was oÅset, in part, by product mix diÅerences and $5.1 million in LIFO income in 2003 compared with $0.8 million in LIFO income in 2002. Total year 2003 also reÖected an improvement in cost of sales as a percentage of sales due to Ñnalization of award and incentive fee negotiations for work performed on certain contracts in prior years in the Systems Engineering Solutions 33 segment. At December 29, 2002, Teledyne recorded income of $0.1 million following the Ñnal resolution of the 2001 restructuring, asset impairment and other charge. Selling, general and administrative expenses, including research and development and bid and proposal expense, in total dollars were higher in 2003, compared with 2002. This increase was in line with higher sales which resulted from organic growth and acquisitions. The increased bid and proposal expense was primarily driven by bidding opportunities in the Systems Engineering Solutions segment. Selling, general and administrative expenses for 2003, as a percentage of sales, were relatively Öat compared with 2002, reÖecting the beneÑt of higher sales and continued cost control. Included in operating proÑt in 2003 was pension expense of $6.9 million compared with pension income of $2.3 million in 2002. The increase in pension expense in 2003 compared with 2002, reÖects, in part, a reduction in the discount rate assumption for the Company's deÑned beneÑt plan as well as the decline in the market value of the Company's pension assets during 2002, 2001 and 2000. The Company's eÅective tax rate for 2003 was 33.3%, compared with 39.7% for 2002. Total year 2003 reÖected an income tax beneÑt of $2.4 million due to the reversal of an income tax contingency reserve which was determined to be no longer needed during the third quarter of 2003. Excluding this beneÑt, the Company's eÅective tax rate for 2003 would have been 38.7%. Sales under contracts with the U.S. Government were approximately 46% of net sales in 2003 and 2002. International sales represented approximately 16% of net sales in 2003 and 2002. Total interest expense including facility fees and other bank charges was $1.0 million in 2003 and $0.9 million in 2002. Interest income was $0.2 million in 2003 and $0.3 million in 2002. In 2003, we recorded a $2.3 million charge, in other expense, for the write-oÅ of the Company's remaining cost-based investment in a private company engaged in manufacturing and development of micro optics and microelectromechanical devices. In 2002, we recorded a $0.5 million charge, in other expense, related to the partial write-down of this investment. Fiscal years 2003 and 2002 also include sublease rental income and royalty income in other income. 2001 Restructuring, Asset Impairment and Other Charge Information In 2001, the Company recorded a $26.4 million pretax charge of which $7.5 million was for asset impairments, $8.8 million was for restructuring and other charges, $9.8 million was for inventory write- downs and a $0.3 million pretax charge for discontinued operations. During 2002, the Company completed the eÅorts related to the 2001 charge, recording actual expenses of $26.3 million. At year-end 2002, the cumulative restructuring charges were $8.1 million, $0.7 million lower than the 2001 year-end estimate, the cumulative charges to cost of sales related to excess and obsolete inventory were $10.4 million, $0.6 million higher than the 2001 year-end-estimate, with no change to either the asset impairment charge or the charge for discontinued operations. This resulted in $0.2 million of income in the Electronics and Communications segment in 2002 and an additional cost impact of $0.1 million in the Systems Engineering segment during 2002. No amounts remain on the balance sheet related to the charge. 34 Segments The following discussion of our four segments should be read in conjunction with Note 14 to the Notes to Consolidated Financial Statements. Electronics and Communications Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $567.9 Operating proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 54.4 Operating proÑt % of salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ International sales % of salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Governmental sales % of salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 12.8 9.6% 27.6% 25.9% 2004 2002 2003 (Dollars in millions) $446.9 $ 33.0 $388.0 $ 35.9 7.4% 21.4% 31.8% $ 14.9 $ 9.3% 21.7% 29.7% 8.3 Our Electronics and Communications segment provides a wide range of specialized electronic systems, instruments, components and services that address niche market applications in commercial aerospace, communications, defense, industrial and medical markets. 2004 compared with 2003 Our Electronics and Communications segment sales were $567.9 million in 2004, compared with sales of $446.9 million in 2003. Operating proÑt was $54.4 million in 2004, compared with $33.0 million in 2003. Sales in 2004, compared with 2003, reÖected revenue growth in defense electronic products, electronic instruments, telecommunication subsystems, avionics products and relay products. This growth was partially oÅset by lower sales from electronic manufacturing services, primarily driven by lower government sales. The revenue growth in defense electronic products was driven by sales of traveling wave tubes and ejection seat sequencers, the acquisition of Reynolds Industries, Incorporated on July 2, 2004, and the acquisition of assets of Filtronic Solid State on December 31, 2003. Electronic instruments revenue for 2004, compared 2003, was favorably impacted by the acquisition of Isco on June 18, 2004, the acquisition of Leeman Labs' assets on February 27, 2004, increased shipments of geophysical sensors for the petroleum exploration market and increased sales of other instrument products. Electronic instruments revenue for 2004, compared with 2003, was also favorably impacted by the acquisition of Tekmar Company on May 16, 2003. The revenue growth in avionics products was favorably impacted by the acquisition of the Aviation Information Solutions (""AIS'') businesses from Spirent plc on June 27, 2003. The increase in revenue from acquisitions for 2004, compared with 2003, was $98.6 million. Incremental operating proÑt from acquisitions including synergies for 2004, compared with 2003, was $11.8 million. Segment operating proÑt was favorably impacted by acquisitions and organic sales growth partially oÅset by an increase in pension expense. Pension expense was $6.0 million for 2004 compared with pension expense of $5.1 million in 2003. Operating proÑt in 2003 was favorably impacted by a $1.8 million reduction in LIFO reserve, which resulted from a reduced inventory level, mostly oÅset by a $0.9 million fourth quarter write-down on slow moving test equipment inventory and contract settlements totaling $0.8 million. No LIFO adjustment was made in 2004. 2003 compared with 2002 Our Electronics and Communications segment sales were $446.9 million in 2003, compared with sales of $388.0 million in 2002. Operating proÑt was $33.0 million in 2003, compared with $35.9 million in 2002. Sales in 2003, compared with 2002, reÖected revenue growth in defense electronic products, electronic manufacturing services, avionics products, electronic instruments, medical products and commercial 35 lighting products. The revenue growth in defense electronic products was driven by traveling wave tubes and military microelectronics. The revenue growth in electronic manufacturing services was driven by increased sales to military customers. Revenue growth in avionics products was driven by the acquisition of the Aviation Information Solutions businesses in June 2003, partially oÅset by continued weakness in the commercial aviation market. Electronic instruments revenue was favorably impacted by the acquisition of Monitor Labs Incorporated at the end of the third quarter of 2002 and the acquisition of Tekmar- Dohrmann in May 2003. This revenue growth in electronic instruments was partially oÅset by reduced sales of geophysical sensors for the petroleum exploration market. The increase in revenue from acquisitions for 2003, compared with 2002, was $39.9 million. Incremental operating proÑt from acquisitions including synergies for 2003, compared with 2002, was $1.9 million. Operating proÑt in 2003 was favorably impacted by increased sales and a $1.8 million reduction in LIFO reserve, which resulted from a reduced inventory level, compared with LIFO income of $0.6 million in 2002. These operating proÑt improvements were more than oÅset by a $0.9 million fourth quarter write-down on slow moving test equipment inventory, contract settlements totaling $0.8 million and higher pension expense. In 2002, the Company recorded a $0.8 million write-down of certain optoelectronics equipment due to lower than expected utilization. Segment operating proÑt in 2003 included $5.1 million of pension expense, compared with $2.0 million of pension income in 2002. Systems Engineering Solutions Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $242.2 Operating proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 27.1 Operating proÑt % of salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ International sales % of salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Governmental sales % of salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 11.2% 0.1% 99.3% 1.7 2004 2002 2003 (Dollars in millions) $212.5 $ 23.2 $206.7 $ 20.6 10.9% 0.1% 99.0% 1.5 10.0% 1.3% 98.0% 3.1 $ $ Our Systems Engineering Solutions segment, principally through Teledyne Brown Engineering, Inc., applies the skills of its extensive staÅ of engineers and scientists to provide innovative systems engineering, advanced technology, and manufacturing solutions to defense, space, environmental, and homeland security requirements. 2004 compared with 2003 Our Systems Engineering Solutions segment sales were $242.2 million in 2004, compared with sales of $212.5 million in 2003. Operating proÑt was $27.1 million in 2004, compared with $23.2 million in 2003. Sales for 2004, compared with 2003, reÖected revenue growth in core defense and environmental and aerospace programs. The higher operating proÑt in 2004, compared with 2003, was primarily due to higher sales and improved margins on various time and material contracts. Operating proÑt in 2003 was negatively impacted by the recognition of a $1.0 million loss on an oÇce sublease agreement. Segment operating proÑt in 2004 included $0.8 million of pension expense, of which $0.5 million was recoverable in accordance with CAS from certain government contracts, compared with $0.3 million of pension expense in 2003 of which none was recoverable in accordance with CAS. 2003 compared with 2002 Our Systems Engineering Solutions segment sales were $212.5 million in 2003, compared with sales of $206.7 million in 2002. Operating proÑt was $23.2 million in 2003, compared with $20.6 million in 2002. 36 Sales in 2003, compared with 2002, reÖected increased work in environmental and core defense programs, partially oÅset by lower sales in aerospace programs. Operating proÑt in 2003, compared with 2002, was favorably impacted by increased sales and $4.1 million related to both the Ñnalization of negotiation of prior year award and incentive fees for work performed on certain contracts, primarily the Ground-based Midcourse Defense and Pressurents, Propellants, and Calibration contracts. Operating proÑt in 2003 also reÖected improved margins for environmental programs. Operating proÑt in 2003 was negatively impacted by the recognition of a $1.0 million loss on an oÇce sublease agreement. Segment operating proÑt in 2003 included $0.3 million of pension expense, compared with $0.2 million of pension income in 2002. Aerospace Engines and Components Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $181.8 6.1 Operating proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.4% Operating proÑt % of salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20.2% International sales % of salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.3% Governmental sales % of salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.2 Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2004 2002 2003 (Dollars in millions) $165.5 6.4 $ 3.9% 23.5% 14.9% 3.2 $ $162.9 2.7 $ 1.7% 21.7% 15.6% 3.6 $ Our Aerospace Engines and Components segment, principally through Teledyne Continental Motors, Inc., focuses on the design, development and manufacture of piston engines, turbine engines, electronic engine controls and aviation batteries. 2004 compared with 2003 Our Aerospace Engines and Components segment sales were $181.8 million in 2004, compared with sales of $165.5 million in 2003. Operating proÑt was $6.1 million in 2004, compared with $6.4 million in 2003. Sales in 2004, compared with 2003, reÖected revenue growth in OEM piston engines, aftermarket piston engines and parts sales, and slightly higher turbine engine sales. Turbine engine sales for 2004, compared with 2003, were higher primarily due to increased spare parts sale and favorable Joint Air-to- Surface StandoÅ Missile (""JASSM'') engine sales, partially oÅset by reduced Improved Tactical Air- Launched Decoy (""ITALD'') and Harpoon cruise missile engines. Operating proÑt in 2004 included the receipt of $2.5 million pursuant to an agreement with Honda Motor Co., Ltd. related to the piston engine business. While the terms of the piston engine agreement are conÑdential, the Company anticipates receiving $5.0 million in 2005 and $2.5 million in 2006 under the agreement. Segment operating proÑt for 2004 also reÖected a $4.8 million increase in aircraft product liability insurance costs and self insurance reserve expense, a $1.7 million charge for environmental matters and LIFO expense of $0.5 million. Operating proÑt in the piston engine business in 2003 was positively impacted by a $3.3 million reduction in LIFO reserve, which resulted from a reduced inventory level. Segment operating proÑt in 2004 included $1.5 million of pension expense, compared with $1.3 million of pension expense in 2003. 2003 compared with 2002 Our Aerospace Engines and Components segment sales were $165.5 million in 2003, compared with sales of $162.9 million in 2002. Operating proÑt was $6.4 million in 2003, compared with $2.7 million in 2002. Sales in 2003, compared with 2002, reÖected revenue growth in OEM piston engines, partially oÅset by reduced sales of aftermarket products and services. Operating proÑt in the piston engine business was positively impacted by an improved cost structure, productivity improvements and a $3.3 million reduction in LIFO reserve, which resulted from a reduced inventory level, partially oÅset by an increase of 37 $4.1 million for aircraft product liability insurance costs and self insurance reserve expense. Operating proÑt in 2002 included $0.2 million from a reduction in LIFO reserve. Sales from turbine engines were unfavorably impacted by lower revenue from spare parts for Air Force training aircraft and lower Harpoon cruise missile engine sales, partially oÅset by higher revenue from ITALD engines and favorable Joint Air-to-Surface StandoÅ Missile (""JASSM'') engine sales. Operating proÑt for turbine engines was lower in 2003, compared with 2002, and resulted from lower sales and a less favorable product mix. Segment operating proÑt in 2003 included $1.3 million of pension expense, compared with $0.5 million of pension income in 2002. Energy Systems Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $24.7 Operating proÑt/(loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.6 Operating proÑt/(loss) % of salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ International sales % of salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Governmental sales % of salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.1 2003 2001 2002 (Dollars in millions) $15.8 $(0.7) $ 15.1 $ (1.9) 6.5% (4.4)% (12.6)% 28.3% 17.0% 22.8% 61.2% 78.5% 67.7% 0.4 $ 0.6 $ Our Energy Systems segment, through Teledyne Energy Systems, Inc., provides on-site gas and power generation systems based on proprietary electrolysis, thermoelectric and fuel cell technologies. 2004 compared with 2003 Our Energy Systems segment sales were $24.7 million in 2004, compared with sales of $15.8 million in 2003. The 2004 operating income was $1.6 million, compared with a 2003 operating loss of $0.7 million. The increase in sales for 2004, compared with 2003, resulted from multi-year government contracts, which were awarded, in 2003, for fuel cell and thermoelectric power generator work. Operating proÑt for 2004, compared with the operating loss in 2003, was favorably impacted by the growth in sales and by a reduction in research and development costs. The operating loss in 2003 included $0.4 million in charges for contract claims and the recognition of a $0.5 million loss on a facility sublease agreement. Segment operating proÑt included pension expense of $0.1 million in 2004, compared with no pension expense in 2003. 2003 compared with 2002 Our Energy Systems segment sales were $15.8 million in 2003, compared with sales of $15.1 million in 2002. The 2003 operating loss was $0.7 million, compared with an operating loss of $1.9 million in 2002. Sales in 2003 reÖected revenue growth in government programs related to multi-year contracts which were won, in 2003, primarily for thermoelectric generator development, partially oÅset by reduction in commercial revenue, primarily hydrogen generator sales. The reduction in operating loss for 2003, compared with 2002, resulted from increased sales, an improved overhead cost structure, reduced general and administrative and research and development expenses and the absence of $0.3 million in program cost adjustments that impacted 2002, partially oÅset by $0.4 million in charges for contract claims and the recognition of a $0.5 million loss on a facility sublease agreement. 38 Financial Condition, Liquidity and Capital Resources Principal Capital Requirements Our principal capital requirements are to fund working capital needs, capital expenditures and debt service requirements, as well as to fund acquisitions. It is anticipated that operating cash Öow, together with available borrowings under the credit facility described below, will be suÇcient to meet these requirements and could be used to fund some acquisitions in the year 2005. To support acquisitions, we may need to raise additional capital. Our liquidity is not dependent upon the use of oÅ-balance sheet Ñnancial arrangements. We have no oÅ-balance sheet Ñnancing arrangements that incorporate the use of special purpose entities or unconsolidated entities. Revolving Credit Agreement In June 2004, the Company terminated its then existing $200.0 million Ñve-year revolving credit agreement and replaced it with a new $280.0 million credit facility that expires in June 2009. Excluding interest and fees, no payments are due under the credit facility until the credit facility terminates. Available borrowing capacity under the $280.0 million credit facility, which is reduced by borrowings and outstanding letters of credit, was $203.0 million at year-end 2004. For a description of some terms of our credit facility, see ""Financing Activities'' on page 43. Contractual Obligations The following table summarizes our expected cash outÖows resulting from Ñnancial contracts and commitments at January 2, 2005. We have not included information on our normal recurring purchases of materials for use in our operations. These amounts are generally consistent from year to year, closely reÖect our levels of production, and are not long-term in nature (in millions): 2005 2006 Operating lease obligations ÏÏÏÏÏÏÏÏ Long-term debt obligations ÏÏÏÏÏÏÏ Capital lease obligations(a) ÏÏÏÏÏÏÏ Purchase obligations(b) ÏÏÏÏÏÏÏÏÏÏ $10.2 3.1 0.3 26.8 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $40.4 $ 7.5 0.1 0.3 2.7 $10.6 2007 $4.7 Ì 0.3 0.1 $5.1 2008 $4.1 Ì 0.4 Ì $4.5 2009 $ 3.2 70.5 0.4 Ì $74.1 2010 and beyond $10.6 Ì 5.4 Ì $16.0 Total $ 40.3 73.7 7.1 29.6 $150.7 (a) Includes imputed interest and short-term portion (b) Purchase obligations generally include long-term contractual obligations for the purchase of goods and services. The amounts above exclude our minimum funding requirements as set forth by ERISA, which are $24.6 million over the next two years. Our minimum funding requirements after 2004 are dependent on several factors. We also have payments due under our other postretirement beneÑts plans. These plans are not required to be funded in advance, but are pay as you go. See further discussion in Note 13 of the Notes to Consolidated Financial Statements Operating Activities In 2004, net cash provided from continuing operations was $84.9 million, compared with $56.8 million in 2003 and $74.2 million in 2002. The higher net cash provided from continuing operations for 2004, compared with 2003, reÖected improved net income and lower aircraft product liability settlement payments, as well as operating cash Öow from acquisitions, partially oÅset by deÑned beneÑt pension contributions of $3.1 million. The deferred income tax component of the cash Öow statement reÖected a $6.8 million increase in 2004, a $7.6 million decrease in 2003 and a $15.2 million increase in 2002 related 39 to the minimum pension liability adjustment recorded in each year. This adjustment had no impact on cash Öows from operations in 2004. The decrease in net cash provided from continuing operations in 2003, compared with 2002, reÖected timing diÅerences related to accounts payable, diÅerences in the cash impact of income taxes, higher payments in 2003 for aircraft product liability settlements and higher accounts receivables balances. The higher accounts receivables balances reÖected the impact of higher sales in December 2003 compared to December 2002. In 2003, cash was used to pay down accounts payable, compared to an increase in accounts payable for 2002 resulting primarily from timing of inventory and capital purchases. The deferred income tax and the accrued pension obligation components of the cash Öow statement in 2003 were both aÅected by the deferred tax amount of $7.6 million related to the minimum pension liability adjustment recorded in 2003. This adjustment had no impact on cash Öows from continuing operations in 2003. Fiscal years 2003 and 2002 reÖected payments for workers compensation claims. The 2002 cash used by discontinued operations also reÖected the payment of a purchase price adjustment. Working Capital Working capital was $124.4 million at year-end 2004, compared with $129.5 million at year-end 2003. The decrease in working capital was due to lower cash balances, oÅset in part, by working capital from recent acquisitions. The lower cash balances reÖects cash used to pay down debt incurred for recent acquisitions. We continue to emphasize improvements in working capital management. Balance Sheet Changes The changes in the following selected components of Teledyne balance sheet are discussed below (in millions): 2004 2003 Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 11.4 Accounts receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $141.7 Inventories, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 97.7 Long-term deferred income taxes, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 28.3 Property, plant and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 90.8 Goodwill, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $166.0 Acquired intangible assets, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 26.0 Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 62.3 Short-term accrued liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 