Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Teledyne Technologies, Inc. Form 10-K 63 303K
2: EX-3.1 Restated Certificate of Incorporation 15 63K
3: EX-3.2 Amended and Restated Bylaws 14 70K
4: EX-4.2 Credit Agreement 98 380K
5: EX-4.3 First Amendment to Credit Agreement 16 25K
10: EX-10.10 Executive Deferred Compensation Plan 19 68K
11: EX-10.11 Material Contract 7 24K
6: EX-10.5 1999 Incentive Plan 20 77K
7: EX-10.6 1999 Non-Employee Director Stock Compensation Plan 7 26K
8: EX-10.8 Employment Agreement 4 24K
9: EX-10.9 Form of Change of Control Severence Agreement 15 66K
12: EX-21 Significant Subsidiary 1 6K
13: EX-23 Consent of Experts or Counsel 1 8K
14: EX-24 Power of Attorney 2± 12K
15: EX-27.1 Financial Data Schedule 1 10K
16: EX-27.2 Financial Data Schedule 2± 11K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended January 2, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
Commission file number: 1-15295
TELEDYNE TECHNOLOGIES INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware 25-1843385
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2049 Century Park East, Suite 1500
Los Angeles, California 90067-3101
(Address of principal executive office and Zip Code)
Registrant's telephone number, including area code: (310) 277-3311
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, par value $.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
----------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At March 23, 2000, the number of outstanding shares of Common Stock of the
registrant was 26,732,933. At March 23, 2000, the aggregate market value of the
registrant's Common Stock held by non-affiliates of the registrant was
approximately $350.7 million, based on the closing price of $13.625 per share as
reported on the New York Stock Exchange. Shares of Common Stock known by the
registrant to be beneficially owned by directors and executive officers subject
to Section 16 of the Securities Exchange Act of 1934 are not included in the
computation. The registrant, however, has made no determination that such
persons are "affiliates" within the meaning of Rule 12b-2 under the Securities
Exchange Act of 1934.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the registrant's proxy statement for its 2000 Annual
Meeting of Stockholders (the "2000 Proxy Statement") are incorporated by
reference in Part III of this Report. Information required by paragraphs (k) and
(l) of Item 402 of Regulation S-K is not incorporated by reference in this Form
10-K or in any other filing of the registrant. Such information shall not be
deemed "soliciting material" or to be filed with the Commission as permitted by
Instruction (9) to Item 402 of Regulation S-K.
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INDEX
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PAGE
NUMBER
------
PART I
Item Business.................................................... 3
1.
Item Properties.................................................. 21
2.
Item Legal Proceedings........................................... 23
3.
Item Submission of Matters to a Vote of Security Holders......... 23
4.
PART II
Item Market for Registrant's Common Equity and Related
5. Stockholder Matters......................................... 24
Item Selected Financial Data..................................... 24
6.
Item Management's Discussion and Analysis of Financial Condition
7. and Results of Operations................................... 25
Item Quantitative and Qualitative Disclosure About Market Risk... 32
7A.
Item Financial Statements and Supplementary Data................. 32
8.
Item Changes in and Disagreements with Accountants on Accounting
9. and Financial Disclosure.................................... 32
PART
III
Item Directors and Executive Officers of the Registrant.......... 33
10.
Item Executive Compensation...................................... 33
11.
Item Security Ownership of Certain Beneficial Owners and
12. Management.................................................. 33
Item Certain Relationships and Related Transactions.............. 33
13.
PART IV
Item Exhibits, Financial Statement Schedules, and Reports on Form
14. 8-K......................................................... 33
INDEX TO FINANCIAL STATEMENTS AND RELATED INFORMATION F-1
SIGNATURES
EXHIBIT INDEX
DEFINED TERMS
In this Form 10-K, Teledyne Technologies Incorporated is sometimes referred
to as the "Company", "Teledyne Technologies", or "TDY". References to ATI mean
Allegheny Technologies Incorporated, formerly known as Allegheny Teledyne
Incorporated, the company from which we were spun-off on November 29, 1999.
PART I
ITEM 1. BUSINESS.
WHO WE ARE
Teledyne Technologies Incorporated is a leading provider of sophisticated
electronic and communications products, systems engineering solutions and
information technology services, and aerospace engines and components. Our
customers include aerospace prime contractors, general aviation companies,
government agencies and major communications and other commercial companies. We
serve high-value niche market segments where performance, precision and
reliability are critical and where we are in several cases the leading supplier.
Our businesses are interrelated by their use of technology to provide
cost-effective and value-added solutions.
Our products include avionic systems that collect and communicate
information for airlines and business aircraft systems; broadband communications
subsystems for wireless and satellite systems; engineering and information
technology services for space, defense and industrial customers; and engines for
general aviation aircraft and for cruise missiles.
Total sales in 1999 were $803.4 million, compared to $780.4 million and
$756.6 million in 1998 and 1997, respectively. Our segment operating profits
were $90.6 million, $89.2 million and $74.9 million in 1999, 1998 and 1997,
respectively. Approximately 57% of our total sales in 1999 was to commercial
customers and the balance was to the U.S. Government. Approximately 67% of these
U.S. Government sales were attributable to fixed-price type contracts and the
balance to cost plus fee type contracts. International sales accounted for
approximately 18% of total sales in 1999.
Our three business segments, their respective operating companies, and
their contribution to our sales in 1999, 1998 and 1997 are summarized in the
following table:
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PERCENTAGE OF SALES
---------------------
SEGMENT OPERATING BUSINESSES 1999 1998 1997
---------------------------------- ---------------------------------- ----- ----- -----
Electronics and Communications Teledyne Electronic Technologies 43% 44% 45%
Systems Engineering Solutions Teledyne Brown Engineering, Inc. 28% 29% 28%
Aerospace Engines and Components Teledyne Continental Motors and 29% 27% 27%
Teledyne Cast Parts
Teledyne Technologies was organized as a Delaware corporation on August 23,
1999. Teledyne Technologies is comprised of certain businesses of the former
Aerospace and Electronics segment of Allegheny Teledyne Incorporated, now known
as Allegheny Technologies Incorporated. On November 29, 1999, we were spun-off
from ATI after a strategic review concluded that our businesses would be able to
grow faster and be stronger competitors if they were combined as a separate
company. On such date, each holder of ATI stock as of the close of business on
November 22, 1999 received one share of TDY Common Stock for every seven shares
of ATI stock. Our origin dates back to Teledyne, Inc. founded in 1960 by Dr.
Henry Singleton.
Our principal executive offices are located at 2049 Century Park East,
Suite 1500, Los Angeles, California 90067-3101. Our telephone number is (310)
277-3311.
OUR BUSINESS SEGMENTS
ELECTRONICS AND COMMUNICATIONS
Our Electronics and Communications segment, through Teledyne Electronic
Technologies, applies proprietary technology, advanced software and hardware
design skills and manufacturing capabilities in three areas: Data Acquisition
and Communications Products; Precision Electronic Devices; and Electronic
Manufacturing.
Data Acquisition and Communication Products
We are a leading supplier of systems and software for data acquisition and
communications
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applications in commercial aviation, as well as critical components and
subsystems for wireless and satellite communications terminals. We are focused
on expanding our technology base to support the emerging needs for high data
rate (HDR) broadband communications technology.
We also supply a range of specialized components, subsystems and equipment
to domestic and international government aviation and aerospace customers. We
participate in the markets for data acquisition and communications equipment and
services for both air transport (including commercial passenger aircraft) and
business and commuter aircraft.
- Air Transport Products. Our aircraft information management solutions
are designed to increase the safety and efficiency of airline
transportation throughout the world. With over 200 commercial airline
customers, we are a leading supplier of digital flight data acquisition
systems for the commercial airline industry. We have provided these
systems for our airline customers for over one-half of Boeing aircraft
currently in production. We also provide our systems of certain aircraft
customers of Airbus Industrie's partner, DaimlerChrysler Aerospace
Airbus. These systems acquire both mandatory data for use by the
aircraft's flight data recorder, and record additional data for the
airline's use, such as performance and engine condition monitoring.
The markets for data acquisition and communications systems include both
new and retrofitted aircraft. Boeing estimates that the worldwide
operational air transport fleet will grow from a current fleet of 12,600
to 19,100 aircraft by 2008.
Our newest digital flight data acquisition units have the most advanced
features in the industry. These systems conform to the required expansion
of data recording capabilities, which were mandated by the Federal
Aviation Administration (FAA) in 1997. At that time, the FAA increased
the number of mandatory parameters to be monitored from 17 (prior to the
rule change) to 88 by the year 2002. Our flight data units also perform
additional, non-mandatory aircraft and engine condition monitoring for
use by airline customers.
- Business and Commuter Products. Communication capabilities for business
and commuter aircraft are growing rapidly as these aircraft have begun to
mirror air transport aircraft in data gathering and aircraft monitoring.
We are one of the largest suppliers of air-ground telephony, facsimile
and data transmission products to the growing business and commuter
aircraft market.
Bombardier Aerospace selected us to provide a suite of communications
products for its new, ultra long-range Global Express business jet. These
products include an air-to-ground telephone system and our Telelink(TM)
datalink system that link onboard avionics with ground service providers
to facilitate air traffic management and flight operations.
The business and commuter fleet is significantly larger than the
commercial air transport fleet, with approximately 27,000 aircraft
currently operational. Forecast International, an industry consultant,
projects that the business and commuter fleet will increase by
approximately 40% during the next decade. We expect continued demand for
both new installations and upgrades for these systems by business and
commuter aircraft customers.
- Wireless Ground Link. In March 1999, we demonstrated a prototype of our
new Wireless Ground Link that automates the transfer of in-flight data
recorded by our data acquisition systems to an airline's operations
center. Transmission of the data can occur anytime an aircraft is on the
ground utilizing the existing digital wireless infrastructure. The raw
data are then forwarded to the airline through the Internet, where our
Flight Data Replay and Analysis System can process them
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into useful formats. Such data can then be used by the airline in
scheduling maintenance services and implementing safety procedures.
- Wireless and Satellite Communication Components. Our communication
components and subsystems are used in satellite earth terminals,
communication satellites, and base stations for Personal Communication
Services (PCS) and wireless loops. The technology that we apply to
wireless and satellite communications originated in defense applications.
We supply power amplifiers used in the L, C and Ku band satellite uplink
transmitters. These products encompass both solid state monolithic
microwave integrated circuits (MMICs) and high power helix traveling wave
tubes. Markets include amplifiers for fixed wireless applications
operating in the Unlicensed National Information Infrastructure (U-NII)
band and Very Small Aperture Terminals (VSATs) used for credit card
verification, corporate networking and mobile news gathering.
The markets for both wireless and satellite systems are being driven by
the growing need for high data rate (HDR) communications. In order to
obtain sufficient bandwidth to support transmission of these data,
wireless and satellite systems are moving to higher frequencies.
We have developed a unique line of microwave filters that are
manufactured with a patented injection molding technique. These
metal-plated plastic filters are lighter in weight than competing metal
filters, and can be used efficiently in the new lightweight microcell and
picocell base stations for PCS systems. Our filters and our new VSAT
transceivers have applications in wireless local loops, which are used to
supply communications infrastructure in the developing world where the
cost and time to deploy wireline communications can be excessive.
- Defense and Space Electronics. We are a leading supplier of high power
traveling wave tubes for electronic warfare systems, radar systems, and
military satellite communications systems for both domestic and
international applications. Our tubes are used in airborne systems on
many aircraft, including the B-52, B-18, B-1B, F-15 and E-A6B, and Global
Hawk, and on surface systems, such as AEGIS ships. We believe that there
will be a continuing demand for our tubes in both new and existing
systems.
We believe that the use of traveling wave tubes for radar applications
will grow as these systems are upgraded with advanced capabilities that
cannot be achieved with current transmitter technologies.
We have also supplied thousands of microprocessor-controlled ejection
seat sequencers for U.S. Air Force and U.S. Navy tactical aircraft, such
as the F-16, F-18 and the new F-22 fighter.
Precision Electronic Devices
We develop and manufacture microelectronic devices, high-performance
relays, microelectromechanical systems (MEMS), high-density connectors and
precision instruments that are engineered for demanding applications in the
defense, commercial aerospace, medical, instrumentation and industrial markets
where small size, high performance and reliability are of paramount importance.
We also provide precision instruments to manufacturers in these industries.
- Microelectronic Devices. Our hybrid microcircuits are used in
applications such as military (including F-18 and F-22 aircraft and the
M1A2 tank), aerospace, medical and instrumentation systems. These compact
and complex electronic building blocks combine multiple transistors and
integrated circuits in multi-chip modules (MCMs). In late 1999, Harris
Corporation awarded us the contract to manufacture rugged fiber optic
transmitters and receivers for the new F-22 fighter program.
Approximately 50 transmit and
5
receive modules are used on each aircraft to route data to and from
avionics equipment and the aircraft's central processor. Our fiber optic
transmitter and receiver modules are also used for video distribution on
the International Space Station.
We have applied our MCM technology to the manufacture of life sustaining
and life enhancing implantable medical devices, including cardiac
pacemakers and defibrillators, neural stimulators and cochlear implant
hearing aids. Newer products include biological signal sensors and
ambulatory digital recorders for diagnosis and monitoring of epilepsy and
sleep disorders. These products are distributed on a private label basis
by our customers. Our medical manufacturing operations are
FDA-registered, and like all of our electronic manufacturing facilities,
certified to IS0 9000.
- High Performance Relays. Our Teledyne Relays miniature electromechanical
relays are used where maintenance of signal fidelity is essential.
Examples of applications include switching of high-speed digital and
microwave signals in semiconductor and microwave test equipment, wireless
systems and communication satellites. According to Venture Development,
an industry consultant, the size of the telecommunications and
instrumentation relay market is approximately $870 million annually and
is expected to grow at more than 5% per year.
Growth in the transmission of broadband data via the Internet, increases
in clock speeds of microprocessors, and the migration of wireless and
satellite systems to higher frequency bands are all contributing to a
need for switching devices that operate at higher frequencies. During
1999, we added new products to our growing line of high frequency relays
and work towards introducing additional products in 2000.
- Microelectromechanical Systems. We are leveraging our experience with
precision electromechanical devices and microelectronics fabrication
technology to develop new MEMS. The first product we are developing in
this line is a microrelay based on an exclusively licensed patented
electromagnetic actuation technique. The microrelay will be significantly
smaller than current electromechanical relays, an important factor in
modern, miniaturized electronic systems, and will provide us with access
to a new market segment in which we do not currently compete.
- High-Density Connectors. We supply custom, low profile, surface mount
connectors for applications in commuter disk drives and consumer medical
electronic devices. We have increased our development efforts for
high-density microprocessor connectors, targeted for use in high-volume
applications such as personal computers and workstations and personal
communication systems handsets. We were issued a patent for a new, low-
cost method of producing high-density connectors in October 1999.
Prismark Partners, an industry consultant, estimates that the market for
this type of connector will grow from 100 million units per year in 1999
to 200 million by 2003, with the price of a typical connector expected to
be approximately $6.
- Precision Instruments. We design and manufacture precision instruments
for process applications in semiconductor and petrochemical manufacturing
with a broadline of analyzers for oxygen and other gases, vacuum gauges,
and mass flow meters and controllers. These instruments are sold under
the Teledyne Analytical Instruments and Teledyne Hastings brand names.
Our Model 2002(TM) sensor is a wide range digital vacuum meter used to
measure vacuum or pressure in various process control and other systems
applications.
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Electronic Manufacturing
We operate turnkey manufacturing facilities in Tennessee, Mexico and
Scotland for low-to-moderate volume, technically sophisticated products, ranging
from individual printed circuit board assemblies to complete electronic systems,
used in the aerospace, medical and communications industries. We manufacture
subsystems used in such diverse products as weapons release systems and medical
magnetic resonance imaging systems. Our customers include major aerospace and
electronic companies. Our production capabilities include through-hole,
surface-mount and multi-chip module assembly; and digital, analog, radio
frequency and microwave testing.
Our patented REGAL(R) rigid-flex technology combines rigid and flexible
printed circuits into one assembly that eliminates board-to-board connectors,
which results in improved reliability and packaging density. These rigid-flex
circuit boards are use in military (such as the AMRAAM missiles, the Airborne
Self-Protection Jammer and the Apache Longbow Helicopter), commercial aerospace
and medical applications. In late 1998, we added rapid prototyping capabilities
for rigid-flex printed circuits to improve customer service.
In 1999, we expanded our line of capital equipment for printed circuit
board manufacturing with an innovative copper plating system designed to plate
panels in ten minutes. This compact system occupies 50% less space than
conventional systems.
During 1998 we expanded our capacity for low-cost manufacturing in Mexico.
Subject to prevailing labor conditions, we plan additional growth in Mexico and
at our Scotland facility. According to Frost & Sullivan, an industry consultant,
the market for military electronic contract manufacturing services was
approximately $800 million in 1998 and is expected to grow at an 8% annual rate
as major military systems companies increasingly focus more on integration of
systems and rely on merchant suppliers for electronics manufacturing.
SYSTEMS ENGINEERING SOLUTIONS
Teledyne Brown Engineering, Inc. offers a wide range of engineering
solutions and information services to government defense, aerospace and
commercial customers. Our software solutions center on the following five areas:
- Aerospace Solutions
- Defense Solutions
- Information Services
- Environmental Solutions
- Enterprise Control and Energy Products
Aerospace Solutions
We provide a broad range of highly sophisticated engineering solutions and
services to U.S. space programs. U.S. Government budgeted expenditures in this
market are approximately $19.3 billion in 2000.