97.0 Other long-term liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 54.9 Long-term debt and capital lease obligations, net of current portionÏÏÏÏÏÏÏÏÏÏ $ 74.4 Accrued pension obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 46.7 Accumulated other comprehensive lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(22.3) $ 37.8 $121.3 $ 63.6 $ 19.7 $ 76.0 $ 56.2 $ 5.4 $ 48.1 $ 74.9 $ 38.4 $ Ì $ 25.6 $(11.3) The lower balance in cash and cash equivalents at January 2, 2005, compared with December 28, 2003 reÖected cash used to acquire businesses and capital spending, partially oÅset by positive cash Öow from operations. The higher balance in accounts receivables, inventory, property, plant and equipment and accounts payable reÖected the impact of businesses acquired in 2004. The increase in long-term deferred income taxes reÖected the $6.8 million increase related to the minimum pension liability adjustment. Goodwill and acquired intangible assets reÖect the impact of acquisitions. The increase in short-term accrued liabilities reÖected liabilities for businesses acquired in 2004 and higher compensation accruals. The increase in other long-term liabilities reÖected an increase in the aircraft product liability reserve. The accrued pension obligation increased primarily as a result of the increase in the unfunded pension liability in 2004, partially oÅset by pension contributions. The change in the accumulated other comprehensive loss 40 reÖected the $10.9 million non-cash adjustment related to the increase in the unfunded pension liability in 2004. The adjustment to the accumulated other comprehensive loss component of equity was required since the diÅerence between the value of the Company's pension assets and the accumulated pension beneÑt obligation was larger as of year-end 2004, compared with year-end 2003 (the ""unfunded pension liability''). The reduction to equity did not aÅect net income and was recorded net of $6.8 million in deferred taxes. The increase in long-term debt and capital lease obligations resulted from cash used to acquire businesses in 2004 and a capital lease assumed in the Reynolds acquisition. Investing Activities Net cash used in investing activities included capital expenditures as presented below: Capital Expenditures 2004 Electronics and Communications ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $12.8 1.7 Systems Engineering Solutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.2 Aerospace Engines and Components ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.1 Energy SystemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2003 (In millions) $14.9 1.5 3.2 0.6 2002 $ 8.3 3.1 3.6 0.4 $18.8 $20.2 $15.4 During 2005, we plan to invest approximately $23.0 million in capital principally to reduce manufacturing costs, to introduce new products and to upgrade capital equipment. Commitments at January 2, 2005 for capital expenditures were approximately $2.6 million. Investing activities in 2004 included the Ñve acquisitions. On December 31, 2003, Teledyne acquired the electronic warfare business of Filtronic Solid State for $12.0 million in cash. Solid State's electronic warfare business had sales of approximately $12.5 million for the Ñscal year ended May 2003. On February 27, 2004, Teledyne acquired Leeman Labs' assets for $8.1 million in cash which includes a purchase price adjustment. Leeman Labs had sales of approximately $8.6 million for the Ñscal year ended September 30, 2003. On June 18, 2004, Teledyne completed the acquisition of the stock of Isco for $16.00 per share in cash or $93.8 million net of cash acquired. Teledyne sold $17.3 million of marketable securities acquired as part of the Isco acquisition and applied the proceeds against debt. Teledyne assumed $2.9 million in long-term debt as part of the Isco acquisition. Isco had sales of approximately $60.8 million for the Ñscal year ended July 25 2003. On July 2, 2004, Teledyne acquired Reynolds for $41.2 million in cash which includes a purchase price adjustment and is net of cash acquired. Teledyne assumed a $3.9 million capital lease as part of the Reynolds acquisition. Reynolds had sales of approximately $35.0 million for the Ñscal year ended April 30, 2004. On October 22, 2004, Teledyne acquired the defense electronics business of Celeritek, Inc. for $32.7 million in cash, which includes the receipt of a purchase price adjustment. The defense electronics business of Celeritek, Inc. had sales of approximately $19.7 million for the Ñscal year ended March 31, 2004. Investing activities in 2003 included the acquisitions of AIS and Tekmar Company. On June 27, 2003, Teledyne acquired AIS for $6.4 million in cash, which is net of a $0.4 million purchase price adjustment. AIS had sales of approximately $16.8 million for the Ñscal year ended December 2002. On May 16, 2003, Teledyne acquired Tekmar Company for $13.5 million in cash. Tekmar Company had sales of $22.5 million for the Ñscal year ended in September 2002. Investing activities in 2002 included the acquisition of Monitor Labs from Spirent plc on September 27, 2002 for $24.0 million in cash. Monitor Labs had sales of approximately $25.6 million for the twelve months ended September 29, 2002. Investing activities in 2002 also included the receipt of a tax refund of $1.1 million related to the API acquisition. 41 In all acquisitions, the results are included in the Company's consolidated Ñnancial statements from the date of each respective acquisition. The allocation of the purchase price for the acquisition of Tekmar Company was completed as of year-end 2003 and the allocation of the purchase price for the acquisition of AIS was completed in the Ñrst quarter of 2004. The allocation of the purchase price for the Isco, Reynolds, Solid State and Leeman Labs acquisitions are complete as of year-end 2004. Each of the above acquisitions is part of the Electronics and Communications segment. Approximately $36.4 million of goodwill recorded in 2004 is deductible for tax purposes. The Company is in the process of speciÑcally identifying the amount to be assigned to intangible assets for the Celeritek acquisition and has made preliminary estimates as of January 2, 2005, since there was insuÇcient time between the acquisition date and the end of the quarter to Ñnalize the valuation. The preliminary amount of goodwill recorded as of January 2, 2005 for the Celeritek acquisition, was $25.0 million. The preliminary amount of intangible assets recorded as of January 2, 2005 for the Celeritek acquisition, was $3.9 million. These amounts were based on estimates that are subject to change pending the completion of the Company's internal review and the receipt of third party appraisals. The following table summarizes the total intangible assets acquired as part of the Ñve acquisitions made in 2004 and the two acquisitions made in 2003 (dollars in millions): January 2, 2005 Weighted average useful life in years Intangibles not subject to amortization: Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Trademarks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangibles subject to amortization: Proprietary Technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Customer List/RelationshipsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Patents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-compete agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Backlog ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total subject to amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $121.2 10.0 $131.2 $ 10.0 4.7 0.2 0.2 0.9 $ 16.0 n/a n/a 9.7 6.4 14.9 5.0 1.1 6.2 Amortizable intangible assets are amortized over their estimated useful lives on a straight line basis. The Company recorded $1.4 million and $0.2 million in amortization expense in 2004 and 2003, respectively, for acquired intangible assets. The expected future amortization expense for the next Ñve years is as follows (in millions): 2005-$2.4, 2006-$1.7, 2007-$1.6, 2008-$1.6, 2009-$1.5. 42 The following is a summary at the acquisition date of the estimated fair values of the assets acquired and liabilities assumed for the Ñve acquisitions made in 2004 (in millions): Current assets, excluding cash acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ GoodwillÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total assets acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Current liabilities, including short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term capital lease ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 50.4 19.7 110.1 20.6 19.5 220.3 28.2 0.5 3.8 Total liabilities assumed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchase price, net of cash acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32.5 $187.8 Financing Activities Cash provided by Ñnancing activities for 2004 also reÖected net borrowings under the revolving credit agreement. Cash used in Ñnancing activities for 2002 reÖected the payment of long-term debt. Cash provided by Ñnancing activities for Ñscal years 2004, 2003 and 2002 reÖect proceeds from the exercise of stock options. In June 2004, the Company terminated its then existing $200.0 million Ñve-year revolving credit agreement and replaced it with a new $280.0 million credit facility that expires in June 2009. At year-end 2004, we had $203.0 million of available committed credit under the credit facility, which can be utilized, as needed, for daily operating and periodic cash needs, including acquisitions. Borrowings under the credit facility bear interest, at our option, at a rate based on either a deÑned base rate or the London Interbank OÅered Rate (LIBOR), plus applicable margins. The credit agreement also provides for facility fees that vary between 0.15% and 0.30% of the credit line, depending on our capitalization ratio as calculated from time to time. The credit agreement requires the Company to comply with various Ñnancial and operating covenants, including maintaining certain consolidated leverage and interest coverage ratios, as well as minimum net worth levels and limits on acquired debt. Total debt at year-end 2004 includes the $70.0 million outstanding under the credit facility and $3.2 million assumed in the Isco acquisition, of which $3.1 million is current. The Company also assumed a $3.9 million capital lease in the Reynolds acquisition, of which $0.1 million is current. We also had $0.5 million in long-term debt outstanding at year-end 2004 under a $5.0 million uncommitted bank facility. This credit line is utilized, as needed, for periodic cash needs. At January 2, 2005, the Company had $10.0 million in outstanding letters of credit. In March 2003, Teledyne announced that its Board of Directors authorized the Company to purchase, from time to time, up to one million shares of its Common Stock in open market or privately negotiated transactions through March 31, 2004. No repurchases were made under the program. Pension Plans In connection with the spin-oÅ, a deÑned beneÑt pension plan was established and Teledyne assumed the existing pension obligations for all of the employees, both active and inactive, at the operations which perform government contract work and for active employees at operations which do not perform government contract work. ATI transferred pension assets to fund the new deÑned beneÑt pension plan. The Company has changed its retirement beneÑts for non-union new hires. As of January 1, 2004, non- union new hires participate in an enhanced deÑned contribution plan as opposed to the company's existing deÑned beneÑt plan. Currently, Teledyne anticipates making an after-tax cash contribution of approximately $9.0 million to its deÑned beneÑt pension plan in 2005. Also, under one of its spin-oÅ 43 agreements, after November 29, 2004, the Company is able to charge pension costs to the U.S. Government under certain government contracts in accordance with CAS. Statement of Financial Accounting Standard (""SFAS'') No. 87, ""Employers' Accounting for Pensions,'' requires that a minimum pension liability be recorded if the value of pension assets is less than the accumulated pension beneÑt obligation. This condition existed since year-end 2002. In accordance with the requirements of SFAS No. 87, the Company has a $22.7 million non-cash reduction to stockholders' equity, a long-term intangible asset of $7.2 million and a long-term additional pension liability of $44.3 million at year-end 2004. As of year-end 2003, the Company had a $11.8 million non-cash reduction to stockholders' equity, a long-term intangible asset of $8.5 million and an additional long-term pension liability of $27.9 million. The adjustments to equity did not aÅect net income and are recorded net of deferred taxes. The reduction will be reversed should the value of the pension assets exceed the accumulated pension beneÑt obligation as of a future measurement date. See Note 13 of the Notes to Consolidated Financial Statements for additional pension disclosures. Other Matters Income Taxes As noted earlier, the Company's eÅective tax rate for 2004 was 38.7%, compared with 33.3% for 2003 and 39.7% for 2002. Total year 2003 reÖected an income tax beneÑt of $2.4 million due to the reversal of an income tax contingency reserve which was determined to be no longer needed during the third quarter of 2003. Excluding this beneÑt, the Company's eÅective tax rate for 2003 would have been 38.7%. Based on the Company's history of operating earnings, expectations of future operating earnings and potential tax planning strategies, it is more likely than not that the deferred income tax assets at January 2, 2005 will be realized. Costs and Pricing InÖationary trends in recent years have been moderate. We primarily use the last-in, Ñrst-out method of inventory accounting that reÖects current costs in the costs of goods sold. These costs, the increasing costs of equipment and other costs are considered in establishing sales pricing polices. The Company emphasizes cost containment in all aspects of its business. Hedging Activities; Market Risk Disclosures We have not utilized derivative Ñnancial instruments such as futures contracts, options and swaps, forward foreign exchange contracts or interest rate swaps and futures during 2004 or 2003. We believe that adequate controls are in place to monitor any hedging activities. Our primary exposure to market risk relates to changes in interest rates and foreign currency exchange rates. We periodically evaluate these risks and have taken measures to mitigate these risks. We own assets and operate facilities in countries that have been politically stable. Also, our foreign risk management objectives are geared towards stabilizing cash Öow from the eÅects of foreign currency Öuctuations. Most of the Company's sales are denominated in U.S. dollars which mitigates the eÅect of exchange rate changes. Any borrowings under the Company's revolving credit line are based on a Öuctuating market interest rate and, consequently, the fair value of any outstanding debt should not be aÅected materially by changes in market interest rates. Overall, we believe that our exposure to interest rate risk and foreign currency exchange rate changes is not material to our Ñnancial condition or results of operations. Related Party Transactions In connection with the spin-oÅ, Teledyne and ATI entered into several agreements governing the separation of our businesses and various employee beneÑts, compensation, tax, indemniÑcation and transition arrangements. The Company's principal spin-oÅ requirements, including the requirement to ensure a favorable tax treatment, have been satisÑed. Three of our nine directors continue to serve on ATI's board. In addition, under one of our spin-oÅ agreements, the Company is able to charge pension 44 costs to the U.S. Government under certain government contracts after November 29, 2004. In 2004, we purchased the ""Teledyne'' name and related logos, symbols and marks from an aÇliate of ATI for $412,000. Our Chairman, President and Chief Executive OÇcer is a director of Mellon Financial Corporation. Another of our directors is a former chief executive oÇcer and director of Mellon Financial Corporation. All transactions with Mellon Bank, N.A. and its aÇliates are eÅected under normal commercial terms, and we believe that our relationships with Mellon Bank, N.A. and its aÇliates are arms-length. Mellon Bank, N.A. is one of ten lenders under our $280.0 million credit facility, having committed up to $25.0 million under the facility. It also provides cash management services and an uncommitted $5.0 million line of credit. Mellon Bank, N.A. serves as trustee under our pension plan and provides asset management services for the plan. Mellon Investor Services LLC serves as our transfer agent and registrar, as well as agent under our stockholders rights plan. Environmental We are subject to various federal, state, local and international environmental laws and regulations which require that we investigate and remediate the eÅects of the release or disposal of materials at sites associated with past and present operations. These include sites at which Teledyne has been identiÑed as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, and comparable state laws. We are currently involved in the investigation and remediation of a number of sites. Reserves for environmental investigation and remediation totaled approximately $3.5 million at January 2, 2005. This amount includes $1.8 million for an environmental matter related to the Aerospace Engines and Component segment. As investigation and remediation of these sites proceed and new information is received, the Company expects that accruals will be adjusted to reÖect new information. Based on current information, we do not believe that future environmental costs, in excess of those already accrued, will materially and adversely aÅect our Ñnancial condition or liquidity. However, resolution of one or more of these environmental matters or future accrual adjustments in any one reporting period could have a material adverse eÅect on our results of operations for that period. For additional discussion of environmental matters, see Notes 2 and 16 to the Notes to Consolidated Financial Statements. Government Contracts We perform work on a number of contracts with the Department of Defense and other agencies and departments of the U.S. Government including sub-contracts with government prime contractors. Sales under these contracts with the U.S. Government, which included contracts with the Department of Defense, were approximately 43% in 2004 and 46% of total sales in 2003 and in 2002. For a summary of sales to the U.S. Government by segment, see Note 14 to the Notes to Consolidated Financial Statements. Sales to the Department of Defense represented approximately 33%, 31% and 30% of total sales for 2004, 2003 and 2002, respectively. Performance under government contracts has certain inherent risks that could have a material adverse eÅect on the Company's business, results of operations and Ñnancial condition. Government contracts are conditioned upon the continuing availability of Congressional appropriations, which usually occurs on a Ñscal year basis even though contract performance may take more than one year. While the overall U.S. military budget declined in real dollars from the mid-1980s through the early 1990s, U.S. defense spending has increased and is expected to continue to increase over the next few years as a result of global responses to terrorism and perceived nuclear threats. Notwithstanding the potential for increased defense spending, delays or declines in U.S. military expenditures in the programs in which we participate could adversely aÅect our business, results of operations and Ñnancial condition. For information on accounts receivable from the U.S. Government, see Note 6 to the Notes to Consolidated Financial Statements. 45 Estimates and Reserves Our discussion and analysis of Ñnancial condition and results of operations are based upon our consolidated Ñnancial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these Ñnancial statements requires us to make estimates and judgments that aÅect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates, including those related to product returns, allowance for doubtful accounts, inventories, intangible assets, income taxes, warranty obligations, pension and other postretirement beneÑts, long-term contracts, environmental, workers' compensation and general liability, aircraft product liability, employee dental and medical beneÑts and other contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances at the time, the results of which form the basis for making our judgments. Actual results may diÅer materially from these estimates under diÅerent assumptions or conditions. In some cases, such diÅerences may be material. See ""Other Matters Ì Critical Accounting Policies''. The following table reÖects signiÑcant reserves and valuation accounts, which are estimates and based on judgments as described above, at January 2, 2005 and December 28, 2003: Reserves and Valuation Accounts(a) 2004 2003 (In millions) Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2.6 LIFO reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $21.7 Other inventory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $21.2 Aircraft product liability reserves(b) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $27.4 Workers' compensation and general liability reserves(b) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6.3 Warranty reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6.9 Environmental reserves(b) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.5 Other accrued liability reserves(b) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.9 $ 2.4 $21.1 $14.2 $13.0 $ 4.5 $ 6.0 $ 2.0 $ 3.2 (a) This table should be read in conjunction with the Notes to Consolidated Financial Statements. (b) Includes both long-term and short-term reserves. Critical Accounting Policies Our critical accounting policies are those that are reÖective of signiÑcant judgments and uncertainties, and may potentially result in materially diÅerent results under diÅerent assumptions and conditions. We have identiÑed the following as critical accounting policies: revenue recognition; impairment of long-lived assets; income taxes; inventories and related allowance for obsolete and excess inventory; aircraft product liability reserve, accounting for pension plans and accounting for business combinations. For additional discussion of the application of these and other accounting policies, see Note 2 of the Notes to Consolidated Financial Statements. Revenue Recognition Commercial sales and revenue from U.S. Government Ñxed-price-type contracts are generally recorded as shipments are made or as services are rendered. Occasionally, for certain Ñxed-price type contracts that require substantial performance over a long time period (one or more years) before shipments begin, in accordance with the requirements of Statement of Position 81-1 ""Accounting for Performance of Construction-Type and Certain Production-Type Contracts'', revenues may be recorded based upon attainment of scheduled performance milestones which could be time, event or expense driven. In these few instances, invoices are submitted to the customer under a contractual agreement and payments are made by the customer. Sales under cost-reimbursement contracts are recorded as costs are 46 incurred and fees are earned. Since certain contracts extend over a long period of time, all revisions in cost and funding estimates during the progress of work have the eÅect of adjusting the current period earnings on a cumulative catch-up basis. If the current contract estimate indicates a loss, a provision is made for the total anticipated loss. The Company follows the requirements of Securities and Exchange Commission StaÅ Accounting Bulletin No. 101 and No. 104 on revenue recognition. Some of the Company's products are subject to speciÑed warranties and the Company provides for the estimated cost of product warranties. We regularly assess the adequacy of our preexisting warranty liabilities and adjust amounts as necessary based on a review of historic warranty experience with respect to the applicable business or products, as well as the length and actual terms of the warranties. The product warranty reserve is included in current accrued liabilities on the balance sheet. Changes in the Company's product warranty reserve are as follows (in millions): Balance at beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accruals for product warranties charged to expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cost of product warranty claims ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 2003 $ 6.0 3.5 (3.4) 0.8 $ 5.2 3.5 (3.9) 1.2 Balance at year-end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6.9 $ 6.0 Impairments of Long-Lived Assets We monitor the recoverability of the carrying value of our long-lived assets. An impairment charge is recognized when events and circumstances indicate that the undiscounted cash Öows expected to be generated by an asset (including any proceeds from dispositions) are less than the carrying value of the asset and the asset's carrying value is less than its fair value. Our cash Öow estimates are based on historical results adjusted to reÖect our best estimate of future market and operating conditions. The net carrying value of assets not recoverable is reduced to fair value. Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions. In 2002, we determined that the carrying amounts of certain of our long-lived assets were no longer recoverable based on estimates of future operating cash Öows to be generated by these assets. As a result, in 2002, we recorded a $0.8 million write-down of certain optoelectronic equipment and a $0.5 million charge related to the partial write-down of the Company's $2.8 million cost-based investment in a private company engaged in manufacturing and development of micro optics and microelectromechanical devices. In 2003, we wrote-oÅ the remaining $2.3 million of this investment. Accounting for Income Taxes As part of the process of preparing our consolidated Ñnancial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary diÅerences resulting from diÅering treatment of items for tax and accounting purposes. These diÅerences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We assess the likelihood that our deferred tax assets will be recovered from future taxable income, recognizing that future taxable income may give rise to new deferred tax assets. To the extent that we believe that future recovery is not likely, we must establish a valuation allowance. To the extent we establish or increase a valuation allowance, we must include an expense within the tax provision in the income statement. SigniÑcant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. A valuation allowance of $3.3 million exists as of January 2, 2005. In the event that actual results diÅer 47 from these estimates, or we adjust these estimates in future periods, we may need to adjust the valuation allowance, which could impact our Ñnancial position and results of operations. Provisions for income taxes for 2004, 2003 and 2002 are subject to audit by the Internal Revenue Service and the tax authorities in the various jurisdictions in which we do business. Inventories and Related Allowance for Obsolete and Excess Inventory Inventories are valued at the lower of cost (last-in, Ñrst-out; Ñrst-in, Ñrst-out; and average cost methods) or market, less progress payments. We primarily use the last-in, Ñrst-out method of inventory accounting that reÖects current costs in the costs of products sold. Costs include direct material, direct labor, applicable manufacturing and engineering overhead, and other direct costs. Inventories have been reduced by an allowance for excess and obsolete inventories. The estimated allowance is based on management's review of inventories on hand compared to assumptions about future demand and market conditions. If actual future demand or market conditions are more or less favorable than those currently projected by management, adjustments may be required. In 2003, we recorded a $0.9 million fourth quarter write-down on slow moving test equipment inventory in our Electronics and Communication segment. Total inventories at cost were net of reserves for excess, slow moving and obsolete inventory of $21.2 million and $14.2 million at January 2, 2005 and December 28, 2003, respectively. The increase from 2003 is primarily attributable to reserve balances acquired as part of acquisitions made in 2004. Aircraft Product Liability Reserve We are currently involved in certain legal proceedings related to aircraft product liability claims. We have accrued an estimate of the probable costs for the resolution of these claims. This estimate has been developed in consultation with our insurers, outside counsel handling our defense in these matters and historical experience, and is based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. We do not believe these proceedings will have a material adverse eÅect on our consolidated Ñnancial position. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially aÅected by speciÑc events occurring in the period, changes in our assumptions, or the eÅectiveness of our strategies, related to these proceedings. The Company has aircraft and product liability insurance. However, based on a review of claims experience, changes to the claims management process and an analysis of available options, the Company, in 2004, increased its annual self-insurance retention for general aviation aircraft liabilities incurred in connection with products manufactured by Teledyne Continental Motors to $25.0 million from $15.0 million, and as a result lowered its annual insurance premium. We cannot assure that, for 2005 and in future years, our ability to obtain insurance, or the premiums for such insurance, or the amount of our self-insured retention or reserves will not be negatively impacted by our experience in prior years or other factors. Our current aircraft product liability insurance policy expires May 2005. Accounting for Pension Plans Teledyne has a deÑned beneÑt pension plan covering most of its employees. The Company accounts for its deÑned beneÑt pension plan in accordance with SFAS No. 87 Ì ""Employers' Accounting for Pensions,'' which requires that amounts recognized in Ñnancial statements be determined on an actuarial basis, rather than as contributions are made to the plan. A signiÑcant element in determining the Company's pension income or expense in accordance with SFAS No. 87 is the expected return on plan assets. The Company has assumed, based upon the types of securities the plan assets are invested in and the long-term historical returns of these investments, that the long-term expected return on pension assets will be 8.5% in 2005, compared with 8.5% in 2004, and its assumed discount rate will be 6.25% in 2005, compared with 6.5% in 2004. The Company made an after-tax contribution of $1.9 million to its pension plan in 2004, and anticipates making an after-tax cash contribution of approximately $9.0 million to its pension plan in 2005. The assumed long-term rate of return on assets is applied to the market-related value of plan assets at the end of the previous year. This produces the expected return on plan assets that is included in annual pension income or expense for the current year. The cumulative diÅerence between 48 this expected return and the actual return on plan assets is deferred and amortized into pension income or expense over future periods. As noted earlier, since the value of the Company's pension assets were less than the accumulated pension beneÑt obligation, in accordance with the requirements of SFAS No. 87, the Company has a $22.7 million non-cash reduction to stockholders' equity, a long-term intangible asset of $7.2 million and an additional long-term pension liability of $44.3 million at year-end 2004. The adjustment to equity did not aÅect net income and is net of deferred taxes of $14.4 million. The charge will be reversed should the value of the pension assets exceed the accumulated pension beneÑt obligation as of a future measurement date. See Note 13 of the Notes to Consolidated Financial Statements for additional pension disclosures. Accounting for Business Combinations The Company accounts for goodwill and purchased intangible assets under Statement of Financial Accounting Standards (""SFAS'') No. 141 ""Business Combinations'' and SFAS No. 142 ""Goodwill and Other Intangible Assets''. Business acquisitions are accounted for under the purchase method by assigning the purchase price to tangible and intangible assets acquired and liabilities assumed. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. Purchased intangible assets with Ñnite lives are amortized over their estimated useful lives. Goodwill and intangible assets with indeÑnite lives are not amortized, but reviewed at least annually for impairment. The Company performs an annual impairment review in the fourth quarter by comparing the fair value of the reporting units, which are our four business segments, to their carrying values. Fair values are estimated using discounted cash Öow methodologies that are based on projections of the amounts and timing of future revenues and cash Öows. Based on the annual impairment review completed in the fourth quarter of 2004, no impairment of goodwill or intangible assets with indeÑnite lives was indicated. In all acquisitions, the results are included in the Company's consolidated Ñnancial statements from the date of each respective acquisition. Recent Accounting Pronouncements SFAS No. 123R In December 2004, the Financial Accounting Standards Board (""FASB'') issued SFAS No. 123R, ""Share Based Payment'' (""SFAS No. 123R'') that will require compensation costs related to share-based payment transactions to be recognized in the Ñnancial statements. With limited exceptions, the amount of compensation costs will be measured based on the grant date Ì fair value of the equity or liability instrument issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123R replaces SFAS No. 123, ""Accounting for Stock-Based Compensation'' and supersedes SFAS No. 25, ""Accounting for Stock Issued to Employees.'' Beginning with the third quarter of 2005, Teledyne plans to recognize compensation expense in accordance with FASB No. 123R. The adoption of this standard for the expensing of stock options is expected to reduce pretax earnings by $2.2 million in the second half of 2005. SFAS No. 151 In November 2004, the FASB issued SFAS No 151, ""Inventory Costs Ì an amendment of ARB No. 43 Chapter 4'' (""SFAS No. 151''). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, ""Inventory Pricing,'' to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 requires that those items be recognized as current-period charges. SFAS No. 151 is eÅective for Ñrst Ñscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have any impact on the Company. SFAS No. 132 In December 2003, the FASB issued SFAS No 132, ""Employers' Disclosures about Pensions and Other Postretirement BeneÑts'' (""SFAS No. 132''). SFAS No. 132 requires additional information 49 regarding the types of plan assets, investment strategy, measurement date, plan obligations, cash Öows and components of net periodic beneÑt cost recognized during interim periods as is eÅective immediately upon issuance. The Company has included the required disclosures in Note 13 to the Notes to Consolidated Financial Statements. SFAS No. 150 In May 2003, the FASB issued SFAS No. 150, ""Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity'' (""SFAS No. 150''). This Statement establishes standards for classifying and measuring as liabilities certain Ñnancial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. It represents a signiÑcant change in practice in the accounting for a number of Ñnancial instruments, including mandatorily redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. SFAS No. 150 must be applied immediately to instruments entered into or modiÑed after May 31, 2003 and to all other instruments that exist as of the beginning of the Ñrst interim Ñnancial reporting period beginning after June 15, 2003, except for noncontrolling interests of a limited-life subsidiary which has been deferred indeÑnitely. As Teledyne currently has no Ñnancial instruments that would be subject to SFAS No. 150, the adoption had no impact on the Company. SFAS No. 149 In April 2003, the FASB issued SFAS No. 149, ""Amendment of Statement 133 on Derivative Instruments and Hedging Activities'' (""SFAS No. 149''). SFAS No. 149 amends and clariÑes accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 clariÑes under what circumstances a contract with an initial net investment meets the characteristics of a derivative and when a derivative contains a Ñnancing component that warrants special reporting in the statement of cash Öows. SFAS No. 149 is generally eÅective for contracts entered into or modiÑed after June 30, 2003, and had no impact on Teledyne's Ñnancial position or results of operations. FIN 46 In January 2003, the FASB issued Interpretation No. 46, ""Consolidation of Variable Interest Entities'' (""FIN 46''). FIN 46 requires companies to evaluate variable interest entities to determine whether to apply the consolidation provisions of FIN 46 to those entities. Companies must apply FIN 46 to entities created after January 31, 2003, and to variable interest entities in which a company obtains an interest after that date. In October 2003, the FASB deferred the eÅective date to the Ñrst Ñscal year or interim period ending after December 15, 2003, to variable interest entities in which a company holds a variable interest that is acquired before February 1, 2003. Teledyne's adoption of FIN 46 had no impact on the Company's consolidated results of operations or Ñnancial position. SFAS No. 143 In June 2001, the FASB issued SFAS No. 143, ""Accounting for Asset Retirement Obligations,'' which addresses Ñnancial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs (""SFAS No. 143''). Teledyne' initial adoption of SFAS No. 143, eÅective January 1, 2003, did not have a material eÅect on its Ñnancial position or results of operations. Outlook Based on its current outlook, the Company's management believes that Ñrst quarter 2005 earnings per share will be in the range of approximately $0.37 to $0.40. The full-year 2005 earnings per share outlook is expected to be in the range of approximately $1.35 to $1.43. The Company's estimated eÅective income tax rate for 2005 is 39.6%. 50 The Company's 2005 outlook reÖects anticipated sales growth in defense electronics and instrumenta- tion businesses, primarily due to the full-year eÅect of the Company's acquisitions completed in 2004. Organic sales growth of electronic instruments is expected to be oÅset by a substantial reduction in sales of geophysical sensors for the energy exploration market. The Company's management expects revenue in its Systems Engineering segment to peak in the Ñrst quarter of 2005, due in part to favorable timing on certain chemical weapons demilitarization programs and the Company's systems engineering and technical assistance contract with the U.S. Army. In addition, revenues in the Company's Energy Systems segment and its military turbine engine business are expected to be lower in the second half of 2005 compared with the second half of 2004. The full year 2005 earnings outlook includes approximately $6.0 million or $0.11 per share in pension expense after recovery of allowable pension costs from our government contracts. Full year 2004 earnings included $8.7 million or $0.16 per share in gross pension expense, or $8.2 million or $0.15 per share in net pension expense after recovery of allowable pension costs from our government contracts. The decrease in pension expense reÖects, in part, the ability to recover pension cost from the government in 2005, partially oÅset by increased pension liability due to a reduction in the discount rate assumption for the Company's deÑned beneÑt plan. The Company's assumed discount rate is 6.25% in 2005, compared with 6.5% in 2004. Beginning with the third quarter of 2005, the Company plans to recognize compensation expense in accordance with SFAS No. 123 (revised 2004). The adoption of this standard for the expensing of stock options is expected to reduce earnings per share by approximately $0.05 in the second half of 2005. EARNINGS PER SHARE SUMMARY (Diluted earnings per common share from continuing operations) Earnings per share (excluding net pension expense, income tax beneÑt and stock option expense)ÏÏÏ Net pension expense after recovery from certain government contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings per share (excluding income tax beneÑt 2005 Full Year Outlook Low High 2004 Results Actual 2003 Results Actual $ 1.51 $ 1.59 $ 1.39 $ 0.97 (0.11) (0.11) (0.15) (0.13) and stock option expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stock option expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.40 Ì (0.05) 1.48 Ì (0.05) 1.24 Ì Ì 0.84 0.07 Ì Earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.35 $ 1.43 $ 1.24 $ 0.91 Safe Harbor Cautionary Statement Regarding Outlook and Other Forward Looking Data This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements as deÑned in the Private Securities Litigation Reform Act of 1995, relating to earnings, growth opportunities, capital expenditures, pension matters, stock option expense and strategic plans. 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 diÅer materially from these forward-looking statements. Many factors, including funding, continuation, timing and award of government programs, changes in demand for products sold to the semiconductor, communications, commercial aviation and energy exploration markets, changes in insurance expense, customers' acceptance of piston engine price increases, continued liquidity of our customers (including commercial airline customers) and economic and political conditions, could change the anticipated results. In addition, stock market Öuctuations aÅect the value of the Company's pension assets. 51 Global responses to terrorism and other perceived threats increase uncertainties associated with forward-looking statements about our businesses. Various responses to terrorism and perceived threats could realign government programs, and aÅect the composition, funding or timing of our programs. Flight restrictions would negatively impact the market for general aviation aircraft piston engines and components. The Company continues to take action to assure compliance with the internal controls, disclosure controls and other requirements of the Sarbanes-Oxley Act of 2002. While the Company believes its control systems are eÅective, there are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected. While Teledyne's growth strategy includes possible acquisitions, the Company cannot provide any assurance as to when, if, or on what terms, any acquisitions will be made. Acquisitions, including the recent acquisition of the defense electronics business of Celeritek, Inc., Reynolds Industries, Incorporated and Isco, Inc., involve various inherent risks, such as, among others, our ability to integrate acquired businesses and to achieve identiÑed Ñnancial and operating synergies. Additional information concerning factors that could cause actual results to diÅer materially from those projected in the forward-looking statements is contained beginning on page 15 of this Form 10-K under the caption ""Risk Factors; Cautionary Statements as to Forward-Looking Statements.'' 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. We assume no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or otherwise. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The information required by this item is included in this Report at page 44 under the caption ""Other Matters Ì Hedging Activities; Market Risk Disclosures'' of ""Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.'' Item 8. Financial Statements and Supplementary Data. The information required by this item is included in this Report at pages 57 through 91. See the ""Index to Financial Statements and Related Information'' at page 56. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. Disclosure Controls Teledyne's disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that it Ñles or submits, under the Securities Exchange Act of 1934, was recorded, processed, summarized and reported within the time periods speciÑed in the rules and forms of the Securities and Exchange Commission. The Company's management, with the participation of its Chairman, President and Chief Executive OÇcer and Vice President and Chief Financial OÇcer, have evaluated the eÅectiveness, as of January 2, 2005, of the Company's ""disclosure controls and procedures,'' as that term is deÑned in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended (""the Exchange Act''). Based upon that evaluation, our Chief Executive OÇcer and our Chief Financial OÇcer concluded that the disclosure controls and procedures as of January 2, 2005, were eÅective to provide a reasonable assurance that information required to be disclosed by the Company in the reports Ñled or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods speciÑed in the SEC's rules and forms, and to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to 52 the Company's management, including its principal executive oÇcer and principal Ñnancial oÇcer, as appropriate to allow timely decisions regarding required disclosure. Internal Control See Management Statement on page 57 for management's annual report on internal control over Ñnancial reporting. See Report of Independent Registered Public Accounting Firm on page 58 for Ernst & Young LLP's attestation report on management's assessment of internal control over Ñnancial reporting. There was no change in the Company's ""internal control over Ñnancial reporting'' (as such term is deÑned in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended January 2, 2005, that has materially aÅected, or is reasonably likely to materially eÅect, the Company's internal control over Ñnancial reporting. Sarbanes-Oxley Disclosure Committee In September 2002, the Company formally constituted the Sarbanes-Oxley Disclosure Committee. Current members include: John T. Kuelbs, Senior Vice President, General Counsel and Secretary Dale A. Schnittjer, Vice President and Chief Financial OÇcer Ivars R. Blukis, Chief Business Risk Assurance OÇcer (Internal Audit) Susan L. Main, Vice President and Controller Robyn E. McGowan, Vice President, Administration and Human Resources and Assistant Secretary Melanie S. Cibik, Vice President, Associate General Counsel and Assistant Secretary Shelley D. Green, Treasurer Brian A. Levan, Director of External Financial Reporting and Assistant Controller Jason VanWees, Director of Corporate Development and Investor Relations Among its tasks, the Sarbanes-Oxley Disclosure Committee discusses and reviews disclosure issues to help the Company fulÑll its disclosure obligations on a timely basis in accordance with SEC rules and regulations and is intended to be used as an additional resource for employees to raise questions regarding accounting, auditing, internal controls and disclosure matters. Our toll-free Corporate Ethics Help Line (1-877-666-6968) continues to be an alternative means to communicate concerns to the Company's management. Item 9B. Other Information. None. PART III Item 10. Directors and Executive OÇcers of the Registrant. In addition to the information set forth under the caption ""Executive Management'' beginning at page 11 in Part I of this Report, the information concerning the directors of Teledyne required by this item is set forth in the 2005 Proxy Statement under the caption ""Item 1 on Proxy Card Ì Election of Directors'' and is incorporated herein by reference. The information set forth in the Proxy Statement under the captions ""Board Composition and Practices,'' ""Corporate Governance,'' ""Committees of Our Board of Directors Ì Audit Committee'' and ""Stock Ownership Ì Sections 16(a) BeneÑcial Ownership Reporting Compliance'' is incorporated herein by reference. Item 11. Executive Compensation. The information required by this item is set forth in the 2005 Proxy Statement under the captions ""Directors Compensation'', ""Executive Compensation'' and ""Compensation Committee Interlocks and 53 Insider Participation'' and is incorporated herein by reference. Teledyne does not incorporate by reference in this Form 10-K either the ""2004 Report on Executive Compensation'' or the ""Cumulative Total Stockholder Return'' section of the 2005 Proxy Statement. Item 12. Security Ownership of Certain BeneÑcial Owners and Management and Related Stockholder Matters. The information required by this item is set forth in the 2005 Proxy Statement under the caption ""Stock Ownership Information'' and is incorporated herein by reference. Equity Compensation Plans Information The following table summarizes information with respect to equity compensation plans as of December 31, 2004: Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a) Weighted-Average Exercise Price of Options, Warrants or Rights (b) Plan Category Equity compensation plans approved by security holders: 1999 Incentive Plan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2002 Stock Incentive Plan ÏÏÏÏÏÏÏÏÏÏ Non-Employee Director Stock Compensation Plan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Employee Stock Purchase Plan(4) ÏÏÏ Equity compensation plans not approved by security holders ÏÏÏÏÏÏÏ 2,343,050(1) 911,404(3) 228,012 Ì Ì Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,482,466 $14.35 $16.39 $14.01 Ì Ì $14.86 Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans ®excluding securities reÖected in column (a)© (c) 501,117(2) 1,044,990 135,437 1,000,000 Ì 2,681,544 (1) The amount does not include 42,384 shares of our Common Stock issued with respect to the third and Ñnal installment under our Performance Share Plan for the 2000-2002 performance cycle. (2) The 1999 Incentive Plan, as amended, contains a ""capped'' evergreen provision. It provides that if the number of issued and outstanding shares of our Common Stock is increased after January 26, 2000, the total number of shares available for issuance under this plan will be increased by 10%, up to an additional 2,500,000 shares. As a result of Teledyne's public oÅering completed in the third quarter of 2000, 460,500 additional shares were made available for issuance under the 1999 Incentive Plan. Hence, an additional 2,039,500 shares could become available for issuance under this Plan depending on Teledyne' issued and outstanding shares of Common Stock after January 26, 2000 (after considering that, as a result of our 2000 public oÅering, 460,500 shares have already been registered and listed with respect to the Plan under this evergreen provision). (3) The amount does not include up to 306,237 shares of our Common Stock potentially issuable (at maximum payout) under our Performance Share Plan for the 2003-2005 performance cycle. (4) Teledyne maintains an Employee Stock Purchase Plan (commonly known as The Stock Advantage Plan) for eligible employees. It enables employees to invest in our Common Stock through automatic, after-tax payroll deductions, within speciÑed limits. Teledyne adds a 25% matching company contribution up to $1,200 annually. The Company's contribution is currently paid in cash and the Plan Administrator purchases shares in the open market. 54 Item 13. Certain Relationships and Related Transactions. The information required by this item is set forth in the 2005 Proxy Statement under the caption ""Certain Transactions'' and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services. The information required by this item is set forth in the 2005 Proxy Statement under the captions ""Fees Billed by Independent Auditors'' and ""Audit Committee Pre-Approval Policy'' under ""Item 2 on the Proxy Card Ì RatiÑcation of Appointment of Independent Auditor'' and is incorporated herein by reference. PART IV Item 15. Exhibits and Financial Statement Schedules. (a) Exhibits and Financial Statement Schedules: (1) Financial Statements See the ""Index to Financial Statements and Related Information'' at page 55 of this Report, which is incorporated herein by reference. (2) Financial Statement Schedules See Schedule II captioned ""Valuation and Qualifying Accounts'' at page 90 of this Report, which is incorporated herein by reference. (3) Exhibits A list of exhibits Ñled with this Form 10-K or incorporated by reference is found in the Exhibit Index immediately following the certiÑcations of this Report and incorporated herein by reference. (b) Exhibits: See Item 15(a)(3) above. (c) Financial Schedules: See Item 15(a)(2) above. 55 INDEX TO FINANCIAL STATEMENTS AND RELATED INFORMATION Financial Statements and Related Information: Management Statement ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Report of Independent Registered Public Accounting Firm ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Statements of Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Balance Sheets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Statements of Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Statements of Cash FlowsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Financial Statement Schedule: Page 57 58 60 61 62 63 64 65 Schedule II Ì Valuation and Qualifying Accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 91 56 MANAGEMENT STATEMENT RESPONSIBILITY FOR PREPARATION OF THE FINANCIAL STATEMENTS AND ESTABLISHING AND MAINTAINING ADEQUATE INTERNAL CONTROL OVER FINANCIAL REPORTING We are responsible for the preparation of the Ñnancial statements included in this Annual Report. The Ñnancial statements were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on the best estimates and judgments of management. The other Ñnancial information contained in this Annual Report is consistent with the Ñnancial statements. Our internal control system is designed to provide reasonable assurance concerning the reliability of the Ñnancial data used in the preparation of Teledyne's Ñnancial statements, as well as to safeguard the Company's assets from unauthorized use or disposition. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be eÅective can provide only reasonable assurance with respect to Ñnancial statement presentation. REPORT OF MANAGEMENT ON TELEDYNE TECHNOLOGIES INCORPORATED'S INTERNAL CONTROL OVER FINANCIAL REPORTING We are also responsible for establishing and maintaining adequate internal control over Ñnancial reporting. We conducted an evaluation of the eÅectiveness of the Company's internal control over Ñnancial reporting as of January 2, 2005. In making this evaluation, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Ì Integrated Framework. Our evaluation included reviewing the documentation of our controls, evaluating the design eÅectiveness of our controls and testing their operating eÅectiveness. Our evaluation did not include assessing the eÅectiveness of internal control over Ñnancial reporting at the recent Leeman, Isco, Reynolds and Celeritek acquisitions, which are included in the 2004 consolidated Ñnancial statements of the Company and constituted: $195.0 million and $172.6 million of total and net assets, respectively, as of January 2, 2005 and: $70.2 million and $4.9 million of total revenues and net income, respectively, for the year then ended. We did not assess the eÅectiveness of internal control over Ñnancial reporting at these newly acquired entities due to the insuÇcient time between the dates acquired and year-end and the complexity associated with assessing internal controls during integration eÅorts, thus making the process impractical. Based on this evaluation we believe that, as of January 2, 2005, the Company's internal controls over Ñnancial reporting were eÅective. Ernst and Young LLP, an independent registered public accounting Ñrm, has issued their report on our evaluation of Teledyne's internal control over Ñnancial reporting. Their report appears on page 58 of this Annual Report. Date: February 18, 2005 Date: February 18, 2005 /s/ ROBERT MEHRABIAN Robert Mehrabian Chairman, President and Chief Executive OÇcer /s/ DALE A. SCHNITTJER Dale A. Schnittjer Vice President and Chief Financial OÇcer 57 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Board of Directors and Stockholders of Teledyne Technologies Incorporated We have audited management's assessment, included in the accompanying Report of Management on Teledyne Technologies Incorporated's Internal Control Over Financial Reporting, that Teledyne Technolo- gies Incorporated maintained eÅective internal control over Ñnancial reporting as of January 2, 2005, based on criteria established in Internal Control Ì Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Teledyne Technologies Incorporated's management is responsible for maintaining eÅective internal control over Ñnancial reporting and for its assessment of the eÅectiveness of internal control over Ñnancial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the eÅectiveness of the company's internal control over Ñnancial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether eÅective internal control over Ñnancial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over Ñnancial reporting, evaluating management's assessment, testing and evaluating the design and operating eÅectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over Ñnancial reporting is a process designed to provide reasonable assurance regarding the reliability of Ñnancial reporting and the preparation of Ñnancial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over Ñnancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reÖect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of Ñnancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material eÅect on the Ñnancial statements. Because of its inherent limitations, internal control over Ñnancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of eÅectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As indicated in the accompanying Report of Management on Teledyne Technologies Incorporated's Internal Control Over Financial Reporting, management's assessment of and conclusion on the eÅectiveness of internal control over Ñnancial reporting did not include the internal controls of the recent Leeman, Isco, Reynolds and Celeritek acquisitions which are included in the 2004 consolidated Ñnancial statements of Teledyne Technologies Incorporated and constituted: $195.0 million and $172.6 million of total and net assets, respectively, as of January 2, 2005 and: $70.2 million and $4.9 million of revenues and net income, respectively, for the year then ended. Management did not assess the eÅectiveness of internal control over Ñnancial reporting at these entities due to insuÇcient time between the dates acquired and year-end and the determination that it was impractical to suÇciently address the complexities associated with post-integration merger eÅorts to assess those controls. Our audit of internal control over Ñnancial reporting of Teledyne Technologies Incorporated also did not include an evaluation of the internal control over Ñnancial reporting of Leeman, Isco, Reynolds and Celeritek. In our opinion, management's assessment that Teledyne Technologies Incorporated maintained eÅective internal control over Ñnancial reporting as of January 2, 2005, is fairly stated, in all material 58 respects, based on the COSO criteria. Also, in our opinion, Teledyne Technologies, Incorporated maintained, in all material respects, eÅective internal control over Ñnancial reporting as of January 2, 2005, based on the COSO criteria. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Teledyne Technologies Incorporated as of January 2, 2005 and December 28, 2003, and the related consolidated statements of income, stockholders' equity, and cash Öows for each of the three years in the period ended January 2, 2005 of Teledyne Technologies Incorporated and our report dated February 18, 2005 expressed an unqualiÑed opinion thereon. Our audits also included the Ñnancial statement schedule listed in the index at Item 15(a) and our report dated February 18, 2005 expressed an unqualiÑed opinion thereon. Los Angeles, California February 18, 2005 59 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors Teledyne Technologies Incorporated We have audited the accompanying consolidated balance sheets of Teledyne Technologies Incorporated as of January 2, 2005 and December 28, 2003, and the related consolidated statements of income, stockholders' equity, and cash Öows for each of the three years in the period ended January 2, 2005. Our audits also included the Ñnancial statement schedule listed in the index at Item 15(a). These Ñnancial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these Ñnancial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Ñnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Ñnancial statements. An audit also includes assessing the accounting principles used and signiÑcant estimates made by management, as well as evaluating the overall Ñnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the Ñnancial statements referred to above present fairly, in all material respects, the consolidated Ñnancial position of Teledyne Technologies Incorporated at January 2, 2005 and December 28, 2003, and the consolidated results of its operations and its cash Öows for each of the three years in the period ended January 2, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related Ñnancial statement schedule, when considered in relation to the basic Ñnancial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the eÅectiveness of Teledyne Technologies Incorporated's internal control over Ñnancial reporting as of January 2, 2005, based on criteria established in Internal Control Ì Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 18, 2005 expressed an unqualiÑed opinion thereon. Los Angeles, California February 18, 2005 60 TELEDYNE TECHNOLOGIES INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (In millions, except per-share amounts) Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Costs and expenses Cost of sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Selling, general and administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Restructuring and other chargesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total costs and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before other income and expense and income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest and debt expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 2003 2002 $1,016.6 $840.7 $772.7 746.3 203.4 Ì 949.7 66.9 1.9 3.0 68.0 26.3 41.7 636.7 157.0 Ì 793.7 47.0 0.8 (1.6) 44.6 14.9 584.9 145.6 (0.7) 729.8 42.9 0.6 (0.2) 42.1 16.7 $ 29.7 $ 25.4 1.29 $ 0.92 $ 0.79 1.24 $ 0.91 $ 0.77 $ $ $ The accompanying notes are an integral part of these Ñnancial statements. 61 TELEDYNE TECHNOLOGIES INCORPORATED CONSOLIDATED BALANCE SHEETS (In millions, except share amounts) 2004 2003 Assets Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 11.4 141.7 Accounts receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 97.7 Inventories, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26.8 Deferred income taxes, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9.3 Prepaid expenses and other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Property, plant and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxes, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Goodwill, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acquired intangibles, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 286.9 90.8 28.3 166.0 26.0 26.8 $ 37.8 121.3 63.6 22.7 7.1 252.5 76.0 19.7 56.2 5.4 23.8 Total Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $624.8 $433.6 Liabilities and Stockholders' Equity Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 62.3 97.0 Accrued liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.2 Current portion of long-term debt and capital lease ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 48.1 74.9 Ì Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debt and capital lease obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued pension obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued postretirement beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other long-term liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commitments and Contingencies Stockholders' Equity 162.5 74.4 46.7 24.2 54.9 362.7 123.0 Ì 25.6 25.6 38.4 212.6 Preferred stock, $0.01 par value; outstanding shares Ì none ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Common stock, $0.01 par value; authorized 125 million shares; Outstanding shares: 2004 Ì 32,912,362 and 2003 Ì 32,266,578 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated other comprehensive lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 0.3 142.8 141.3 (22.3) 0.3 132.4 99.6 (11.3) Total Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 262.1 221.0 Total Liabilities and Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $624.8 $433.6 The accompanying notes are an integral part of these Ñnancial statements. 62 TELEDYNE TECHNOLOGIES INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In millions) Balance, December 31, 2001ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other comprehensive income, net of tax: Loss on marketable equity security ÏÏÏÏ Foreign currency translation gain ÏÏÏÏÏÏ Minimum pension liability adjustment Comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Exercise of stock options and other, net ÏÏ Balance, December 30, 2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other comprehensive loss, net of tax: Gain on marketable equity security ÏÏÏÏ Foreign currency translation gains ÏÏÏÏÏ Minimum pension liability adjustment Comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Exercise of stock options and other, net ÏÏ Balance, December 29, 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other comprehensive loss, net of tax: Foreign currency translation lossesÏÏÏÏÏ Minimum pension liability adjustment Comprehensive income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Exercise of stock options and other, net ÏÏ Common Stock $0.3 Ì Additional Paid-in Capital $128.0 Ì Retained Earnings $ 44.5 25.4 Accumulated Other Comprehensive Income (Loss) $ 0.2 Ì Total Stockholders' Equity $173.0 25.4 Ì Ì Ì Ì 0.3 Ì Ì Ì Ì Ì Ì 0.3 Ì Ì Ì Ì Ì Ì Ì Ì 1.8 129.8 Ì Ì Ì Ì Ì 2.6 132.4 Ì Ì Ì Ì 10.4 Ì Ì 25.4 Ì 69.9 29.7 Ì Ì Ì 29.7 Ì 99.6 41.7 Ì Ì 41.7 Ì (0.4) 0.2 (23.2) (23.4) Ì (23.2) Ì 0.3 0.2 11.4 11.9 Ì (11.3) Ì (0.1) (10.9) (11.0) Ì (0.4) 0.2 (23.2) 2.0 1.8 176.8 29.7 0.3 0.2 11.4 41.6 2.6 221.0 41.7 (0.1) (10.9) 30.7 10.4 Balance, January 2, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $0.3 $142.8 $141.3 $(22.3) $262.1 The accompanying notes are an integral part of these Ñnancial statements. 63 TELEDYNE TECHNOLOGIES INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Operating activities Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Adjustments to reconcile net income to net cash provided by operating 41.7 $ 29.7 $ 25.4 2004 2003 2002 activities: Depreciation and amortization of assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gains on sale of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Disposal of Ñxed assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Changes in operating assets and liabilities, excluding the eÅect of businesses acquired: Decrease(increase) in accounts receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Decrease (increase) in inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Decrease (increase) in prepaid expenses and other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏ Decrease (increase) in long-term assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase (decrease) in accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase in accrued liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase in current income taxes receivable, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase in other long-term liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Decrease in accrued postretirement beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Increase (decrease) in accrued pension obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other operating, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash provided by operating activities from continuing operations ÏÏ Net cash from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24.8 (10.2) Ì 0.9 (1.2) (11.9) (1.8) (3.5) 8.6 10.0 1.0 16.4 (1.4) 11.4 0.1 84.9 Ì 84.9 Investing activities Purchases of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchase of business and other investments, net of cash acquired ÏÏÏÏÏÏ Proceeds from sale of marketable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other investing, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash used by investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (18.8) (187.8) 17.3 0.2 (189.1) 23.1 8.0 Ì Ì 21.8 (15.1) 0.9 Ì (7.0) 8.5 1.0 0.2 (10.5) 2.3 0.6 3.1 (1.2) (1.9) 0.9 56.8 (0.1) 56.7 (20.2) (19.9) Ì (0.2) (40.3) 4.3 (8.0) 0.5 1.6 14.8 3.6 7.7 6.8 (2.2) 12.1 Ì 74.2 (0.9) 73.3 (15.4) (22.9) Ì 0.7 (37.6) (30.0) 1.4 (28.6) Financing activities Net proceeds from (repayments of) long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from exercise of stock options and other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash provided (used) by Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70.5 7.3 77.8 Ì 2.4 2.4 Increase (decrease) in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and cash equivalents Ì beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and cash equivalents Ì end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (26.4) 37.8 11.4 $ 18.8 19.0 $ 37.8 7.1 11.9 $ 19.0 The accompanying notes are an integral part of these Ñnancial statements. 