As the payload integration contractor for NASA's Marshall Space Flight
Center, we have had major responsibilities in the numerous scientific missions
of the Space Shuttle. This work has ranged from experiment planning, through
designing and fabricating interface hardware, to manning the mission control
center during flight operations.
The centerpiece of our current space activities is the International Space
Station. We are involved in both space-borne and ground-support hardware
development and we participate in mission planning and operations. We have
approximately 300 people working on International Space Station projects and
realized sales associated with these projects of approximately $29 million in
1999.
The development and integration of complex ground support equipment has
long been one of our specialties. Recognition of this is reflected in our
selection by the U.S. Air Force to produce three prototype aircraft cargo
loaders as a part of the Air Force's Next Generation Small Loader program.
7
Defense Solutions
For over 45 years, we have played a key role in the development of U.S.
defense systems. The Department of Defense has budgeted $3.6 billion in
expenditures in 2000 for various missile defense programs, which are projected
to grow at a modest rate for the next five years. The current 2000 budget for
the National Missile Defense program is approximately $837 million and is
projected to grow to $1.8 billion in 2002. During the last 10 years alone, our
systems engineering solutions in defense technologies have averaged over
1,000,000 man-hours per year.
In ballistic missile defense programs, we have provided solutions in
systems engineering, integration, and testing; real-time distributed testing and
training; radar and optical systems design; command center development; and
intelligence studies and threat analysis. We provide battle simulation software
as part of our role for the U.S. Ballistic Missile Defense Organization's
National Missile Defense program.
We also provide an array of engineering solutions related to combat systems
technologies, including research and development test support, operational test
and evaluation, systems survivability analysis, and body armor development.
Information Services
One of our strongest capabilities is in information technology. The
government sector of the information technology market is approximately $33.6
billion in 1999, and is expected to grow at an annual rate of between 4% and
10%. Approximately 30% of our contracts are in this sector.
Our software products, most of which are certified to ISO 9001, are used
for highly diverse applications, such as high-fidelity simulations, multi-media
training, Internet website development, distributed real-time testing, and
command and control centers.
We have developed hundreds of simulation programs, including the Extended
Air Defense Simulation, which is used by friendly governments worldwide and was
combat-proven during Operation Desert Storm and more recent operations. We have
recently upgraded the U.S. Army's land-combat model to include amphibious and
tactical air operations.
We are recognized as a leader in the development of real-time, vehicle-and
weapons-integrated simulations for systems testing and training. Our Systems
Exerciser is a simulation tool used to verify the inter-operational
compatibility of geographically separated, complex defense systems. The Systems
Exerciser "drives" actual weapons systems with a simulated environment including
threats, weather, and terrain, creating a robust virtual world in which real
systems can operate and interact.
We have been continuously involved in weapons signature management
development efforts since 1989, with over 47 successful programs, of which 37
were sole source contracts. We are particularly well known for systems that
limit the detection of soldiers on the battlefield by radar or infrared sensors,
as to which we hold several issued and pending patents. The Optical Signatures
Code, which we developed and maintain, is the recognized standard in missile
defense. We also developed the world's largest on-line database for optical
signatures.
Environmental Solutions
We utilize our systems engineering solutions to assist the U.S. Government
in complying with terms of the Chemical Weapons Convention Treaty. This Treaty
requires the United States to destroy all chemical weapons and material by 2007.
As a 50% participant in a joint venture, we are developing alternative
technologies to incineration for the destruction of stockpile chemical
munitions. We are presently the only contractor operating in the non-stockpile
chemical munitions sector. As the prime contractor for the U.S. Army's
Non-Stockpile Chemical Materiel Demilitarization program, we are designing,
fabricating, integrating, and testing equipment to safely destroy small caches
of chemical munitions and materiel located in over 30 states.
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We were selected by the Air Force to establish and operate a highly
specified analysis laboratory for performing nuclear forensic analysis of gas
samples. Prior to selecting a contractor operation, military personnel at
McClellan Air Force Base in California operated this laboratory for many years.
Enterprise Control and Energy Products
Our systems engineering capabilities are applied to energy problems through
a variety of services and products. Our OpenVector(TM) supervisory control and
data acquisitions systems are used for managing over half of the gas
transportation pipelines in the United States, and we have some international
customers.
We manufacture and sell low power, continuously operating electrical
generators utilized in energy remote locations. We market our line of low-power
radioisotope thermoelectric generators under the SENTINEL(TM) brand name. One of
our units aboard the Pioneer spacecraft has exited the solar system, after
flawlessly providing power for more than two decades. Our TELAN(TM)
thermoelectric systems provide up to 90 watts of constant, reliable power at
remote locations throughout the world. Our recently announced 2.5-kilowatt
Minotaur(TM) engine-generator system runs on natural gas and is designed for
long-term, continuous, low-maintenance operation for the oil and gas production
industry, and to provide prime power for applications in emerging countries that
lack sophisticated infrastructures.
AEROSPACE ENGINES AND COMPONENTS
Our Aerospace Engines and Components Segment, through Teledyne Continental
Motors and Teledyne Cast Parts, focuses on the design, development and
manufacture of piston engines, turbine engines, electronic engine controls,
batteries and complex metal castings.
Piston Engines
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 producers of piston
engines and after-market service providers for the general aviation marketplace.
Over 300,000 piston-powered aircraft have been produced since the inception
of the general aviation industry. The active fleet of single and twin-engine
aircraft is estimated to be 165,000, with approximately 200,000 engines
currently in service. We estimate that our engines power approximately one half
of the active fleet. The average age of this fleet is approximately 30 years.
Our share of the installed base is extremely important in a business in which
repair and replacement parts can provide substantial ongoing revenue.
Our product lines included engines powering the industry benchmark 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 will power four new
high-speed composite aircraft currently entering production. These are the
Cirrus SR-20, Lancair Columbia, Diamond Katana C1, and the Extra 400.
The market for piston powered general aviation aircraft has shown a strong
resurgence in recent years. Following the passage of the General Aviation
Revitalization Act (GARA) of 1994, which limited manufacturers' product
liability for aircraft over 18 years in age, the domestic production of new
aircraft has increased from 444 new units in 1994 to over 1,500 units in 1998.
Following the passage of GARA, the industry has introduced new and advanced
airframes and avionics and increased the rate of spending for new product
research and development. Additionally, NASA is sponsoring technology
development programs aimed at increasing the efficient commercial use of small
general aviation aircraft. These programs include the demonstration of a new
piston aircraft engine for light aircraft that is fueled by Jet-A fuel. Teledyne
Continental Motors was selected to design and demonstrate this advanced engine.
In addition to the sales of new aircraft engines to aircraft producers, we
also actively support the aircraft engine aftermarket. Piston aircraft engines
are produced with a finite utiliza-
9
tion life generally expressed as time between
overhaul (TBO). Rebuilding or overhauling of the engine is required at TBO,
which can range between 1,600 and 2,000 hours for our aircraft engines. With an
installed base of approximately 100,000 Teledyne Continental Motors engines and
an average aircraft utilization of 133 hours per year, approximately 10,000 of
our aircraft engines can be expected to require some degree of overhaul in the
aftermarket each year. Our aftermarket support includes the rebuilding of nearly
3,000 of these units annually with our Gold Medallion Rebuilt Engine. We also
provide a full complement of spare parts such as cylinders, crankcases, fuel
systems, crankshafts, camshafts and ignition products.
Our Aerosance unit has developed the first full authority digital
electronic controls for piston aircraft engines. These controls are designed to
automate many functions that currently require manual control, such as fuel flow
and power management. This system also saves fuel as a result of improved engine
management. We believe that these control systems, which are in the process of
FAA certification testing, will become standard equipment on new aircraft, and
will be retrofitted on higher-end, piston-powered general aviation aircraft.
In November 1999, we acquired certain assets of Long Island, New York-based
Mattituck Aviation Corporation, a privately owned aftermarket supplier and
piston engine rebuilder and overhauler to the general aviation marketplace. This
acquisition is expected to bring additional service capabilities to Teledyne
Continental Motors. These service capabilities should leverage our investments
in manufacturing excellence and the development of digital electronic controls
for piston aircraft engines.
Turbine Engines
We design, develop and manufacture small turbine engines for missiles and
unmanned aerial vehicles. We also produce engines that power military trainer
aircraft. Since the late 1950s, we have delivered over 21,000 of these engines
to defense contractors. We believe that the near-term demand for these engines
will increase as a result of the depletion of cruise missiles in recent
international conflicts.
Our J402 engine powers the HARPOON missile system. Derivatives of this
engine power the Standoff Land Attack Missile and the Standoff Land Attack
Missile Expanded Response. Over 7,700 of these engines have been produced for
these missile systems, which are deployed by the U.S. Navy and various NATO
countries.