64 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Description of Business EÅective November 29, 1999 (the ""Distribution Date''), Teledyne Technologies Incorporated (""Teledyne'' or the ""Company''), became an independent, public company as a result of the distribution by Allegheny Teledyne Incorporated, now known as Allegheny Technologies Incorporated (""ATI''), of the Company's Common Stock, $.01 par value per share, to holders of ATI Common Stock at a distribution ratio of one for seven (the ""spin-oÅ''). The spin-oÅ has been treated as a tax-free distribution for federal income tax purposes. The spin-oÅ included the transfer of certain of the businesses of ATI's Aerospace and Electronics segment to the new corporation, immediately prior to the Distribution Date. ATI no longer has a Ñnancial investment in Teledyne. Teledyne is a leading provider of sophisticated electronic components, instruments and communica- tions products, including defense electronics, data acquisition and communications equipment for airlines and business aircraft, monitoring and control instruments for industrial and environmental applications and components, and subsystems for wireless and satellite communications. We also provide systems engineering solutions and information technology services for space, defense and industrial applications, and manufacture general aviation and missile engines and components, as well as on-site gas and power generation systems. We serve niche market segments where performance, precision and reliability are critical. Our customers include major industrial and communications companies, government agencies, aerospace prime contractors and general aviation companies. Teledyne consists of the operations of the Electronics and Communications segment with operations in the United States, United Kingdom, Germany, Mexico and Canada; the Systems Engineering Solutions segment with operations in the United States; the Aerospace Engines and Components segment with operations in the United States; and the Energy Systems segment with operations in the United States. On January 3, 2005, in an eÅort to streamline operations and reduce costs, the businesses principally operating as Teledyne Microwave, located in Mountain View, California, and Teledyne Microwave Electronic Components, located in Rancho Cordova, California, were consolidated into one legal entity, Teledyne Wireless, Inc., a wholly-owned subsidiary of the Company. Teledyne Wireless, Inc. had been the subsidiary that bought the defense electronics assets of each of Filtronic Solid State and Celeritek, Inc. Teledyne Wireless, Inc. is part of the Electronics and Communications segment. Note 2. Summary of SigniÑcant Accounting Policies Principles of Consolidation The consolidated Ñnancial statements of Teledyne include the accounts of the businesses as described in Note 1. SigniÑcant intercompany accounts and transactions have been eliminated. Certain Ñnancial statements, notes and supplementary data for prior years have been changed to conform to the 2004 presentation. Theses changes did not aÅect our reported results of operations or stockholders' equity. Fiscal Year The Company operates on a 52- or 53-week Ñscal year convention ending on the Sunday nearest to December 31. Fiscal year 2004 was a 53-week Ñscal year and ended on January 2, 2005. Fiscal years 2003, and 2002 were 52-week years and ended on December 28, 2003 and December 29, 2002, respectively. References to the years 2004, 2003 and 2002 are intended to refer to the respective Ñscal year unless otherwise noted. 65 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Estimates The preparation of Ñnancial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that aÅect reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to product returns, allowance for doubtful accounts, inventories, intangible assets, income taxes, warranty obligations, pension and other postretirement beneÑts, long-term contracts, environmental, workers' compensation and general liability, aircraft product liability, employee dental and medical beneÑts and other contingencies, and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances at the time, the results of which form the basis for making its judgments. Actual results may diÅer materially from these estimates under diÅerent assumptions or conditions. Management believes that the estimates are reasonable. Revenue Recognition Commercial sales and revenue from U.S. Government Ñxed-price-type contracts generally are recorded as shipments are made or as services are rendered. Occasionally, for certain Ñxed-price-type contracts that require substantial performance over a long time period (one or more years) before shipments begin, in accordance with the requirements of Statement of Position 81-1 ""Accounting for Performance of Construction-Type and Certain Production-Type Contracts,'' revenues may be recorded based upon attainment of scheduled performance milestones which could be time, event or expense driven. In these few instances, invoices are submitted to the customer under a contractual agreement and payments are made by the customer. Sales under cost-reimbursement contracts are recorded as costs are incurred and fees are earned. Since certain contracts extend over a long period of time, all revisions in cost and funding estimates during the progress of work have the eÅect of adjusting the current period earnings on a cumulative catch-up basis. If the current contract estimate indicates a loss, provision is made for the total anticipated loss. The Company follows the requirements of Securities and Exchange Commission StaÅ Accounting Bulletin No. 101 and No. 104 on revenue recognition. Some of the Company's products are subject to speciÑed warranties and the Company provides for the estimated cost of product warranties. The adequacy of the preexisting warranty liabilities is assessed regularly and the reserve is adjusted as necessary based on a review of historic warranty experience with respect to the applicable business or products, as well as the length and actual terms of the warranties. The product warranty reserve is included in current accrued liabilities on the balance sheet. Changes in the Company's product warranty reserve are as follows (in millions): 2004 2003 Balance at beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accruals for product warranties charged to expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cost of product warranty claims ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6.0 3.5 (3.4) 0.8 $ 5.2 3.5 (3.9) 1.2 Balance at year-end ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6.9 $ 6.0 Research and Development Selling, general and administrative expenses include company-funded research and development and bid and proposal costs which are expensed as incurred and were $32.6 million in 2004, $27.9 million in 2003, and $26.2 million in 2002. Costs related to customer-funded research and development contracts 66 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) were $230.7 million in 2004, $190.1 million in 2003, and $170.6 million in 2002 and are charged to costs and expenses as the related sales are recorded. A portion of the costs incurred for company-funded research and development is recoverable through overhead cost allocations on government contracts. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (""SFAS'') No. 109, ""Accounting for Income Taxes.'' Under this method, deferred income tax assets and liabilities are determined on the estimated future tax eÅects of diÅerences between the Ñnancial reporting and tax basis of assets and liabilities given the application of enacted tax laws. Deferred income tax provisions and beneÑts are based on changes to the asset or liability from year to year. Net Income Per Common Share Basic and diluted earnings per share were computed based on net earnings. The weighted average number of common shares outstanding during the period was used in the calculation of basic earnings per share. This number of shares was increased by contingent shares that could be issued under various compensation plans as well as by the dilutive eÅect of stock options based on the treasury stock method in the calculation of diluted earnings per share. The following table sets forth the computations of basic and diluted earnings per share (amounts in millions, except per-share data): Basic earnings per share 2004 2003 2002 Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $41.7 $29.7 $25.4 Weighted average common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32.4 32.2 32.2 Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1.29 $0.92 $0.79 Diluted earnings per share Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $41.7 $29.7 $25.4 Weighted average common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dilutive eÅect of contingently issuable shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted average diluted common shares outstanding ÏÏÏÏÏÏÏÏÏ 32.4 1.3 33.7 32.2 0.5 32.7 32.2 0.7 32.9 Diluted earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1.24 $0.91 $0.77 Stock Incentive Plan ATI sponsored an incentive plan that provided for ATI stock option awards to oÇcers and key employees. In connection with the spin-oÅ, outstanding stock options held by Teledyne's employees that participated in the plan prior to the spin-oÅ were converted into options to purchase Teledyne's Common Stock. The following disclosures are based on stock options held by Teledyne's employees and include the stock options that have been converted from ATI options to Teledyne's options as noted above. Teledyne accounts for its stock option plans in accordance with APB Opinion No. 25 Ì ""Accounting for Stock Issued to Employees,'' (""APB Opinion No. 25'') and related Interpretations. Under APB Opinion No. 25, no compensation expense is recognized because the exercise price of the Company's employee stock options equals the market price of the underlying stock at the date of the grant. In December 2002, the 67 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Financial Accounting Standards Board (""FASB'') issued SFAS No. 148, ""Accounting for Stock-Based Compensation-Transition and Disclosure.'' SFAS No. 148 amends SFAS No. 123, ""Accounting for Stock- based Compensation,'' (""SFAS No. 123'') and is eÅective immediately upon issuance. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation as well as amending the disclosure requirements of Statement No. 123 to require interim and annual disclosures about the method of accounting for stock based compensation and the eÅect of the method used on reported results. The Company follows the requirements of APB Opinion No. 25 and the disclosure only provision of SFAS No. 123, as amended by SFAS No. 148. As noted in the preceding paragraph, Teledyne accounts for its stock options under APB Opinion No. 25. If compensation cost for these options had been determined under the SFAS No. 123 fair-value method using the Black-Scholes option-pricing model, the impact on net income and earnings per share is presented in the following table (amounts in millions, except per-share data): Net income as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stock-based compensation under SFAS No. 123 fair-value method, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fiscal Year 2003 2004 2002 $41.7 $29.7 $25.4 (3.7) (4.8) (5.4) Adjusted net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $38.0 $24.9 $20.0 Basic earnings per share As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1.29 As adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1.17 Diluted earnings per share As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1.24 As adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1.13 $0.92 $0.77 $0.91 $0.76 $0.79 $0.62 $0.77 $0.61 The following assumptions were used in this valuation: Expected dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected volatilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected lives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted-average fair value of options granted during the year ÏÏ Accounts Receivable 2004 Ì 60.7% 4.0% 8.0 $12.89 For the year 2003 Ì 62.1% 4.0% 8.0 $9.12 2002 Ì 69.4% 5.0% 8.0 $10.64 Receivables are presented net of a reserve for doubtful accounts of $2.6 million at January 2, 2005 and $2.4 million at December 28, 2003. Expense recorded for the reserve for doubtful accounts was $0.6 million, $0.2 million, and $0.6 million for 2004, 2003, and 2002, respectively. An allowance for doubtful accounts is established for losses expected to be incurred on accounts receivable balances. Judgment is required in estimation of the allowance and is based upon speciÑc identiÑcation, collection history and creditworthiness of the debtor. The Company markets its products and services principally throughout the United States, Europe, Japan and Canada to commercial customers and agencies of, and prime contractors to, the U.S. Government. Trade credit is extended based upon evaluations of each customer's ability to perform its obligations, which are updated periodically. 68 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Cash Equivalents Cash equivalents consist of highly liquid money-market mutual funds and bank deposits with initial maturities of three months or less. Cash equivalents totaled $3.9 million at January 2, 2005 and $32.9 million at December 28, 2003. Inventories Inventories are stated at the lower of cost (last-in, Ñrst-out; Ñrst-in, Ñrst-out; and average cost methods) or market, less progress payments. Costs include direct material, direct labor, applicable manufacturing and engineering overhead, and other direct costs. Property, Plant and Equipment Property, plant and equipment is capitalized at cost. Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are determined using a combination of accelerated and straight-line methods over the estimated useful lives of the various asset classes. Buildings are depreciated over periods not exceeding 45 years, equipment over 5 to 18 years, computer hardware over 3 to 5 years and leasehold improvements over the shorter of their estimated remaining lives or lease terms. SigniÑcant improvements are capitalized while maintenance and repairs are charged to operations as incurred. Depreciation expense on plant and equipment was $23.4 million in 2004, $22.9 million in 2003 and $21.8 million in 2002. Goodwill and Acquired Intangible Assets Teledyne's goodwill was $166.0 million at January 2, 2005 and $56.2 million at December 28, 2003. Teledyne's acquired intangible assets were $26.0 million at January 2, 2005 and $5.4 million at December 28, 2003. The increase in both goodwill and acquired intangibles in 2004 resulted from acquisitions. In all acquisitions, the results are included in the Company's consolidated Ñnancial statements from the date of each respective acquisition. The Company accounts for goodwill and purchased intangible assets under SFAS No. 141 ""Business Combinations'' and SFAS No. 142 ""Goodwill and Other Intangible Assets''. Business acquisitions are accounted for under the purchase method by assigning the purchase price to tangible and intangible assets acquired and liabilities assumed. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. Purchased intangible assets with Ñnite lives are amortized over their estimated useful lives. Goodwill and intangible assets with indeÑnite lives are not amortized, but reviewed at least annually for impairment. The Company performs an annual impairment review in the fourth quarter by comparing the fair value of the reporting units, which are our four business segments, to their carrying values. Fair values are estimated using discounted cash Öow methodologies that are based on projections of the amounts and timing of future revenues and cash Öows. Based on the annual impairment review completed in the fourth quarter of 2004, no impairment of goodwill or intangible assets with indeÑnite lives was indicated. The allocation of the purchase price for the acquisition of Tekmar Company was completed as of year-end 2003 and the allocation of the purchase price for the acquisition of AIS was completed in the Ñrst quarter of 2004. The allocation of the purchase price for the Isco, Inc., Reynolds Industries, Incorporated and the Filtronic Solid State and Leeman Labs asset acquisitions are complete as of year-end 2004. Each of the above acquisitions is part of the Electronics and Communications segment. Approximately $36.4 million of goodwill recorded in 2004, is deductible for tax purposes. The Company is in the process of speciÑcally identifying the amount to be assigned to intangible assets for the Celeritek acquisition and has made preliminary estimates as of January 2, 2005, since there was insuÇcient time between the acquisition date and the end of the quarter to Ñnalize the valuation. The preliminary amount of goodwill recorded as of January 2, 2005 for the Celeritek acquisition, was $25.0 million. The preliminary 69 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) amount of intangible assets recorded as of January 2, 2005 for the Celeritek acquisition was $3.9 million. These amounts were based on estimates that are subject to change pending the completion of the Company's internal review and the receipt of third party appraisals. The following table summarizes the total intangible assets acquired as part of the Ñve acquisitions made in 2004 and the two acquisitions made in 2003 (dollars in millions): Weighted average useful life in years January 2, 2005 Intangibles not subject to amortization: Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Trademarks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangibles subject to amortization: Proprietary technology ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Customer list/relationships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Patents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-compete agreementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BacklogÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total subject to amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $121.2 10.0 $131.2 $ 10.0 4.7 0.2 0.2 0.9 $ 16.0 n/a n/a 9.7 6.4 14.9 5.0 1.1 6.2 Amortizable intangible assets are amortized on a straight line basis. The Company recorded $1.4 million and $0.2 million in amortization expense in 2004 and 2003, respectively for acquired intangible assets. The expected future amortization expense for the next Ñve years is as follows (in millions): 2005-$2.4, 2006-$1.7, 2007-$1.6, 2008-$1.6, 2009-$1.5. The following is a summary at the acquisition date of the estimated fair values of the assets acquired and liabilities assumed for Ñve acquisitions made in 2004 (in millions): Current assets, excluding cash acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ GoodwillÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total assets acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Current liabilities, including short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term capital lease ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 50.4 19.7 110.1 20.6 19.5 220.3 28.2 0.5 3.8 Total liabilities assumed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Purchase price, net of cash acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32.5 $187.8 Other Long-Lived Assets The carrying value of long-lived assets is periodically evaluated in relation to the operating performance and sum of undiscounted future cash Öows of the underlying businesses. An impairment loss 70 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) is recognized when the sum of expected undiscounted future net cash Öows is less than book value. In 2003, Teledyne recorded a $2.3 million charge for the write-down of the Company's remaining cost-based investment in a private company engaged in manufacturing and development of micro optics and microelectromechanical devices. In 2002, Teledyne recorded a $0.5 million charge for the partial write- down of this investment. In 2002, Teledyne also recorded a $0.8 million write-down of certain optoelectronic equipment. Environmental Costs that mitigate or prevent future environmental contamination or extend the life, increase the capacity or improve the safety or eÇciency of property utilized in current operations are capitalized. Other costs that relate to current operations or an existing condition caused by past operations are expensed. Environmental liabilities are recorded when the Company's liability is probable and the costs are reasonably estimable, but generally not later than the completion of the feasibility study or the Company's recommendation of a remedy or commitment to an appropriate plan of action. The accruals are reviewed periodically and, as investigations and remediations proceed, adjustments are made as necessary. Accruals for losses from environmental remediation obligations do not consider the eÅects of inÖation, and anticipated expenditures are not discounted to their present value. The accruals are not reduced by possible recoveries from insurance carriers or other third parties, but do reÖect anticipated allocations among potentially responsible parties at federal Superfund sites or similar state-managed sites and an assessment of the likelihood that such parties will fulÑll their obligations at such sites. The measurement of environmental liabilities by the Company is based on currently available facts, present laws and regulations, and current technology. Such estimates take into consideration the Company's prior experience in site investigation and remediation, the data concerning cleanup costs available from other companies and regulatory authorities, and the professional judgment of the Company's environmental experts in consultation with outside environmental specialists, when necessary. Foreign Currency Translation The Company's foreign entities' accounts are measured using local currency as the functional currency. Assets and liabilities of these entities are translated at the exchange rate in eÅect at year-end. Revenues and expenses are translated at average month end rates of exchange prevailing during the year. Unrealized translation gains and losses arising from diÅerences in exchange rates from period to period are included as a component of accumulated other comprehensive income in stockholders' equity. Most of the Company's sales are denominated in U.S. dollars which mitigates the eÅect of exchange rate changes. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123R, ""Share Based Payment'' (""SFAS No. 123R'') that will require compensation costs related to share-based payment transactions to be recognized in the Ñnancial statements. With limited exceptions, the amount of compensation costs will be measured based on the grant date-fair value of the equity or liability instrument issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes SFAS No. 25, Accounting for Stock Issued to Employees. Beginning with the third quarter of 2005, Teledyne plans to recognize compensation expense in accordance with FASB No. 123R. The adoption of this standard for the expensing of stock options is expected to reduce pretax earnings by $2.2 million in the second half of 2005. SFAS No. 151. In November 2004, the FASB issued SFAS No 151, ""Inventory Costs-an amendment of ARB No. 43 Chapter 4'' (""SFAS No. 151''). SFAS No. 151 amends the guidance in ARB 71 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) No. 43, Chapter 4, ""Inventory Pricing,'' to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 requires that those items be recognized as current-period charges. SFAS No. 151 is eÅective for Ñrst Ñscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have any impact on the Company. SFAS No. 132. In December 2003, the FASB issued SFAS No 132, ""Employers' Disclosures about Pensions and Other Postretirement BeneÑts'' (""SFAS No. 132''). SFAS No. 132 requires additional information regarding the types of plan assets, investment strategy, measurement date, plan obligations, cash Öows and components of net periodic beneÑt cost recognized during interim periods as is eÅective immediately upon issuance. The Company has included the required disclosures in Note 13 to the Notes to Consolidated Financial Statements. SFAS No. 150. In May 2003, the FASB issued SFAS No. 150, ""Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity'' (""SFAS No. 150''). This Statement establishes standards for classifying and measuring as liabilities certain Ñnancial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. It represents a signiÑcant change in practice in the accounting for a number of Ñnancial instruments, including mandatorily redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. SFAS No. 150 must be applied immediately to instruments entered into or modiÑed after May 31, 2003 and to all other instruments that exist as of the beginning of the Ñrst interim Ñnancial reporting period beginning after June 15, 2003, except for noncontrolling interests of a limited-life subsidiary which has been deferred indeÑnitely. As Teledyne currently has no Ñnancial instruments that would be subject to SFAS No. 150, the adoption had no impact on the Company. SFAS No. 149. In April 2003, the FASB issued SFAS No. 149, ""Amendment of Statement 133 on Derivative Instruments and Hedging Activities'' (""SFAS No. 149''). SFAS No. 149 amends and clariÑes accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 clariÑes under what circumstances a contract with an initial net investment meets the characteristics of a derivative and when a derivative contains a Ñnancing component that warrants special reporting in the statement of cash Öows. SFAS No. 149 is generally eÅective for contracts entered into or modiÑed after June 30, 2003 and had no impact on Teledyne's Ñnancial position or results of operations. FIN 46. In January 2003, the FASB issued Interpretation No. 46, ""Consolidation of Variable Interest Entities'' (""FIN 46''). FIN 46 requires companies to evaluate variable interest entities to determine whether to apply the consolidation provisions of FIN 46 to those entities. Companies must apply FIN 46 to entities created after January 31, 2003, and to variable interest entities in which a company obtains an interest after that date. In October 2003, the FASB deferred the eÅective date to the Ñrst Ñscal year or interim period ending after December 15, 2003, to variable interest entities in which a company holds a variable interest that is acquired before February 1, 2003. Teledyne's adoption of FIN 46 had no impact on the Company's consolidated results of operations or Ñnancial position. SFAS No. 143. In June 2001, the FASB issued SFAS No. 143 Ì ""Accounting for Asset Retirement Obligations,'' which addresses Ñnancial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Teledyne's initial adoption of SFAS No. 143, eÅective January 1, 2003, did not have a material eÅect on its Ñnancial position or results of operations. Hedging Activities Teledyne has not utilized derivative Ñnancial instruments such as futures contracts, options and swaps, forward exchange contracts or interest rate swaps and futures during 2004 or 2003. 72 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Supplemental Cash Flow Information Teledyne's cash payments for federal, foreign and state income taxes were $30.2 million for 2004 which is net of refunds of $40 thousand. Teledyne's cash payments for federal, foreign and state income taxes were $15.1 million for 2003 which is net of refunds of $2.2 million. Teledyne's cash payments for federal, foreign and state income taxes were $13.5 million for 2002 which is net of refunds of $7.4 million. Cash payments for interest and facility fees by Teledyne totaled approximately $1.2 million, $0.4 million and $0.7 million for 2004, 2003 and 2002, respectively. Comprehensive Income Teledyne's comprehensive income consists of net income, the minimum pension liability adjustment, changes in the value of marketable equity securities and foreign currency translation adjustments. The minimum pension liability adjustment was recorded net of deferred taxes of $14.4 million, $7.6 million and $15.2 million in 2004, 2003 and 2002, respectively. See Note 13 for a further discussion of the pension adjustment. Teledyne's comprehensive income was $30.7 million, $41.6 million, and $2.0 million for the years 2004, 2003 and 2002, respectively. The year-end components of accumulated other comprehensive income (loss) are shown in the following table (in millions): Foreign currency translation gainsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Gain (loss) on marketable equity securityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Minimum pension liability adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.4 Ì (22.7) $ 0.4 0.1 (11.8) $ 0.2 (0.2) (23.2) Accumulated other comprehensive income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(22.3) $(11.3) $(23.2) Balance at year-end 2003 2004 2002 Note 3. 2001 Restructuring, Asset Impairment and Other Charges In 2001, the Company recorded a $26.4 million pretax charge of which $7.5 million was for asset impairment, $8.8 million was for restructuring and other charges, $9.8 million was for inventory write- downs and a $0.3 million pretax charge for discontinued operations. During 2002, the Company completed the eÅorts related to the 2001 charge, recording actual expenses of $26.3 million. At year-end 2002, the cumulative restructuring charges were $8.1 million, $0.7 million lower than the 2001 year-end estimate, the cumulative charges to cost of sales related to excess and obsolete inventory were $10.4 million, $0.6 million higher than the 2001 year-end-estimate, with no change to either the asset impairment charge or the charge for discontinued operations. This resulted in $0.2 million of income in the Electronics and Communications segment in 2002 and an additional cost impact of $0.1 million in the Systems Engineering segment during 2002. No amounts remain on the balance sheet related to the charge. Note 4. Business Combinations and Discontinued Operation On October 22, 2004, Teledyne, through its wholly owned subsidiary Teledyne Wireless, Inc., acquired the defense electronics business of Celeritek, Inc. (Celeritek) for $32.7 million in cash, which includes the receipt of a $0.3 million purchase price adjustment. Celeritek's defense electronics business designs and manufactures gallium arsenide-based radio frequency and microwave components and subassemblies for electronic warfare, radar and other military applications. Teledyne relocated the business from Santa Clara, California and consolidated it with Teledyne's operations in Mountain View, California. 73 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) On July 2, 2004 Teledyne Investment, Inc., completed the acquisition of Reynolds Industries, Incorporated (Reynolds), headquartered in Los Angeles, California, for total consideration of $41.2 million which includes the payment of a purchase price adjustment and is net of cash acquired. Reynolds is a supplier of specialized high voltage connectors and subassemblies for defense, aerospace and industrial applications, as well as unique pilot helmet mounted display components and subsystems. On June 18, 2004, Teledyne completed the acquisition of the stock of Isco, Inc. (Isco) for $16.00 per share in cash or $93.8 million net of cash acquired. Teledyne sold $17.3 million of marketable securities acquired as part of the Isco acquisition and applied the proceeds against debt. Isco, located in Lincoln, Nebraska, is a producer of water quality monitoring products such as wastewater samplers and open channel Öow meters. Isco's liquid chromatography customers include pharmaceutical laboratories involved in drug discovery and development. Isco also manufactures chemical separation instruments for industrial and research use. Isco's results have been included since the date of the acquisition. The unaudited pro forma information below assumes that Isco had been acquired at the beginning of each Ñscal year and includes the eÅect of amortization of acquired identiÑable intangible assets as well as increased interest expense on acquisition debt. Isco's historical Ñscal quarter end had been approximately three weeks after Teledyne's Ñscal quarter end. Isco's historical results were pro-rated to reÖect the same number of days per period as reported by Teledyne for the periods presented below. This pro forma Ñnancial information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have resulted had the acquisition been in eÅect at the beginning of the respective periods. In addition, the pro forma results are not intended to be a projection of future results and do not reÖect any operating eÇciencies or cost savings that might be achievable. The following table contains the pro forma results for the 2004 and 2003 Ñscal year. 2003 2004 (Unaudited Ì in millions, except per share amounts) Net sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,050.6 43.8 $ 1.35 $ 1.30 $ $905.5 $ 30.9 $ 0.96 $ 0.95 On February 27, 2004, Teledyne Tekmar Company acquired assets of Leeman Labs, Inc. (Leeman Labs), located in Hudson, New Hampshire, for $8.1 million in cash, which includes a payment of a $0.1 million purchase price adjustment. Leeman Labs' product lines augment Teledyne's existing laboratory and continuous monitoring instruments used in environmental applications. On December 31, 2003, which is part of Teledyne's 2004 Ñscal year, Teledyne, through its wholly owned subsidiary Teledyne Wireless, Inc. acquired certain assets of the Filtronic Solid State (Solid State) business from Filtronic plc for $12.0 million in cash. Solid State designs and manufactures customized microwave subassemblies for electronic warfare, radar and other military applications. The business, which operates as Teledyne Microwave, was relocated from Santa Clara, California to Teledyne's operations in Mountain View, California. On June 27, 2003, Teledyne acquired from Spirent plc its Aviation Information Solutions businesses (collectively ""AIS''), which include Spirent Systems Wichita, Inc., Spirent Systems Ì Aerospace Solutions (Ottawa) Limited and assets of United Kingdom-based The Flight Data Company Limited, for $6.4 million in cash, which is net of a purchase price adjustment. AIS designs and manufactures aerospace data acquisition devices, networking products and Öight deck and cabin displays. The acquisition of AIS 74 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) provides Teledyne with advanced airborne Ñle servers, data analysis software and information displays that are highly synergistic with Teledyne Controls' data acquisition and communication systems that enhance Öight safety and maintenance eÇciency for airline and airfreight customers. On May 16, 2003, Teledyne acquired Tekmar Company, a wholly owned subsidiary of Emerson Electric Co., for $13.5 million in cash. Tekmar Company, also known as Tekmar-Dohrmann, is a manufacturer of gas chromatography introduction systems and automated total organic carbon analyzers. Tekmar Company, located in Mason, Ohio, became a business unit of Teledyne Instruments, a group of electronic instrumentation businesses within Teledyne's Electronics and Communications business segment. Tekmar Company manufactures instruments that automate the preparation and concentration of drinking water and wastewater samples for the analysis of volatile organic compounds in gas chromatographs. It also provides laboratory analytical systems for the detection of total organic carbon. On September 27, 2002, Teledyne acquired Monitor Labs from Spirent plc for $24 million in cash. Monitor Labs is a supplier of environmental monitoring instrumentation for the detection, measurement and reporting of air pollutants with locations in Englewood, Colorado and Gibsonia, Pennsylvania. In November 2001, Teledyne acquired API for $25.0 million in cash. API is a designer and manufacturer of advanced air quality monitoring instruments, based in San Diego, California. Each of the above acquisitions are part of the Electronics and Communications segment and are included in the consolidated Ñnancial statements since the date of each respective acquisition. In July 2001, Teledyne combined its Energy Systems business unit with assets of Florida based Energy Partners, Inc., to create majority-owned (86%) Teledyne Energy Systems, Inc. This transaction was recorded as a transfer of net assets between entities under common control in accordance with SFAS No. 141. The company focuses on supplying thermoelectric and fuel cell power systems to government customers and hydrogen/oxygen gas generators and test stands to commercial customers. In 2000, Teledyne sold the assets of Teledyne Cast Parts, a provider of sand and investment castings to the aerospace and defense industries which was previously reported as part of the Aerospace Engines and Components segment In 2002, Teledyne made payments for a purchase price adjustment. In 2003 and 2002, Teledyne made payments for workers' compensation claims. The consolidated statements of cash Öows reÖect payments related to Teledyne Cast Parts as a discontinued operation. Note 5. Financial Instruments Teledyne values Ñnancial instruments as required by SFAS No. 107 Ì ""Disclosures about Fair Value of Financial Instruments,'' as amended. The carrying amounts of cash and cash equivalents approximate fair value because of the short maturity of those instruments. Teledyne estimates the fair value of its long- term debt based on the quoted market prices for debt of similar rating and similar maturity and at comparable interest rates. The estimated fair value of Teledyne's long-term debt at January 2, 2005 approximated the carrying value of $70.6 million. There was no long-term debt outstanding at December 28, 2003. The carrying value of other on-balance-sheet Ñnancial instruments approximates fair value, and the cost, if any, to terminate oÅ-balance sheet Ñnancial instruments (primarily letters of credit) is not signiÑcant. 75 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 6. Accounts Receivable Accounts receivable are summarized as follows (in millions): Balance at year-end 2004 2003 U.S. Government and prime contractors contract receivables: Billed receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 30.1 18.9 Unbilled receivablesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 95.3 Commercial and other receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 39.7 14.0 70.0 Reserve for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 144.3 (2.6) 123.7 (2.4) Total accounts receivable, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $141.7 $121.3 The billed contract receivables from the U.S. Government and prime contractors contain $10.0 million and $13.0 million at January 2, 2005 and December 28, 2003, respectively, due to long-term contracts. The unbilled contract receivables from the U.S. Government and prime contractors contain $17.2 million and $13.1 million at January 2, 2005 and December 28, 2003, respectively, due to long-term contracts. Unbilled contract receivables represent accumulated costs and proÑts earned but not yet billed to customers. The Company believes that substantially all such amounts will be billed and collected within one year. Note 7. Inventories Inventories consisted of the following (in millions): Balance at year-end 2004 2003 Raw materials and suppliesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 35.8 80.2 Work in process ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8.9 Finished goods ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 22.4 54.0 12.1 Total inventories at current costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ LIFO reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Progress payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124.9 (21.6) (5.6) 88.5 (21.1) (3.8) Total inventories, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 97.7 $ 63.6 Inventories at current cost, determined on the last-in, Ñrst-out method were $82.7 million at January 2, 2005 and $58.4 million at December 28, 2003. The remainder of the inventory at current cost, $42.2 million at January 2, 2005 and $30.1 million at December 28, 2003 was determined using the Ñrst-in, Ñrst-out and average cost methods and does not diÅer materially from current cost. In 2004, the Company recorded LIFO expense of $0.5 million which resulted from higher inventory levels. During 2003 and 2002, inventory usage resulted in liquidations of last-in, Ñrst-out inventory quantities. These inventories were carried at the lower costs prevailing in prior years as compared with the cost of current purchases. The eÅect of these last-in, Ñrst-out liquidations was to increase income by $5.1 million in 2003 and $0.8 million in 2002. 76 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Total inventories at current cost were net of reserves for excess, slow moving and obsolete inventory of $21.2 million and $14.2 million at January 2, 2005 and December 28, 2003, respectively. The reserve at January 2, 2005 reÖected reserves acquired as part of acquisitions made in 2004. Inventories, before progress payments, related to long-term contracts were $15.2 million and $23.1 million at January 2, 2005 and December 28, 2003, respectively. Progress payments related to long- term contracts were $4.9 million and $2.1 million at January 2, 2005 and December 28, 2003, respectively. Under the contractual arrangements by which progress payments are received, the customer has an ownership right in the inventories associated with speciÑc contracts. Note 8. Supplemental Balance Sheet Information Property, plant and equipment were as follows (in millions): Balance at year-end 2003 2004 Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Buildings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8.1 55.0 183.3 $ 4.9 43.2 169.7 Accumulated depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 246.4 (155.6) 217.8 (141.8) Total property, plant and equipment, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 90.8 $ 76.0 Other long-term assets included amounts related to deferred compensation, software and other intangible assets. Accrued liabilities included salaries and wages and other related compensation reserves of $40.8 million and $30.2 million at January 2, 2005 and December 28, 2003, respectively. Other long-term liabilities included aircraft product liability reserves of $21.3 million and $13.0 million at January 2, 2005 and December 28, 2003, respectively and deferred compensation liabilities of $12.6 million and $10.5 million at January 2, 2005 and December 28, 2003, respectively. Other long-term liabilities also included reserves for self-insurance, environmental liabilities and the long-term portion of compensation reserves. Note 9. Stockholders' Equity The following is an analysis of Teledyne's common stock activity: Balance, December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stock options exercised and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Balance, December 30, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stock options exercised and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Balance, December 29, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stock options exercised and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Balance, January 2, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Common Stock 31,859,839 188,988 32,048,827 217,751 32,266,578 645,784 32,912,362 Shares issued in all three Ñscal years include stock options exercised as well as shares issued under certain compensation plans. 77 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Preferred Stock Authorized preferred stock may be issued with designations, powers and preferences designated by the Board of Directors. There were no shares of preferred stock issued or outstanding in 2004, 2003 or 2002. Stockholder Rights Plan On November 12, 1999, the Company's Board of Directors unanimously adopted a stockholder rights plan under which preferred share purchase rights were distributed as a dividend on each share of Teledyne's Common Stock distributed to ATI's stockholders in connection with the spin-oÅ and each share to become outstanding between the eÅective date of the spin-oÅ and the earliest of the distribution date, redemption date and Ñnal expiration date. The rights will be exercisable only if a person or group acquires 15 percent or more of the Company's Common Stock or announces a tender oÅer, the consummation of which would result in ownership by a person or group of 15 percent or more of the Common Stock. Each right will entitle stockholders to then buy one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $60 per share. There are 1,250,000 shares of Series A Junior Participating Preferred Stock authorized for issuance under the plan. The record date for the distribution was the close of business of November 22, 1999. The rights will expire on November 12, 2009, subject to earlier redemption or exchange by Teledyne as described in the plan. The rights distribution is not taxable to stockholders. Stock Incentive Plan ATI sponsored an incentive plan that provided for ATI stock option awards to oÇcers and key employees. Teledyne had oÇcers and key employees that participated in this plan prior to the spin-oÅ. In connection with the spin-oÅ, outstanding stock options held by Teledyne's employees were converted into options to purchase Teledyne's Common Stock. The number of shares and the exercise price of each ATI option that was converted to a Teledyne's option was converted based upon a formula designed to preserve the inherent economic value, vesting and term provisions of such ATI options as of the Distribution Date. The exchange ratio and fair market value of the Teledyne's Common Stock, upon active trading, also impacted the number of options issued to Teledyne's employees. Teledyne has established its own long-term incentive plans which provide its Board of Directors the Öexibility to grant restricted stock, performance shares, non-qualiÑed stock options, incentive stock options and stock appreciation rights to oÇcers and employees of Teledyne. Stock option transactions for Teledyne's employees are summarized as follows: Beginning balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Granted or issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Canceled or expired ÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 2003 2002 Weighted Average Exercise Price $14.12 $19.28 $13.35 $18.76 Shares 3,364,237 462,859 (538,552) (34,090) Weighted Average Exercise Price $14.28 $13.45 $10.25 $15.63 Shares 3,256,563 525,625 (112,038) (305,913) Weighted Average Exercise Price $14.12 $14.49 $10.38 $15.35 Shares 2,757,451 635,150 (88,138) (47,900) Ending balance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,254,454 $14.92 3,364,237 $14.12 3,256,563 $14.28 Options exercisable at year-end ÏÏÏ 2,331,729 $14.28 2,240,672 $13.78 2,033,423 $13.29 78 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table provides certain information with respect to stock options outstanding and stock options exercisable at year-end 2004: Range of Exercise Prices Stock Options Outstanding Weighted Average Exercise Price Weighted Average Remaining Life Shares Under $10.00 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10.00 Ó $14.99 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $15.00 Ó $19.99 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $20.00 Ó $24.99 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $25.00 Ó $28.69 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 702,378 1,233,629 1,277,530 9,000 31,917 $ 9.19 $13.83 $18.77 $22.26 $27.16 3,254,454 $14.92 4.6 6.8 6.5 7.3 5.8 6.2 Stock Options Exercisable Weighted Average Exercise Price $ 9.19 $13.84 $18.49 $23.87 $27.16 Shares 702,378 771,678 820,756 5,000 31,917 2,331,729 $14.28 Non-Employee Director Stock Compensation Plan Teledyne also sponsors a stock plan for non-employee directors pursuant to which non-employee directors receive annual stock options and may receive