A derivative of the J402 engine has been selected by Lockheed Martin
Corporation to power the Joint Air-to-Surface Standoff Missile (JASSM) that is
scheduled to be fielded in late 2001. We are the sole source provider for
engines for the JASSM system. The JASSM production requirement, which initially
was projected at 2,400 units, has been increased in recent months to 3,700
units.
Another of our engines provides the turbine power for the Improved Tactical
Air Launched Decoy being built for the U.S. Navy. This system enhances stand-off
capability by identifying the enemy radar sources for lethal weapons. This
low-cost turbine engine is the first of a family of lower-thrust engines to
enter production.
Another of our engines serves as the propulsion source for the T-37
aircraft, the primary jet trainer for the U.S. Air Force. This engine has been
in service for over 40 years and will continue to power the T-37 well into the
next decade. We are the sole source for major spare parts for this engine.
Battery Products
Our battery products operations specialize in the design, development and
manufacture of engineered products for the lead acid battery markets. We are
focused on providing engineered products in niche markets with more favorable
margins than typical battery products.
We design, develop and manufacture dry-charged batteries that can be stored
for years without deterioration. Our maintenance-free, valve-regulated,
recombinant batteries offer electrical performance and rechargeable characteris-
10
tics that are superior to other types of maintenance-free batteries.
Our Gill(TM) line of lead acid batteries is widely recognized as the
premier dry-charged, starting and standby power source for general aviation.
More companies manufacturing new general aviation aircraft choose the Gill(TM)
product line than any other lead acid battery.
The technical characteristics of our batteries offer the possibility of
sales to growing non-aviation markets, such as the cable television and
telecommunications industries backup.
Cast Parts
Teledyne Cast Parts offers a wide range of complex sand-cast aluminum and
magnesium castings and nickel-based superalloy and stainless steel investment
castings to the aerospace and defense industries. Premium quality castings are
produced from various processes in accordance with military, aerospace and
commercial customer specifications to exacting tolerances and mechanical
strengths.
Our major customers include airframe and turbine engine manufacturers,
missile producers and other defense contractors. We supply castings to the U.S.
Navy for use in its Phalanx weapons system, as well as castings used in Tomahawk
Cruise Missiles, jet engines and armament systems for both airborne and land
vehicles.
Based on publicly available sales data, we estimate that the market for
aluminum and magnesium casting was approximately $1 billion in 1998 and the
market for air melt steel and vacuum melt superalloys was approximately $2.6
billion. The metals casting industry has been highly fragmented and has
experienced consolidation in recent years. We believe that this trend may
provide us with additional growth opportunities.
SALES AND MARKETING
No commercial customer accounted for more than 10% of our total sales
during 1999, 1998 or 1997. Approximately 43%, 40% and 40% of our total sales for
1999, 1998 and 1997 were derived from contracts with agencies of, and prime
contractors to, the U.S. Government. We do not regard sales to the U.S.
Government as constituting sales to a single customer, because various U.S.
Government customers exercise independent purchasing decisions.
Our principal U.S. Government customer is the U.S. Department of Defense.
Our largest program with the U.S. Government, the Systems Engineering and
Technical Assistance contract with the Space and Missiles Defense Command,
represented 5.8%, 7.3% and 7.1% of total sales for 1999, 1998 and 1997. Sales by
our segment to agencies of and prime contractors to the U.S. Government in each
of the past three years were as follows:
[Download Table]
1999 1998 1997
------ ------ ------
(IN MILLIONS)
Electronics and
Communications........ $101.1 $102.4 $102.7
Systems Engineering
Solutions............. $185.4 $159.2 $158.0
Aerospace Engines and
Components............ $ 61.7 $ 46.8 $ 42.6
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. Products are also advertised in appropriate trade
journals and by means of various Internet web sites. 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.
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
11
compete generally. Although we have certain
advantages that we believe help us compete in our markets effectively; each of
our markets is highly competitive. Our businesses vigorously compete on the
basis of quality, product performance and reliability, technical expertise,
price and service. Many of our competitors have, and potential competitors could
have, greater name recognition, a larger installed base of products, more
extensive engineering, manufacturing, marketing and distribution capabilities
and greater financial, technological and personnel resources than we do.
RESEARCH AND DEVELOPMENT
We spent a total of $215.9 million, $175.0 million and $188.4 million on
research and development for 1999, 1998 and 1997, respectively. Customer-funded
research and development, most of which was attributable to work under contracts
with the U.S. Government, represented approximately 87%, 86% and 85% of total
research and development costs for 1999, 1998 and 1997, respectively.
INTELLECTUAL PROPERTY
While we own and control various intellectual property rights, including
patents, trade secrets, confidential information, trademarks, trade names, and
copyrights, which, in the aggregate, are of material importance to our business,
our management believes that our business as a whole is not materially dependent
upon any one intellectual property or related group of such properties. We own
over 700 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.
Pursuant to a Trademark License Agreement, an affiliate of ATI granted us
an exclusive license to use the "Teledyne" name and related logos, symbols and
marks in connection with our operations. We pay an annual fee of $100,000 for
this license and on November 24, 2004 have an option to purchase all rights and
interests in the Teledyne marks for $412,000.
Patents, patent applications and license agreements will expire or
terminate over time by operation of law, in accordance with their terms or
otherwise. We do not expect the expiration or termination of these patents,
patent applications and license agreements to have a material adverse effect on
our business, results of operations or financial condition.
EMPLOYEES
Out of a total workforce of approximately 5,800, about 1,400 individuals
have engineering, physics, mathematics or computer science degrees. The
International Union of United Automobile, Aerospace and Agricultural Implement
Workers of America represents approximately 370 of our employees under a
collective bargaining agreement that expires on December 16, 2000. We consider
our relations with our employees to be good.
12
EXECUTIVE MANAGEMENT
TDY's executive officers and segment presidents include:
[Download Table]
NAME AND TITLE AGE PRINCIPAL OCCUPATIONS LAST 5 YEARS
-------------- --- ----------------------------------------
Executive Officers*:
Robert Mehrabian 58 Dr. Mehrabian has been the President and
President and Chief Executive Chief Executive Officer of TDY since its
Officer; Director formation. Prior to the spin-off, he was
the President and Chief Executive
Officer of ATI's Aerospace and
Electronics segment since July 1999 and
had served ATI at various senior
executive capacities since July 1997.
Before joining ATI, Dr. Mehrabian served
as President of Carnegie Mellon
University. He is a director of TDY,
Mellon Financial Corporation and PPG
Industries, Inc.
Stefan C. Riesenfeld 51 Mr. Riesenfeld has been the Executive
Executive Vice President and Chief Vice President and Chief Financial
Financial Officer Officer and the Treasurer of TDY since
the spin-off. From August 1999 to the
spin-off, he was the Executive Vice
President and Chief Financial Officer of
ATI's Aerospace and Electronics segment.
From 1996 to May 1999, Mr. Riesenfeld
was Chief Financial Officer of ICL, PLC,
a global information systems and
services company based in London,
England. From 1983 to 1996, he was with
Unisys Corporation where he served as
Vice President and Corporate Treasurer
from 1989.
John T. Kuelbs 57 Mr. Kuelbs has been the Senior Vice
Senior Vice President, General President, General Counsel and Secretary
Counsel and Secretary of TDY since the spin-off, having joined
ATI's Aerospace and Electronics segment
in October 1999. Mr. Kuelbs was Senior
Vice President - Acquisition Policy for
Raytheon Company from November 1998 to
September 1999 and Senior Vice
President-Legal of Raytheon Systems
Company from January 1998 to November
1998. Before Raytheon's acquisition of
Hughes Aircraft Company, Mr. Kuelbs
spent 17 years at Hughes Aircraft
Company where he served as Senior Vice
President, General Counsel and Secretary
from 1994 to 1998.
13
[Download Table]
NAME AND TITLE AGE PRINCIPAL OCCUPATIONS LAST 5 YEARS
-------------- --- ----------------------------------------
Nicholas L. Blauwiekel 44 Mr. Blauwiekel became Vice President -
Vice President - Human Resources Human Resources of TDY on March 1, 2000.
From October 1998 through February 2000,
he was Corporate Vice President, Human
Resources of Shiloh Industries, a
manufacturer of steel and advanced
materials located in Cleveland, Ohio.
From July 1996 to October 1998, Mr.
Blauwiekel was Vice President, Human
Resources of Cooper Automotive Company,
located in Chesterfield, Missouri. For
over 16 years prior thereto he held
various human resources management
positions with Eaton Corporation, a
global manufacturer of highly engineered
products which serve industrial,
vehicle, construction, commercial and
semiconductor markets.
Dale A. Schnittjer 55 Mr. Schnittjer has been the Controller
Controller of TDY since its spin-off. From 1998 to
the spin-off, Mr. Schnittjer served as a
financial executive to the Aerospace and
Electronics and Industrial Segments of
ATI. Prior to that, he was Vice
President-Finance of Teledyne Wah Chang
from 1997 to 1998 and Vice
President-Finance of Teledyne Specialty
Equipment from 1995 to 1997. Mr.
Schnittjer has held various financial
positions with several of Teledyne's
aerospace and electronics companies
since 1987.
Segment Management:
Marvin H. Fink 63 Mr. Fink has been the President of
President, Teledyne Electronic Technologies since
Teledyne Electronic Technologies 1993. Mr. Fink has held various
management positions with several of
Teledyne's aerospace and electronic
companies for over 37 years.
Richard A. Holloway 57 Mr. Holloway has been the President of
President, Teledyne Brown Engineering since
Teledyne Brown Engineering, Inc. February 1998. Prior thereto, he was
Senior Vice President, Government
Division of SCI Systems, Inc., a
provider of manufacturing and design
services to commercial companies, the
U.S. military and foreign governments.
Bryan L. Lewis 50 Mr. Lewis has been the President of
President, Teledyne Continental Motors since 1992.
Teledyne Continental Motors Mr. Lewis first joined Teledyne 18 years
ago as a project engineer for its
turbine engine business.
14
[Download Table]
NAME AND TITLE AGE PRINCIPAL OCCUPATIONS LAST 5 YEARS
-------------- --- ----------------------------------------
Charles E. McGill 64 Mr. McGill has been the President of
President, Teledyne Cast Parts since March 1999.
Teledyne Cast Parts Prior thereto, he was Vice President of
ATI's Aerospace and Electronics segment
and from 1993 through 1997, he was Vice
President, Finance and Administration of
Teledyne Electronic Technologies. Mr.
McGill has held various management and
financial positions with several of
Teledyne's aerospace and electronics
companies for over 34 years.
-------------------------
* Such officers are subject to the reporting and other requirements of Section
16 of the Securities Exchange Act of 1934, as amended.
Dr. Mehrabian has an Employment Agreement dated as of December 21, 1999
with Teledyne Technologies. A copy is filed as Exhibit 10.8 to this Form 10-K.
Each of the above-listed persons and six other members of management have
entered into Change in Control Severance Agreements with Teledyne Technologies.
A form of such agreement is filed as Exhibit 10.9 to this Form 10-K.
15
RISK FACTORS; CAUTIONARY STATEMENT
AS TO FORWARD-LOOKING STATEMENTS
The following text highlights various risks and uncertainties associated
with Teledyne Technologies. These factors could materially affect
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) that we may from time to time make, including
forward-looking statements contained in "Item 1. Business" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Form 10-K and in TDY's 1999 Annual Report to Stockholders.
IF WE FAIL TO UNDERTAKE A PUBLIC OFFERING OF OUR COMMON STOCK WITHIN ONE YEAR
FOLLOWING THE SPIN-OFF, WE WILL BE IN BREACH OF OUR AGREEMENTS WITH ATI.
ATI received a tax ruling from the IRS stating in principle that the
spin-off will be tax-free to ATI and to ATI's stockholders. One of the
assumptions underlying the tax ruling is that we will undertake a public
offering of our Common Stock within one year following the spin-off and use the
anticipated gross proceeds of approximately $125 million (less associated costs)
for research and development and related capital projects, for the further
development of our manufacturing capabilities and for acquisitions and/or joint
ventures. Pursuant to the Separation and Distribution Agreement and the Tax
Sharing and Indemnification Agreement, we have also agreed with ATI to undertake
such a public offering. Our failure to do so would be a breach of those
agreements and subject us to substantial liabilities.
FAILURE OF REPRESENTATIONS AND ASSUMPTIONS UNDERLYING THE IRS TAX RULING COULD
CAUSE THE SPIN-OFF NOT TO BE TAX-FREE TO ATI OR TO ATI'S STOCKHOLDERS AND MAY
REQUIRE US TO INDEMNIFY ATI.
While the tax ruling relating to the qualification of the spin-off as a
tax-free distribution within the meaning of Section 355 of the Internal Revenue
Code generally is binding on the IRS, the continuing validity of the tax ruling
is subject to certain factual representations and assumptions, including the
assumption that we will complete a required public offering of our Common Stock
within one year following the spin-off, and use anticipated gross proceeds of
approximately $125 million (less associated costs) for research and development
and related capital projects, for the further development of our manufacturing
capabilities and for acquisitions and/or joint ventures. In light of current
market conditions and other factors, we cannot provide any assurances that we
can complete a public offering of such size in the required time period. TDY's
management is currently reviewing this public offering requirement.
If the spin-off were not to qualify as a tax-free distribution within the
meaning of Section 355 of the Code, ATI would recognize taxable gains generally
equal to the amount by which the fair market value of the Teledyne Technologies
Common Stock distributed to ATI's stockholders exceeded the tax basis in our
assets. In addition, the distribution of our Common Stock to each ATI
stockholder would generally be treated as taxable in an amount equal to the fair
market value of the Teledyne Technologies Common Stock such stockholder
receives.
If the spin-off qualified as a distribution under Section 355 of the Code
but failed to be tax-free to ATI because of certain post-spin-off circumstances
(such as an acquisition of Teledyne Technologies) ATI would recognize a taxable
gain as described above, but the distribution of our Common Stock in the
spin-off would generally be tax-free to each ATI stockholder.
The Tax Sharing and Indemnification Agreement provides that we will be
responsible for any taxes imposed on, or other amounts paid by, ATI, its agents
and representatives and its stockholders as a result of the failure of the
spin-off to qualify as a tax-free distribution within the meaning of Section 355
of the Code if the failure or disqualification is caused by certain
post-spin-off actions by or with respect to us (including our subsidiaries) or
our stockholders. For example, the acquisition of Teledyne Technologies by a
third party during the two-year period following the spin-off could cause such a
failure or disqualification. If any of the taxes or other amounts described
above were to become
16
payable by us, the payment could have a material adverse effect on our financial
condition, results of operations and cash flow and could exceed our net worth by
a substantial amount.
OUR DEPENDENCE ON REVENUE FROM GOVERNMENT CONTRACTS SUBJECTS US TO THE RISK
THAT WE MAY NOT BE SUCCESSFUL IN BIDDING FOR FUTURE CONTRACTS AND THAT
GOVERNMENT FUNDING FOR THESE CONTRACTS MAY BE DELAYED OR CONTINUE TO DECREASE.
We perform work on a number of contracts with the Department of Defense and
other agencies and departments of the U.S. Government. Sales under contracts
with the U.S. Government as a whole, including sales under contracts with the
Department of Defense, as prime or subcontractor, represented approximately 43%
of our total revenue for 1999. Performance under government contracts has
certain inherent risks that could have a material effect on our business,
results of operations and financial condition.
Government contracts are conditioned upon the continuing availability of
Congressional appropriations. Congress typically appropriates funds for a given
program on a fiscal-year basis even though contract performance may take more
than one year. As a result, at the beginning of a major program, a contract is
typically only partially funded, and additional monies are normally committed to
the contract by the procuring agency only as appropriations are made by Congress
for future fiscal years.
The overall U.S. military budget declined in real dollars from the
mid-1980's through the early 1990's. Although U.S. military budgets have
stabilized in recent years, future levels of defense spending cannot be
predicted. Delays or further declines in U.S. military expenditures could
adversely affect our business, results of operations and financial condition,
depending upon the programs affected, the timing and size of the changes and our
ability to offset the impact with new business or cost reductions.
Most of our U.S. Government contracts are subject to termination by the
U.S. Government either at its convenience or upon the default of the contractor.
Termination-for-convenience provisions provide only for the recovery of costs
incurred or committed, settlement expenses, and profit on work completed prior
to termination. Termination-for-default imposes liability on the contractor for
excess costs incurred by the U.S. Government in reprocuring undelivered items
from another source.
We obtain many U.S. Government prime and subcontracts through the process
of competitive bidding. We may not be successful in having our bids accepted. In
addition, contracts may not be profitable.
A number of our U.S. Government prime and subcontracts are fixed-price type
contracts (67% in 1999). Under these types of contracts, we bear the inherent
risk that actual performance cost may exceed the fixed contract price. This is
particularly true where the contract was awarded and the price finalized in
advance of final completion of design. We believe that the U.S. Government is
increasingly requesting proposals for fixed-price type contracts.
We, like other government contractors, are subject to various audits,
reviews and investigations (including private party "whistleblower" lawsuits)
relating to our compliance with federal and state laws. In addition, we have a
compliance program designed to surface issues that may lead to voluntary
disclosures to the U.S. Government. Generally, claims arising out of these U.S.