stock or stock options in lieu of their respective retainer and meeting fees. The options become exercisable one year after issuance. The following table provides certain information with respect to the non-employee director stock options outstanding: Balance, December 31, 2001ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stock options issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Balance, December 30, 2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stock options issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stock options exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Balance, December 29, 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stock options issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stock options exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Shares 84,393 51,531 135,924 55,424 (2,000) 189,348 47,503 (8,839) Balance, January 2, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 228,012 Weighted Average Exercise Price $12.33 $14.72 $13.23 $12.68 $ 9.94 $13.11 $17.42 $12.96 $14.01 Price or Range $6.31 Ó $22.47 $9.65 Ó $18.13 $6.31 Ó $22.47 $8.37 Ó $14.22 9.94 $ $6.31 Ó $22.47 $12.54 Ó $19.61 $9.94 Ó $14.75 $6.31 Ó $22.47 Note 10. Related Party Transactions Prior to and in connection with the spin-oÅ, Teledyne and ATI entered into agreements providing for the separation of the companies and governing various relationships for separating employee beneÑts and tax obligations, indemniÑcation and transition services. The Company's principal spin-oÅ requirements, including the requirement to ensure a favorable tax treatment, have been satisÑed. Three of Teledyne's nine directors continue to serve on ATI's board. In addition, under one of the spin-oÅ agreements, the Company is able to charge pension costs to the U.S. Government under certain government contracts after November 29, 2004. In 2004, Teledyne purchased the ""Teledyne'' name and related logos, symbols and marks from an aÇliate of ATI for $412,000. The Company's Chairman, President and Chief Executive OÇcer is a director of Mellon Financial Corporation. Another of its directors is a former chief executive oÇcer and director of Mellon Financial Corporation. All transactions with Mellon Bank, N.A. and its aÇliates are eÅected under normal 79 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) commercial terms, and the Company believes that its relationships with Mellon Bank, N.A. and its aÇliates are arms-length. Mellon Bank, N.A. is one of ten lenders under the Company's $280.0 million credit facility, having committed up to $25.0 million under the facility. Mellon Bank, N.A. provides cash management services and an uncommitted $5.0 million line of credit. Mellon Bank, N.A. serves as trustee under the Company's pension plan and provides asset management services for the plan. Mellon Investor Services LLC serves as our transfer agent and registrar, as well as agent under the Company's stockholders' rights plan. Note 11. Long-Term Debt At January 2, 2005, Teledyne had $70.6 million in long-term debt outstanding. At December 28, 2003, Teledyne had no long-term debt outstanding. On June 15, 2004, the Company terminated its then existing $200 million Ñve-year revolving credit agreement and replaced it with a new $280.0 million credit facility that expires in June 2009. At year-end 2004, the Company had $203.0 million of available committed credit under the credit facility, which can be utilized, as needed, for daily operating and periodic cash needs, including acquisitions. Borrowings under the credit facility bear interest, at Teledyne's option, at a rate based on either a deÑned base rate or the London Interbank OÅered Rate (LIBOR), plus applicable margins. The credit agreement also provides for facility fees that vary between 0.15% and 0.30% of the credit line, depending on the Company's capitalization ratio as calculated from time to time. The credit agreement requires the Company to comply with various Ñnancial and operating covenants, including maintaining certain consolidated leverage and interest coverage ratios, as well as minimum net worth levels and limits on acquired debt. Total debt at year-end 2004 includes the $70.0 million outstanding under the credit facility, and $3.2 million assumed in the Isco acquisition, of which $3.1 million is current. The Company also assumed a $3.9 million capital lease in the Reynolds acquisition, of which $0.1 million is current. Teledyne also had $0.5 million of long- term debt outstanding at year-end 2004 under a $5.0 million uncommitted bank facility. This credit line is utilized, as needed, for periodic cash needs. At January 2, 2005, Teledyne had $10.0 million in outstanding letters of credit. Total interest expense including facility fees and other bank charges was $2.2 million in 2004, $1.0 million in 2003 and $0.9 million in 2002. At January 2, 2005, long-term debt consisted of the following (in millions): Revolving credit and bank facilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other unsecured debt due through March 2009 at varying rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: 2004 $70.5 3.2 73.7 Current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3.1) Total long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $70.6 At January 2, 2005, future minimum principal payments on long-term debt subsequent to January 2, 2005 were as follows: $3.1 million in 2005, $0.1 million in 2006 and $70.5 million in 2009. 80 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 12. Income Taxes Provision for income taxes from continuing operations was as follows (in millions): 2004 2003 2002 Current Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26.7 4.6 State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.6 Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31.9 Deferred Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6.1) 0.5 Total long-term deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5.6) Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26.3 $14.9 3.2 0.1 18.2 $12.0 2.8 1.0 15.8 (3.4) 0.1 (3.3) $14.9 1.4 (0.5) 0.9 $16.7 Income before income taxes included income from domestic operations of $66.5 million for 2004, $43.8 million for 2003 and $40.1 million for 2002. In 2003, Teledyne recorded an income tax beneÑt of $2.4 million due to the reversal of an income tax contingency reserve which was determined to be no longer needed during the third quarter of 2003. The following is a reconciliation of the statutory federal income tax rate to the actual eÅective income tax rate: 2004 2003 2002 U.S. federal statutory tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35.0% 35.0% 35.0% State and local taxes, net of federal beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.8 Reserve reversal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (0.3) 0.2 Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.7 (5.4) (1.0) 4.5 Ì 0.2 EÅective income tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38.7% 33.3% 39.7% Deferred income taxes result from temporary diÅerences in the recognition of income and expense for Ñnancial and income tax reporting purposes, and diÅerences between the fair value of assets acquired in business combinations accounted for as purchases for Ñnancial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax beneÑts or costs to be recognized when those temporary diÅerences reverse. A valuation allowance of $3.3 million exists against deferred tax assets for 2004. Of this amount, $2.1 million relates to recent acquisitions and if not used would result in an adjustment of goodwill. A valuation allowance of $0.6 million was recorded against deferred tax assets for 2003. No valuation allowance was recorded for 2002. The categories of assets and liabilities that have 81 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) resulted in diÅerences in the timing of the recognition of income and expense were as follows (in millions): 2004 2003 Deferred income tax assets: Current ReservesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $13.4 7.6 Inventory valuation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.7 Accrued vacation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5.9 3.7 5.3 Long-term Postretirement beneÑts other than pensions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ReservesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred compensation and other beneÑt plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total deferred income tax assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income tax liabilities: Current 9.4 10.7 19.0 65.8 Other items ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.3 Long-term Property, plant and equipment diÅerencesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other items ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8.2 2.2 Total deferred income tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10.7 10.2 13.0 11.2 49.3 Ì 6.6 0.3 6.9 Net deferred income tax asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $55.1 $ 42.4 Note 13. Pension Plans and Postretirement BeneÑts Prior to the spin-oÅ, certain Teledyne's employees participated in the deÑned beneÑt plan sponsored by ATI. BeneÑts under the deÑned beneÑt plan are generally based on years of service and/or Ñnal average pay. ATI funded the pension plan in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code. As of the spin-oÅ date, Teledyne assumed the existing deÑned beneÑt plan obligations for all of Teledyne's employees, both active and inactive, at its companies that perform government contract work and for Teledyne's active employees at its companies that do not perform government contract work. ATI transferred pension assets to fund the new Teledyne's deÑned beneÑt pension plan. Teledyne's pension expense was $8.7 million in 2004 of which $0.5 million was recoverable in accordance with U.S. Government Cost Accounting Standards (CAS) from certain government contracts compared with pension expense of $6.9 million in 2003 and pension income of $2.3 million in 2002. No pension expense was recoverable in accordance with CAS in 2003 or 2002. Teledyne made $3.1 million in contributions to the deÑned beneÑt pension plan in 2004. As of the spin-oÅ date, Teledyne also participated in a 401(k) plan that was open to all full time U.S. employees and was sponsored by ATI. Teledyne established its own 401(k) plan eÅective April 1, 2000. As of January 1, 2004, non-union new hires participate in an enhanced deÑned contribution plan as opposed to the Company's existing deÑned beneÑt plan. The costs associated with these 401(k) plans were $3.2 million, $2.9 million, and $2.8 million, for 2004, 2003 and 2002, respectively. The Company sponsors several postretirement deÑned beneÑt plans covering certain salaried and hourly employees. The plans provide health care and life insurance beneÑts for certain eligible retirees. 82 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table sets forth the components of net period pension beneÑt (income) expense for Teledyne's deÑned beneÑt pension plans and postretirement beneÑt plans for 2004, 2003, and 2002 (in millions): Pension BeneÑts 2003 2004 2002 Postretirement BeneÑts 2003 2002 2004 Service cost Ì beneÑts earned during the periodÏÏÏ $ 12.8 28.7 Interest cost on beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (35.0) Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.1 Amortization of prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.1 Recognized actuarial (gain) loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 12.2 28.7 (36.4) 2.3 0.1 $ 11.6 27.5 (40.1) 2.3 (3.6) $ 0.1 1.1 Ì Ì (1.1) $ 0.1 1.1 Ì Ì (1.3) $ 0.1 1.1 Ì (0.4) (1.3) Net periodic beneÑt (income) expense ÏÏÏÏÏÏÏÏÏÏÏ $ 8.7 $ 6.9 $ (2.3) $ 0.1 $(0.1) $(0.5) The following table sets forth the reconciliation of the beginning and ending balances of the beneÑt obligation of the deÑned beneÑt pension and postretirement beneÑt plans (in millions): Pension BeneÑts 2003 2004 Postretirement BeneÑts 2004 2003 Changes in beneÑt obligation: BeneÑt obligation Ì beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $447.5 12.8 28.7 20.8 (21.7) 0.7 Service cost Ì beneÑts earned during the periodÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest cost on projected beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Plan amendmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $414.4 12.2 28.7 12.1 (19.9) Ì $17.9 0.1 1.1 0.6 (1.7) Ì $16.0 0.1 1.1 2.3 (1.6) Ì BeneÑt obligation Ì end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $488.8 $447.5 $18.0 $17.9 Accumulated beneÑt obligation Ì end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $446.9 $410.9 The measurement date for the Company's pension and postretirement plans is December 31. The following table presents the estimated future beneÑt payments for the Company's pension and postretirement plans (in millions): 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2010Ó2014 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pension Plan $ 22.0 23.6 25.6 27.5 29.4 178.6 Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $306.7 Postretirement BeneÑt Plan $ 1.6 1.6 1.6 1.6 1.6 7.6 $15.6 83 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following tables set forth the reconciliation of the beginning and ending balances of the fair value of plan assets for Teledyne's deÑned beneÑt pension plans and the percentage of year-end market value by asset class (in millions): Pension BeneÑts 2003 2004 Changes in plan assets: Fair value of plan assets Ì beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $381.9 34.3 3.0 0.9 (21.7) Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Employer contribution Ì deÑned beneÑt plan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Employer contribution Ì other beneÑt plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $335.4 65.7 Ì 0.7 (19.9) Fair value of plan assets Ì end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $398.4 $381.9 Plan Assets % to Total 2004 2003 Equity Instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Domestic Fixed Income InstrumentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 67.6% 67.8% 31.7% 31.5% 0.7% 0.7% Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100.0% 100.0% In 2003, the Company commenced an active management policy for a portion of its pension assets. The investment policy includes a target allocation percentage of 65% in equity instruments and 35% in domestic Ñxed income instruments. The balance in equity instruments can range from 60% to 70% before rebalancing is required under our policy. The expected long-term rate of return on plan assets is reviewed annually, taking into consideration our asset allocation, historical returns on the types of assets held, and the current economic environment. The following assumptions were used to determine the beneÑt obligation and the net beneÑt cost: For the year 2004 2003 2002 Weighted average discount rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted average increase in future compensation levels ÏÏÏÏÏÏÏÏ Expected weighted-average long-term rate of return ÏÏÏÏÏÏÏÏÏÏÏÏ 6.5% 7.0% 7.5% 3.5% 4.0% 4.5% 8.5% 8.5% 9.0% The Company is projecting a long-term rate of return on plan assets of 8.5% in 2005. The discount rate used in determining the beneÑt obligations is expected to be 6.25% in 2005 and the expected weighted average increase in future compensation levels is 3.25%. 84 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table sets forth the funded status and amounts recognized in Teledyne's consolidated balance sheets for the pension and postretirement plans at year-end 2004 and 2003 (in millions): Pension BeneÑts 2003 2004 Postretirement BeneÑts 2004 2003 Funded status ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(90.4) 7.4 Unrecognized prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 78.8 Unrecognized net (gain) loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(65.6) 8.8 57.4 $(18.0) Ì (6.2) $(17.9) Ì (7.7) Prepaid (accrued) beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (4.2) $ 0.6 $(24.2) $(25.6) Accrued pension obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(46.7) Ì Accrued postretirement beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37.1 Accumulated other comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.2 Intangible pension assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.8) Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(25.6) Ì 19.4 8.5 (1.7) $ Ì $ Ì (25.6) (24.2) Ì Ì Ì Ì Ì Ì Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (4.2) $ 0.6 $(24.2) $(25.6) SFAS No. 87, ""Employers' Accounting for Pensions,'' requires that a minimum pension liability be recorded if the value of pension assets is less than the accumulated pension beneÑt obligation. This condition existed since year-end 2002. In accordance with the requirements of SFAS No. 87, the Company has a $22.7 million non-cash reduction to stockholders' equity, a long-term intangible asset of $7.2 million and an additional long-term pension liability of $44.3 million at year-end 2004. As of year-end 2003, the Company had a $11.8 million non-cash reduction to stockholders' equity, a long-term intangible asset of $8.5 million and an additional long-term pension liability of $27.9 million. The adjustments to equity did not aÅect net income and are recorded net of deferred taxes. The reduction will be reversed should the value of the pension assets exceed the accumulated pension beneÑt obligation as of a future measurement date. The annual assumed rate of increase in the per capita cost of covered beneÑts (the health care cost trend rate) for health care plans was 9% in 2004 and was assumed to decrease to 5% by the year 2010 and remain at that level thereafter. Assumed health care cost trend rates have a signiÑcant eÅect on the amounts reported for the health care plans. A one percentage point increase in the assumed health care cost trend rates would result in an increase in the annual service and interest costs by $62 thousand for 2004 and would result in an increase in the postretirement beneÑt obligation by $1.1 million at January 2, 2005. A one percentage point decrease in the assumed health care cost trend rates would result in a decrease in the annual service and interest costs by $55 thousand for 2004 and would result in a decrease in the postretirement beneÑt obligation by $960 thousand at January 2, 2005. In May 2004, the FASB issued FASB StaÅ Position No. 106-2, ""Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003'' (""FSP 106-2''). FSP No. 106-2 provides guidance on the accounting for the eÅects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003'' (""The Act''). The Company sponsors retiree medical programs for certain of its locations and based on current guidance the Company expects that this legislation will reduce the Company's cost for some of these programs. The Company has estimated the impact related to certain retirees who retired on or after May 1, 1993 and is in the process of determining the impact for certain retirees who retired prior to May 1, 1993. The adoption of FSP No. 106-2 as it related to retirees who retired on or after May 1, 1993 did not have a material impact on our results of operations, Ñnancial position or cash Öows. The Company has recorded $0.1 million for 2004 for the expected cost reduction under the Act for those retirees. The estimated impact for certain retirees 85 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) who retired prior to May 1, 1993 is not expected to have a material impact on our results of operations, Ñnancial position or cash Öows. Note 14. Business Segments Teledyne is a leading provider of sophisticated electronic components, instruments and communica- tions products, systems engineering solutions and information technology services, and aerospace engines and components as well as on-site gas and power generation systems. Its customers include aerospace prime contractors, general aviation companies, government agencies and major communications and other commercial companies. Teledyne operates in four business segments: Electronics and Communications, Systems Engineering Solutions, Aerospace Engines and Components and Energy Systems. The factors for determining the reportable segments were based on the distinct nature of their operations. They are managed as separate business units because each requires and is responsible for executing a unique business strategy. The Electronics and Communications segment, sometimes referred to as Teledyne Electronic Technologies, provides a wide range of specialized electronic systems, instruments components and services that address niche market applications in commercial aerospace, communications, defense, industrial and medical markets. The Systems Engineering Solutions segment, principally through Teledyne Brown Engineering, Inc., applies the skills of its extensive staÅ of engineers and scientists to provide innovative systems engineering, advanced technology, and manufacturing solutions to defense, space, environmental, and homeland security requirements. The Aerospace Engines and Components segment, principally through Teledyne Continental Motors, Inc., focuses on the design, development and manufacture of piston engines, turbine engines, electronic engine controls and aviation batteries. The Energy Systems segment, through Teledyne Energy Systems, Inc., provides on-site gas and power generation systems based on proprietary electrolysis, thermoelectric and fuel cell technologies. It currently includes the majority-owned entity that was formed in the third quarter of 2001. Segment operating proÑt includes other income and expense directly related to the segment, but excludes minority interest, interest income and expense, gains and losses on the disposition of assets, sublease rental income and non revenue licensing and royalty income, domestic and foreign income taxes and corporate oÇce expenses. IdentiÑable assets are those assets used in the operations of the segments. Corporate assets primarily consist of cash and cash equivalents, deferred tax assets, net pension assets/liabilities and other assets. Information on the Company's business segments was as follows (in millions): 2004 2003 2002 Sales Electronics and Communications ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 567.9 242.2 Systems Engineering SolutionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 181.8 Aerospace Engines and Components ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24.7 Energy Systems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,016.6 $446.9 212.5 165.5 15.8 $840.7 $388.0 206.7 162.9 15.1 $772.7 86 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2004(a) 2003 2002 Income before taxes Electronics and Communications ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Systems Engineering Solutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Aerospace Engines and Components ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Energy SystemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Segment operating proÑt and other segment income ÏÏ Corporate expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest and debt expense, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other income (expense) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 54.4 27.1 6.1 1.6 89.2 (19.8) (1.9) 0.5 $ 68.0 $ 33.0 23.2 6.4 (0.7) 61.9 (14.9) (0.8) (1.6) $ 44.6 $ 35.9 20.6 2.7 (1.9) 57.3 (14.4) (0.6) (0.2) $ 42.1 a) Total year 2004 segment operating proÑt includes receipt of $2.5 million pursuant to an agreement with Honda Motor Co., Ltd. related to the piston engine business. This amount is included as part of other income on the income statement table. 