Government inquiries and voluntary disclosures can be resolved without resorting
to litigation. However, should the business unit or division involved be charged
with wrongdoing, or should the U.S. Government determine that the unit or
division is not a "presently responsible contractor," that unit or division, and
conceivably our company as a whole, could be temporarily suspended or, in the
event of a conviction, could be debarred for up to three years from receiving
new government contracts or government-approved subcontracts. In addition, we
could expend substantial amounts in defending against such charges and in
damages, fines and penalties if such charges are proven or result in negotiated
settlements.
17
WE MAY BE UNABLE TO SUCCESSFULLY INTRODUCE NEW AND ENHANCED PRODUCTS IN A
TIMELY AND COST-EFFECTIVE MANNER.
Our operating results will depend in part on our ability to introduce new
and enhanced products on a timely basis. Successful product development and
introduction depends on numerous factors, including our ability to anticipate
customer and market requirements, changes in technology and industry standards,
our ability to differentiate our offerings from offerings of our competitors,
and market acceptance.
We may not be able to develop and introduce new or enhanced products in a
timely and cost-effective manner or to develop and introduce products that
satisfy customer requirements. Our new products also may not achieve market
acceptance or correctly anticipate new industry standards and technological
changes.
TECHNOLOGICAL CHANGE COULD CAUSE CERTAIN OF OUR PRODUCTS OR SERVICES TO BECOME
OBSOLETE OR NON-COMPETITIVE.
The markets for a number of our products and services are generally
characterized by rapid technological development, evolving industry standards,
changes in customer requirements and new product introductions and enhancements.
A faster than anticipated change in one or more of the technologies related to
our products or services or in market demand for products or services based on a
particular technology could result in faster than anticipated obsolescence of
certain of our products or services and could have a material adverse effect on
our business, results of operation and financial condition. Currently accepted
industry standards are also subject to change, which may contribute to the
obsolescence of our products or services.
WE MAY NOT HAVE SUFFICIENT RESOURCES TO FUND PLANNED OR NECESSARY RESEARCH AND
DEVELOPMENT, CAPITAL EXPENDITURES AND POSSIBLE ACQUISITIONS.
In order to remain competitive, we must make substantial investments in
research and development to develop new and enhanced products and continuously
upgrade our process technology and manufacturing capabilities.
Although we believe that anticipated cash flows from operations and
available borrowings under our $200 million credit facility will be sufficient
to satisfy our working capital and normal operating requirements, we cannot fund
our planned research and development, capital investment programs and possible
acquisitions without additional financing. Our ability to raise additional
capital will depend on a variety of factors, some of which will not be within
our control, including investor perceptions of us, our businesses and the
industries in which we operate, and general economic and market conditions. We
may be unable to successfully raise needed capital and the amount of net
proceeds that will be available to us may not be sufficient to meet our needs.
Failure to successfully raise needed capital on a timely or cost-effective basis
could have a material adverse effect on our business, results of operations and
financial condition.
INCREASING COMPETITION COULD REDUCE THE DEMAND FOR OUR PRODUCTS AND SERVICES.
Although we have certain advantages that we believe help us compete in our
markets, each of our markets is highly competitive. Many of our competitors
have, and potential competitors could have, greater name recognition, a larger
installed base of products, more extensive engineering, manufacturing, marketing
and distribution capabilities and greater financial, technological and personnel
resources than we do. New or existing competitors may also develop new
technologies which could adversely affect the demand for our products and
services. Industry consolidation trends, particularly among aerospace and
defense contractors, could adversely affect demand for our products and
18
services if prime contractors seek to control more aspects of
vertically-integrated projects.
WE SELL PRODUCTS AND SERVICES TO CUSTOMERS IN INDUSTRIES WHICH ARE CYCLICAL AND
SENSITIVE TO CHANGES IN GENERAL ECONOMIC ACTIVITY.
We derive significant revenues from the commercial aerospace industry.
Domestic and international commercial aerospace markets are cyclical in nature.
Historic demand for new commercial aircraft has been related to the stability
and health of domestic and international economies. Delays or changes in
aircraft and component orders could impact the future demand for our products
and have a material adverse effect on our business, results of operations and
financial condition.
In addition, we sell products and services to customers in industries that
are sensitive to the level of general economic activity and in mature industries
that are sensitive to capacity. Adverse economic conditions affecting these
industries may reduce demand for our products and services, which may reduce our
profits, or our production levels, or both.
WE ARE SUBJECT TO THE RISKS ASSOCIATED WITH INTERNATIONAL SALES.
During 1999, international sales accounted for approximately 18% of our
total revenues. We anticipate that future international sales will continue to
account for a significant percentage of our revenues. Risks associated with
these sales include:
- political and economic instability;
- export controls;
- changes in legal and regulatory requirements;
- U.S. and foreign government policy changes affecting the markets for our
products;
- changes in tax laws and tariffs;
- the impact of the transition to a common European currency;
- convertibility and transferability of
international currencies; and
- exchange rate fluctuations (which may affect sales to international
customers and the value of and profits earned on international sales when
converted into dollars).
Any of these factors could have a material adverse effect on our business,
results of operations and financial condition. Weak conditions in Asian
economies have affected our results of operations adversely.
PRODUCT LIABILITY CLAIMS OR RECALLS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
REPUTATION, BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
As a manufacturer and distributor of various products, our results of
operations are susceptible to adverse publicity regarding the quality or safety
of our products. In part, product liability claims challenging the safety of our
products may result in a decline in sales for a particular product which could
adversely affect our results of operations. This could be true even if the
claims themselves are proven to not be true or settled for immaterial amounts.
While we will have general liability and other insurance policies
concerning product liabilities, we will have self-insured retentions or
deductibles under such policies with respect to a portion of these liabilities.
For example, our annual self-insured retention for general aviation aircraft
liabilities incurred in connection with products manufactured by Teledyne
Continental Motors is $10 million.
Product recalls could also have a material adverse effect on our business,
results of operations and financial condition. For example, in the second
quarter of 1999, Teledyne Continental Motors engaged in a product recall of
piston engines produced in 1998, which had an adverse effect on our recent
financial performance. Product recalls have the potential for tarnishing a
company's reputation and could have a material adverse effect on the sales of
our products.
19
We cannot assure that we will not have additional product liability claims
or that we will not recall any additional products.
COMPLIANCE WITH INCREASING ENVIRONMENTAL REGULATIONS AND THE EFFECTS OF
POTENTIAL ENVIRONMENTAL LIABILITIES COULD HAVE A MATERIAL ADVERSE FINANCIAL
EFFECT ON US.
We, like other industry participants, are subject to various federal,
state, local and international environmental laws and regulations. We may be
subject to increasingly stringent environmental standards in the future. Future
developments, administrative actions or liabilities relating to environmental
matters could have a material adverse effect on our business, results of
operations or financial condition.
Some of our businesses work with highly dangerous substances which require
heightened standards of care. For example, as the prime contractor for the U.S.
Army's Non-Stockpile Chemical Materiel Demilitarization program, we are
responsible for the destruction of small caches of chemical munitions and
materiel located in over 30 states. The destruction of chemical weapons is an
inherently dangerous activity. Although we have not experienced any accidents or
other adverse consequences as a result of our participation in this program, we
cannot assure that we will not experience any problems in the future.
For additional discussion of environmental matters, see the information at
page 30 under the caption "Other Matters-Environmental" of "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Notes 2 and 13 to Notes to Consolidated Financial Statements.
HAVING MINIMAL OPERATING HISTORY AS AN INDEPENDENT COMPANY MAKES IT DIFFICULT
TO PREDICT OUR PROFITABILITY AS A STAND-ALONE COMPANY.
We do not have an external operating history as an independent company.
Prior to the spin-off, our businesses relied on ATI for various financial,
managerial and administrative services and have been able to benefit from the
earnings, financial resources, assets and cash flows of ATI's other businesses.
Since the spin-off, ATI is only obligated to provide us with minimal
transitional assistance and services.
We expect costs and expenses associated with the management of a public
company to be greater than the amount reflected in our historical financial
statements. We also will incur interest expense and be subject to the other
requirements associated with our credit facility. While we had been profitable
as part of ATI, there can be no assurance that, as a stand-alone company, our
future profits will be comparable to historical operating results before the
spin-off.
We have been dedicating significant managerial and other resources at the
corporate level to establish the infrastructure and systems necessary for us to
operate as an independent public company. While we believe that we have
sufficient management resources, we cannot assure you that this will be the case
or that we will successfully implement our operating and growth initiatives.
Failure to implement these initiatives successfully could have a material
adverse effect on our business, results of operations and financial condition.
OUR INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR FUTURE SUCCESS.
Our future success depends to a significant extent upon the continued
service of our executive officers and other key management and technical
personnel and on our ability to continue to attract, retain and motivate
qualified personnel. The loss of the services of one or more of our key
employees or our failure to attract, retain and motivate qualified personnel
could have a material adverse effect on our business, financial condition and
results of operations. In particular, the loss of the services of Robert
Mehrabian, our President and Chief Executive Officer, could materially and
adversely affect us.