2004 2003 2002 Depreciation and amortization Electronics and Communications ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 17.5 1.7 Systems Engineering Solutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.1 Aerospace Engines and Components ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.5 Energy SystemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 15.4 1.9 5.3 0.5 $ 14.8 2.1 4.4 0.5 Total depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 24.8 $ 23.1 $ 21.8 2004 2003 2002 Capital expenditures Electronics and Communications ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 12.8 1.7 Systems Engineering Solutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.2 Aerospace Engines and Components ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.1 Energy SystemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 14.9 1.5 3.2 0.6 $ 8.3 3.1 3.6 0.4 Total capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 18.8 $ 20.2 $ 15.4 2004 2003 2002 IdentiÑable assets Electronics and Communications ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $439.2 37.1 Systems Engineering Solutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49.8 Aerospace Engines and Components ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9.5 Energy SystemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 89.2 Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $228.4 35.5 52.0 8.5 109.2 $197.2 37.8 53.4 8.3 102.2 Total identiÑable assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $624.8 $433.6 $398.9 87 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Information on the Company's sales to the U.S. Government, including direct sales as a prime contractor and indirect sales as a subcontractor, were as follows (in millions): 2004 2003 2002 Electronics and Communications ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $147.3 240.4 Systems Engineering Solutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26.0 Aerospace Engines and Components ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19.4 Energy SystemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $142.0 210.3 24.7 10.7 $115.2 202.4 25.5 9.3 Total U.S. Government salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $433.1 $387.7 $352.4 Sales to the U.S. Government included sales to the Department of Defense of $335.4 million in 2004, $257.9 million in 2003, and $233.5 million in 2002. Total international sales were $198.0 million in 2004, $138.3 million in 2003, and $126.6 million in 2002. Of these amounts, sales by operations in the United States to customers in other countries were $190.3 million in 2004, $133.3 million in 2003, and $118.3 million in 2002. There were no sales to individual countries outside of the United States in excess of 10 percent of the Company's net sales. Sales between business segments, which were not material, generally were priced at prevailing market prices. Note 15. Lease Commitments The Company leases buildings and equipment under capital and operating leases. The present value of the minimum capital lease payments, net of the current portion, totaled $3.8 million at January 2, 2005. Operating lease agreements, which include leases for manufacturing facilities and oÇce space frequently include renewal options and require the Company to pay for utilities, taxes, insurance and maintenance expense. At January 2, 2005, future minimum lease payments for capital leases and for operating leases with non-cancelable terms of more than one year were as follows (in millions): Capital Operating 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.3 0.3 0.3 0.4 0.4 5.4 Total minimum lease payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.1 $10.2 7.5 4.7 4.1 3.2 10.6 $40.3 Less: Imputed interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3.2) (0.1) Present value of minimum capital lease payment, net of current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.8 Included in the 2004 property, plant and equipment accounts were $3.4 million of property leased under a capital lease and $80 thousand related accumulated depreciation. Rental expense under operating leases, net of sublease income, was $12.2 million in 2004, $11.9 million in 2003, and $10.4 million in 2002. 88 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 16. Commitments and Contingencies The Company is subject to federal, state and local environmental laws and regulations which require that it investigate and remediate the eÅects of the release or disposal of materials at sites associated with past and present operations, including sites at which the Company has been identiÑed as a potentially responsible party under the federal Superfund laws and comparable state laws. In accordance with the Company's accounting policy disclosed in Note 2, environmental liabilities are recorded when the Company's liability is probable and the costs are reasonably estimable. In many cases, however, investigations are not yet at a stage where the Company has been able to determine whether it is liable or, if liability is probable, to reasonably estimate the loss or range of loss, or certain components thereof. Estimates of the Company's liability are further subject to uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, evolving remediation standards, imprecise engineering evaluations and estimates of appropriate cleanup technology, methodology and cost, the extent of corrective actions that may be required, and the number and financial condition of other potentially responsible parties, as well as the extent of their responsibility for the remediation. Accordingly, as investigation and remediation of these sites proceeds, it is likely that adjustments in the Company's accruals will be necessary to reflect new information. The amounts of any such adjustments could have a material adverse effect on the Company's results of operations in a given period, but the amounts, and the possible range of loss in excess of the amounts accrued, are not reasonably estimable. Based on currently available information, however, management does not believe that future environmental costs in excess of those accrued with respect to sites with which the Company has been identified are likely to have a material adverse effect on the Company's financial condition or liquidity. However, there can be no assurance that additional future developments, administrative actions or liabilities relating to environmental matters will not have a material adverse effect on the Company's financial condition or results of operations. At January 2, 2005, the Company's reserves for environmental remediation obligations totaled approximately $3.5 million, of which approximately $0.2 million were included in other current liabilities. The Company is evaluating whether it may be able to recover a portion of future costs for environmental liabilities from its insurance carriers and from third parties. The timing of expenditures depends on a number of factors that vary by site, including the nature and extent of contamination, the number of potentially responsible parties, the timing of regulatory approvals, the complexity of the investigation and remediation, and the standards for remediation. The Company expects that it will expend present accruals over many years, and will complete remediation of all sites with which it has been identiÑed in up to thirty years. Various claims (whether based on U.S. Government or Company audits and investigations or otherwise) have been or may be asserted against the Company related to its U.S. Government contract work, including claims based on business practices and cost classiÑcations and actions under the False Claims Act. Although such claims are generally resolved by detailed fact-Ñnding and negotiation, on those occasions when they are not so resolved, civil or criminal legal or administrative proceedings may ensue. Depending on the circumstances and the outcome, such proceedings could result in Ñnes, penalties, compensatory and treble damages or the cancellation or suspension of payments under one or more U.S. Government contracts. Under government regulations, a company, or one or more of its operating divisions or units, can also be suspended or debarred from government contracts based on the results of investigations. However, although the outcome of these matters cannot be predicted with certainty, management does not believe there is any audit, review or investigation currently pending against the Company of which management is aware that is likely to result in suspension or debarment of the Company, or that is otherwise likely to have a material adverse eÅect on the Company's Ñnancial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse eÅect on the Company's results of operations for that period. 89 TELEDYNE TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company learns from time to time that it has been named as a defendant in civil actions Ñled under seal pursuant to the False Claims Act. Generally, since such cases are under seal, the Company does not in all cases possess suÇcient information to determine whether the Company could sustain a material loss in connection with such cases, or to reasonably estimate the amount of any loss attributable to such cases. In October 2002, the Company was informed that the U.S. Government had declined to intervene in a lawsuit Ñled under seal, pursuant to the False Claims Act, more than fours years before. The Company believes that its Electronic Safety Products unit's involvement in this civil action is over, as the plaintiÅ's appeal of the Company's motion to dismiss this action has been denied and the plaintiÅ's petition for a rehearing en banc by the Court of Appeals for the DC Circuit has also been denied. Should the plaintiÅ Ñle a petition for certiorari with the United States Supreme Court by March 21, 2005 the Company intends to continue its vigorous defense. A number of other lawsuits, claims and proceedings have been or may be asserted against the Company relating to the conduct of its business, including those pertaining to product liability, patent infringement, commercial, employment and employee beneÑts. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to the Company, management does not believe that the disposition of any such pending matters is likely to have a material adverse eÅect on the Company's Ñnancial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse eÅect on the Company's results of operations for that period. Teledyne has aircraft and product liability insurance with an annual self-insured retention for general aviation aircraft liabilities incurred in connection with products manufactured by Teledyne Continental Motors of $25.0 million. The Company's current aircraft product liability insurance policy expires May 2005. Note 17. Quarterly Financial Data (Unaudited) The following is Teledyne's quarterly information (in millions, except per-share amounts): 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Fiscal year 2004(a) Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basic earnings per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $219.6 $ 51.3 $ 5.9 $ 0.18 $ 0.18 $238.9 $ 60.6 $ 9.9 $ 0.31 $ 0.30 $270.0 $ 75.4 $ 12.5 $ 0.38 $ 0.37 $288.1 $ 83.0 $ 13.4 $ 0.41 $ 0.39 (a) Fiscal year 2004 was a 53-week year, each quarter contained 13 weeks except for the fourth quarter which was a 14 week quarter Fiscal year 2003(a) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross proÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basic earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $197.2 $ 45.6 $ 5.5 $ 0.17 $ 0.17 $205.4 $ 51.9 $ 6.5 $ 0.20 $ 0.20 $215.7 $ 52.6 $ 9.9 $ 0.31 $ 0.30 $222.4 $ 53.9 $ 7.8 $ 0.24 $ 0.24 (a) Fiscal year 2003 was a 52-week year, each quarter contained 13 weeks. 90 Schedule II VALUATION AND QUALIFYING ACCOUNTS For the Fiscal Years Ended January 2, 2005, December 28, 2003 and December 29, 2002 (In millions) Description Fiscal 2004 Reserve for doubtful accounts ÏÏÏÏÏÏÏÏÏÏ Aircraft product liability reserveÏÏÏÏÏÏÏÏÏ Environmental reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fiscal 2003 Reserve for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏ Aircraft product liability reserve ÏÏÏÏÏÏÏÏÏ Environmental reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fiscal 2002 Reserve for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏ Aircraft product liability reserve ÏÏÏÏÏÏÏÏÏ Environmental reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additions Balance at beginning of period Charged to costs and expenses Acquisitions Deductions(a) Balance at end of period $ 2.4 $13.0 $ 2.0 $ 2.7 $11.1 $ 2.4 $ 2.7 $ 5.5 $ 2.4 0.6 15.9 1.8 0.2 12.8 0.1 0.6 14.0 1.3 0.5 Ì Ì Ì Ì Ì Ì Ì Ì (0.9) (1.5) (0.3) (0.5) (10.9) (0.5) (0.6) (8.4) (1.3) $ 2.6 $27.4 $ 3.5 $ 2.4 $13.0 $ 2.0 $ 2.7 $11.1 $ 2.4 (a) Represents payments except the amounts for allowance for doubtful accounts primarily represents uncollectible accounts written oÅ, net of recoveries. New York Stock Exchange Annual CEO CertiÑcation (Section 303A.12(a)) As the Chief Executive OÇcer of Teledyne Technologies Incorporated, and as required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual, I hereby certify that as of the date hereof I am not aware of any violation by the Company of NYSE's Corporate Governance listing standards, other than has been notiÑed to the Exchange pursuant to Section 303A.12(b) and disclosed as an attachment hereto. (no attachment) /s/ ROBERT MEHRABIAN Robert Mehrabian Chairman, President and Chief Executive OÇcer April 28, 2004 91 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of March 2, 2005. SIGNATURES Teledyne Technologies Incorporated (Registrant) By: /s/ ROBERT MEHRABIAN Robert Mehrabian Chairman, President and Chief Executive OÇcer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ ROBERT MEHRABIAN Robert Mehrabian Chairman, President and Chief Executive OÇcer (Principal Executive OÇcer) and Director March 2, 2005 /s/ DALE A. SCHNITTJER Vice President and Chief Financial OÇcer March 2, 2005 Dale A. Schnittjer /s/ SUSAN L. MAIN Susan L. Main * Robert P. Bozzone * Frank V. Cahouet * Diane C. Creel * Charles Crocker * Simon M. Lorne * Paul D. Miller * Charles J. Queenan, Jr. * Michael T. Smith *By: /s/ MELANIE S. CIBIK Melanie S. Cibik Pursuant to Powers of Attorney Ñled as Exhibit 24.1 (Principal Financial OÇcer) Vice President and Controller (Principal Accounting OÇcer) March 2, 2005 Director March 2, 2005 Director March 2, 2005 Director March 2, 2005 Director March 2, 2005 Director March 2, 2005 Director March 2, 2005 Director March 2, 2005 Director March 2, 2005 Exhibit No. 2.1 3.1 3.2 4.1 4.2 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 EXHIBIT INDEX Description Separation and Distribution Agreement dated as of November 29, 1999 by and among Allegheny Teledyne Incorporated, TDY Holdings, LLC, Teledyne Industries, Inc. and Teledyne Technologies Incorporated (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated as of November 29, 1999 (File No. 1-15295)) Restated CertiÑcate of Incorporation of Teledyne Technologies Incorporated (including CertiÑcate of Designation of Series A Junior Participating Preferred Stock) (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended January 2, 2000 (File No. 1-15295)) Amended and Restated Bylaws of Teledyne Technologies Incorporated (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended January 2, 2000 (File No. 1-15295)) Rights Agreement dated as of November 29, 1999 between Teledyne Technologies Incorporated and ChaseMellon Shareholder Services, L.L.C. (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated as of November 29, 1999 (File No. 1-15295)) Credit Agreement dated as of June 15, 2004, among Teledyne, the Guarantors named therein, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the other Lenders named therein. Tax Sharing and IndemniÑcation Agreement between Allegheny Teledyne Incorporated and Teledyne Technologies Incorporated (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated as of November 29, 1999 (File No. 1-15295)) Employee BeneÑts Agreement between Allegheny Teledyne Incorporated and Teledyne Technolo- gies Incorporated (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K/A (Amendment No. 1) dated as of November 29, 1999 (File No. 1-15295))‰ Teledyne Technologies Incorporated 1999 Incentive Plan (incorporated by reference to Ex- hibit 10.5 to the Company's Annual Report on Form 10-K for the year ended January 2, 2000 (File No. 1-15295))‰ Teledyne Technologies Incorporated 1999 Non-Employee Director Stock Compensation Plan (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended January 2, 2000 (File No. 1-15295))‰ Amendment No. 1 to Teledyne Technologies Incorporated 1999 Non-Employee Director Stock Compensation Plan (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-15295)‰ Amendment No. 2 to Teledyne Technologies Incorporated 1999 Non-Employee Director Stock Compensation Plan (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-15295)‰ Amendment No. 3 to Teledyne Technologies Incorporated 1999 Non-Employee Director Stock Compensation Plan (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 29, 2002 (File No. 1-15295)‰ Amendment No. 4 to Teledyne Technologies Incorporated 1999 Non-Employee Director Stock Compensation Plan (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the period ended September 28, 2004) (File No. 1-15295)‰ Amended and Restated Employment Agreement between Robert Mehrabian and Teledyne Technologies Incorporated (incorporated by reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K for the year ended December 30, 2001 (File No. 1-15295))‰ 10.10 Letter Agreement conÑrming Robert Mehrabian's Salary*‰ 10.11 Form of Change of Control Severance Agreement (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended January 2, 2000 (File No. 1- 15295)), with regard to Dale A. Schnittjer (incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the period ended June 29, 2003 (File No. 1-15295)) and with regard to Susan L. Main (incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K dated March 29, 2004 (File No. 1-15295))‰ Exhibit No. Description 10.12 Teledyne Technologies Incorporated Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended January 2, 2000 (File No. 1-15295))‰ 10.13 Amendment No. 1 to Teledyne Technologies Incorporated Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-15295)‰ 10.14 Amendment No. 2 to Teledyne Technologies Incorporated Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-15295)‰ 10.15 Amendment No. 3 to Teledyne Technologies Incorporated Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the period ended September 28, 2003) (File No. 1-15295)‰ 10.16 Teledyne Technologies Incorporated Pension Equalization/ BeneÑt Restoration Plan (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended January 2, 2000 (File No. 1-15295))‰ 10.17 Teledyne Technologies Incorporated 2002 Stock Incentive Plan (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 30, 2001 (File No. 1-15295))‰ 10.18 Form of Restricted Stock Award Agreement Ì January 22, 2002 Award (incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 29, 2002 (File No. 1-15295))‰ 10.19 Form of Restricted Stock Award Agreement Ì February 25, 2003 Award (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended December 29, 2002 (File No. 1-15295))‰ 10.20 Form of Restricted Stock Award Agreement Ì January 27, 2004 Award (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 28, 2003 (File No. 1-15295))‰ 10.21 Restricted Stock Award Agreement dated March 29, 2004, between Company and Susan L. Main (incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K dated March 29, 2004 (File No. 1-15295))‰ 10.22 Form of Restricted Stock Award Agreement Ì January 25, 2005 Award*‰ 14 Teledyne Technologies Incorporated Corporate Objectives and Guidelines for Employee Con- duct Ì this code of ethics may be accessed via the Company's website at www.teledyne.com/aboutus/ethics.asp. Subsidiaries of Teledyne Technologies Incorporated* Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm* Power of Attorney Ì Directors * CertiÑcation of Chief Executive OÇcer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* CertiÑcation of Chief Financial OÇcer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* CertiÑcation of Chief Executive OÇcer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* CertiÑcation of Chief Financial OÇcer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* 21 23 24.1 31.1 31.2 32.1 32.2 * Submitted electronically herewith. ‰ Denotes management contract or compensatory plan or arrangement required to be Ñled as an Exhibit to this Form 10-K. 32765_text 3/18/05 10:38 AM Page 17 FORWARD-LOOKING STATEMENTS CAUTIONARY NOTICE This annual report contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, relating to earnings, growth opportunities, capital expenditures, pension matters, stock option expense and strategic plans. Actual results could differ materially from these forward-looking statements. Many factors, including changes in demand for products sold to the semiconductor, communications, commercial aviation and energy exploration markets, timely development of acceptable and competitive fuel cell products and systems, funding, continuation and award of government programs, changes in insurance expense, customers’ acceptance of piston engine insurance-related price increases, continued liquidity of our customers (including commercial airline customers) and economic and political conditions, could change the anticipated results. In addition, stock market fluctuations affect the value of the Company’s pension assets. Global responses to terrorism and other perceived threats increase uncertainties associated with forward-looking statements about our businesses. Various responses could realign government programs, and affect the composition, funding or timing of our programs. Flight restrictions would negatively impact the market for general aviation aircraft piston engines and components. The Company continues to take action to assure compliance with the internal controls, disclosure controls and other requirements of the Sarbanes-Oxley Act of 2002. While the Company believes its control systems are effective, there are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected. While Teledyne’s growth strategy includes possible acquisitions, the Company cannot provide any assurance as to when, if, or on what terms, any acquisitions will be made. Acquisitions, including the recent acquisitions of the defense electronic business of Celeritek, Inc., Reynolds Industries, Incorporated and Isco, Inc., involve various inherent risks, such as, among others, our ability to integrate acquired businesses and to achieve identified financial and operating synergies. Additional information concerning factors that could cause actual results to differ materially from those projected in the forward-looking statements is contained in Teledyne’s periodic filings with the Securities and Exchange Commission, including its 2004 Annual Report on Form 10-K. Forward looking statements are generally accompanied by such words as “estimates”, “project”, “predict”, “believes” or “expect”, that convey the uncertainty of future events or outcomes. The Company assumes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or otherwise. Design: James Robie Design Associates 32765_text 3/18/05 10:37 AM Page 2 12333 West Olympic Boulevard • Los Angeles, California 90064 • 310.893.1600 • fax: 310.893.1669 • www.teledyne.com 

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