20
ACQUISITIONS INVOLVE INHERENT RISKS THAT MAY ADVERSELY AFFECT OUR OPERATING
RESULTS AND FINANCIAL CONDITION.
Our growth strategy includes possible acquisitions. Acquisitions involve
various inherent risks, such as:
- our ability to assess accurately the value, strengths, weaknesses,
contingent and other liabilities and potential profitability of
acquisition candidates;
- the potential loss of key personnel of an acquired business;
- our ability to integrate acquired businesses and to achieve identified
financial and operating synergies anticipated to result from an
acquisition; and
- unanticipated changes in business and economic conditions affecting an
acquired business.
PROVISIONS OF OUR GOVERNING DOCUMENTS, APPLICABLE LAW, THE TAX SHARING AND
INDEMNIFICATION AGREEMENT WITH ATI AND OUR CHANGE IN CONTROL SEVERANCE
AGREEMENTS COULD MAKE AN ACQUISITION OF TELEDYNE TECHNOLOGIES MORE DIFFICULT.
Our Restated Certificate of Incorporation, Amended and Restated Bylaws and
Rights Agreement, and the General Corporation Law of the State of Delaware (the
"DGCL"), contain several provisions that could make the acquisition of control
of Teledyne Technologies in a transaction not approved by our board of directors
more difficult. Certain tax aspects of the spin-off could also discourage an
acquisition of control of Teledyne Technologies for some period of time. For
example, the acquisition of Teledyne Technologies by a third party during the
two-year period following the spin-off could result in the spin-off not
qualifying as a tax-free distribution within the meaning of Section 355 of the
Internal Revenue Code and trigger indemnification obligations of Teledyne
Technologies under the Tax Sharing and Indemnification Agreement. We have
entered into Change in Control Severance Agreements with 15 members of our
management, which could have an antitakeover effect.
ITEM 2. PROPERTIES.
Our principal facilities as of January 2, 2000 are listed below. Although
the facilities vary in terms of age and condition, our management believes that
these facilities have generally been well maintained.
21
[Enlarge/Download Table]
SQUARE FOOTAGE
FACILITY LOCATION PRINCIPAL USE (OWNED/LEASED)
--------------------------------------- --------------------------------------- -------------------
ELECTRONICS AND COMMUNICATIONS SEGMENT
Teledyne Electronic Technologies
Los Angeles, California Development and production of 123,000 (leased)
electronic components and subsystems. 17,000 (owned)
Los Angeles, California Production of digital data acquisition 154,000 (leased)
systems for monitoring commercial
aircraft and engines.
Lewisburg, Tennessee Development and production of 153,000 (owned)
electronic components and subsystems.
Mountain View, California Production of ferrite components, 100,000 (owned)
switching devices, filters and
monolithic microwave integrated
circuits.
Hawthorne, California Production of electronic components. 83,000 (owned)
Rancho Cordova, California Development of production of traveling 75,000 (owned)
wave tubes and power supplies for use 16,000 (leased)
in commercial markets.
SYSTEMS ENGINEERING SOLUTIONS SEGMENT
Teledyne Brown Engineering
Huntsville, Alabama Provision of engineered services and 474,000 (owned)
products, including systems 123,000 (leased)
engineering, optical engineering,
software and hardware engineering, and
instrumentation technology.
Hunt Valley, Maryland Manufacturing, assembling and 60,000 (leased)
maintenance of power generating
systems.
Oak Ridge, Tennessee Laboratories and offices in support of 40,000 (leased)
environmental services.
Washington, DC Defense program offices supporting 21,500 (leased)
governmental customers.
AEROSPACE ENGINES AND COMPONENTS
SEGMENT
Teledyne Continental Motors
Mobile, Alabama Design, development and production of 1,270,000 (leased)
new and rebuilt piston engines,
ignition systems and spare parts for
the general aviation market.
Redlands, California Manufacturing of batteries for the 91,000 (owned)
general aviation market.
Toledo, Ohio Design, development and production of 373,000 (leased)
small turbine engines for aerospace and
military markets.
Teledyne Cast Parts
Pomona, California Manufacturing of aluminum and magnesium 231,000 (owned)
castings for air frames, turbine
engines and missiles.
City of Industry, California Manufacturing of nickel-based 70,000 (owned)
superalloy and stainless steel
investment castings.
We also own or lease facilities elsewhere in the U.S. and in countries
outside the U.S., including Tijuana, Mexico, Gloucester, England and
Cumbernauld, Scotland. Our executive offices are currently located at 2049
Century Park East, Suite 1500, Los Angeles, California 90067-3101 and are
subleased from a subsidiary of ATI.
22
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we become involved in various lawsuits, claims and
proceedings related to the conduct of our business. While we cannot predict the
outcome of any lawsuits, claims or proceedings, our management does not believe
that the disposition of any pending matters is likely to have a material adverse
effect on our financial condition or liquidity. The resolution in any reporting
period of one or more of these matters, however, could have a material adverse
effect on our 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 TDY's stockholders during the fourth
quarter of 1999.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On November 29, 1999, in connection with the distribution of our Common
Stock to record holders of ATI's stock as of the close of business on November
22, 1999, our Common Stock commenced trading "regular way" on the New York Stock
Exchange under the symbol "TDY". For the period from November 29, 1999 through
December 31, 1999, our stock traded at a high of $10 5/8 per share and at a low
of $7 13/16 per share. As of January 2, 2000, there were approximately 9,000
record holders of TDY's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The historical financial information below does not include pro forma
adjustments that reflect estimates of the expenses that would have been incurred
had Teledyne Technologies operated as an independent company and as capitalized
at the time of the spin-off for each period presented. The historical financial
information should be read in conjunction with "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
TELEDYNE TECHNOLOGIES INCORPORATED
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA(a)
[Enlarge/Download Table]
FOR THE FISCAL YEARS 1999 1998 1997 1996 1995
-------------------- ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
Sales............................................... $803.4 $780.4 $756.6 $716.4 $680.5
Net income.......................................... $ 49.0 $ 48.7 $ 41.6 $ 40.7 $ 30.9
Working capital..................................... $105.3 $ 78.6 $ 87.7 $104.2 $ 92.8
Total assets........................................ $317.4 $250.8 $255.4 $253.0 $234.3
Long-term debt, net................................. $ 97.0 n/a n/a n/a n/a
Stockholders' equity................................ $ 44.5 $106.4 $109.4 $128.0 $115.2
Basic earnings per common share(b).................. $ 1.79 $ 1.73 $ 1.48 $ 1.49 $ 1.23
Diluted earnings per common share(b)................ $ 1.79 $ 1.73 $ 1.48 $ 1.49 $ 1.23
-------------------------
(a) Effective November 29, 1999, the Company spun-off from ATI. The historical
financial information is not necessarily indicative of the results of
operations or financial position that would have occurred if Teledyne
Technologies had been a separate, independent company during the periods
presented, nor is it indicative of future performance.
(b) Prior to the spin-off, the average outstanding shares used to compute
earnings per share were based on a distribution ratio of one share of
Teledyne Technologies' Common Stock for every seven shares of ATI common
stock.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Effective November 29, 1999, Teledyne Technologies Incorporated was spun
off from ATI.
As a result of a strategic review initiated in 1998, ATI concluded that
certain of its aerospace and electronics businesses, which now comprise Teledyne
Technologies, would be able to grow faster and be stronger competitors if they
were combined as a separate company. The operations included in Teledyne
Technologies are a group of high technology businesses that have critical mass
and shared core competencies, are strategically complementary and have the
potential for profitable growth.
The following is Teledyne Technologies' pro forma financial information for
1999, 1998 and 1997.
[Download Table]
1999 1998 1997
------ ------ ------
(IN MILLIONS, EXCEPT
PER-SHARE AMOUNTS)
SALES................... $803.4 $780.4 $756.6
COSTS AND EXPENSES
Cost of sales......... 587.7 572.1 551.1
Selling, general and
administrative
expenses............ 140.2 134.1 146.6
------ ------ ------
727.9 706.2 697.7
------ ------ ------
OPERATING PROFIT........ 75.5 74.2 58.9
Interest and debt
expense, net........ 8.1 8.0 8.0
Other income.......... 1.0 1.6 1.4
------ ------ ------
INCOME BEFORE INCOME
TAXES................. 68.4 67.8 52.3
Provision for income
taxes................. 27.5 28.0 20.1
------ ------ ------
NET INCOME.............. $ 40.9 $ 39.8 $ 32.2
====== ====== ======
DILUTED EARNINGS PER
COMMON SHARE.......... $ 1.50 $ 1.41 $ 1.15
====== ====== ======
-------------------------
The pro forma financial information above has been presented for
informational purposes only and may not reflect the results of operations of
Teledyne Technologies that would have occurred had Teledyne Technologies
operated as a separate, independent company for the periods presented. The pro
forma financial information should not be relied upon as being indicative of
future results. Pro forma adjustments reflect the estimated expense impacts
(primarily interest expense and corporate expenses) that would have been
incurred had Teledyne Technologies been operated as a separate company as of the
beginning of each year and as capitalized at the time of the spin-off for each
period presented. As part of the spin-off, Teledyne Technologies assumed $100
million in long-term debt incurred by ATI. Pro forma income includes pro forma
interest expense on this long-term debt as if it had been outstanding for all
periods presented. Pro forma income adjusts corporate expenses to an annual
level of $15 million from the amount previously allocated, which was lower.
1999 OVERVIEW
Teledyne Technologies is a leading provider of sophisticated electronic and
communication products, systems engineering solutions and information technology
services and aerospace engines and components. Our customers include aerospace
prime contractors, general aviation companies, government agencies and major
communications and other commercial companies. We serve high-value niche market
segments where performance, precision and reliability are critical and where we
are in several cases the leading supplier. Our businesses are interrelated by
their use of technology to provide cost-effective and value-added solutions.
Teledyne Technologies operates in three business segments: Electronics and
Communications; Systems Engineering Solutions; and Aerospace Engines and
Components. Our products include avionics systems that collect and communicate
information for airlines and business aircraft systems; broadband communication
subsystems for wireless and satellite systems; engineering and information
technology services for space, defense and industrial customers; and engines for
general aviation aircraft and for cruise missiles.
25
Our segments' respective contributions to our total sales for 1999, 1998
and 1997 are summarized in the following table:
[Download Table]
1999 1998 1997
---- ---- ----
Electronics and
Communications........... 43% 44% 45%
Systems Engineering
Solutions................ 28% 29% 28%
Aerospace Engines and
Components............... 29% 27% 27%
--- --- ---
100% 100% 100%
=== === ===
RESULTS OF OPERATIONS
Teledyne Technologies reported 1999 sales of $803.4 million, compared with
sales of $780.4 million for 1998 and $756.6 million for 1997. Pro forma net
income was $40.9 million ($1.50 per diluted share) for 1999, compared with pro
forma net income of $39.8 million ($1.41 per diluted share) for 1998 and pro
forma net income of $32.2 million ($1.15 per diluted share) for 1997.
International sales represented approximately 18%, 22% and 21% of our total
sales for 1999, 1998 and 1997, respectively. Sales under contracts with the U.S.
Government, which included contracts with the Department of Defense, were
approximately 43%, 40% and 40% of our total sales for 1999, 1998 and 1997,
respectively.
In 1999, segment operating profit was $90.6 million, compared with $89.2
million in 1998 and $74.9 million in 1997. Included in operating profit was
pension income of $6.6 million in 1999, $1.7 million in 1998 and pension expense
of $722 thousand in 1997.
Net income, before pro forma adjustments, was $49.0 million ($1.79 per
diluted share) in 1999, compared with $48.7 million ($1.73 per diluted share) in
1998 and $41.6 million ($1.48 per diluted share) in 1997. The historical
financial statements reflect allocations representing corporate expense from ATI
of $7.3 million, $7.8 million, $7.6 million for 1999, 1998 and 1997,
respectively. These allocations were based on sales. The historical financial
statements for 1999 also include one month of actual corporate expenses incurred
by us after the spin-off and one month of interest costs on long-term debt. Cost
of sales increased from 1997 to 1998 and from 1998 to 1999 in line with sales.
Selling, general and administrative expenses decreased in 1998, compared with
1997, reflecting lower selling costs for each segment.
SEGMENTS
The following discussion of our three business segments should be read in
conjunction with Note 12 to Notes to Consolidated Financial Statements.
ELECTRONICS AND COMMUNICATIONS
[Enlarge/Download Table]
1999 1998 1997
--------- --------- ---------
(IN MILLIONS, EXCEPT AS INDICATED)
Sales....................................................... $340.7 $342.1 $340.0
Operating profit............................................ $ 42.6 $ 42.6 $ 36.8
Operating profit % of sales................................. 12.5% 12.5% 10.8%
International sales % of sales.............................. 17.3% 22.2% 23.0%
Governmental sales % of sales............................... 29.6% 29.9% 30.2%
Capital expenditures........................................ $ 13.5 $ 10.3 $ 10.8
Our Electronics and Communications segment, through Teledyne Electronic
Technologies, applies proprietary technology, advanced software and hardware
design skills and manufacturing capabilities in three areas: Data Acquisition
and Communications Products; Precision Electronic Devices; and Electronic
Manufacturing.
1999 Compared with 1998
Our Electronics and Communications segment sales were $340.7 million in
1999, down slightly from 1998 sales of $342.1 million. Operating profit was
$42.6 million, the same as 1998.
26
Improved revenue growth and operating profit margins in the second half of
1999 allowed the segment to recover from a weak first half. For the year, sales
of data acquisition and communications products increased by 3%, led by strong
sales growth in communications equipment for business and commuter aircraft.
Precision electronic device sales declined by 6% as strong sales increases in
medical devices were offset by declines in other lines, particularly military
microelectronics. Electronic manufacturing sales grew modestly. Operating
profit, which was unchanged from 1998, reflected the sales impacts and included
the licensing of certain intellectual property.
1998 Compared with 1997
Sales for our Electronics and Communications segment increased 1% and
operating profit increased 16% in 1998, compared with 1997. Improvements in
sales and operating profit for the segment in 1998 were due primarily to
increases in sales and operating profit of data acquisition and communications
products, which increased by $9.8 million and $11.8 million, respectively. These
increases were attributable to expanded demand by commercial airlines as well as
for the business and commuter aircraft market. Improved sales and operating
profit for electronic contract manufacturing services of $7.4 million and $2.6
million, respectively, reflected continued strength in this market. These
improvements offset declines in sales and operating profit with respect to
precision electronic devices during the period, which decreased by $15.8 million
and $9.4 million, respectively, due to continuing economic difficulties in Asia
and the continued weakness in the semiconductor equipment market. Results for
1998 included a loss of $1.4 million associated with the contract development of
a low-level windshear alert system which was terminated in 1998.
SYSTEMS ENGINEERING SOLUTIONS
[Enlarge/Download Table]
1999 1998 1997
--------- --------- ---------
(IN MILLIONS, EXCEPT AS INDICATED)
Sales....................................................... $226.5 $223.2 $210.4
Operating profit............................................ $ 20.2 $ 20.5 $ 13.1
Operating profit % of sales................................. 8.9% 9.2% 6.2%
International sales % of sales.............................. 13.3% 21.8% 17.4%
Governmental sales % of sales............................... 81.9% 71.3% 75.1%
Capital expenditures........................................ $ 2.0 $ 2.6 $ 2.3
Our Systems Engineering Solutions segment, through Teledyne Brown
Engineering, offers a wide range of engineering solutions and information
services to government defense, aerospace and commercial customers.
1999 Compared with 1998
Sales for the Systems Engineering Solutions segment were $226.5 million, up
slightly from 1998 sales of $223.2 million. For 1999, operating income was $20.2
million, down from $20.5 million for 1998.
The aerospace, defense and environmental businesses all reported sales
increases in double digits, with our environmental business growing by 24%
relative to 1998. This strong performance was offset by a decline of $20.9
million in marine instrumentation products sales due to industry conditions
affecting petroleum exploration activity. While operating profit was down
slightly overall, significant increases in the rest of the business unit nearly
offset a decline of approximately $4 million in marine products.
1998 Compared with 1997
Sales for our Systems Engineering Solutions segment increased 6% and
operating profit increased 56% in 1998 compared with 1997. The improvement in
sales and operating profit was principally due to the increased sales and
operating profit of $18.6 million and $5.2 million, respectively, of marine
instrumentation products due to favorable conditions in the oil industry, as
27
well as participation in defense programs, primarily ballistic missile defense
activities. Aerospace program sales decreased by $6.9 million in 1998 as a
result of the winding down of the NASA payload integration contract, but
operating profit for aerospace programs increased by $800 thousand due to
increased deliveries of international aerospace hardware.
AEROSPACE ENGINES AND COMPONENTS
[Enlarge/Download Table]
1999 1998 1997
--------- --------- ---------
(IN MILLIONS, EXCEPT AS INDICATED)
Sales....................................................... $236.2 $215.1 $206.2
Operating profit............................................ $ 27.8 $ 26.1 $ 25.0
Operating profit % of sales................................. 11.8% 12.1% 12.1%
International sales % of sales.............................. 25.0% 22.5% 21.5%
Governmental sales % of sales............................... 26.1% 21.8% 20.7%
Capital expenditures........................................ $ 16.0 $ 5.2 $ 2.7
Our Aerospace Engines and Components segment, through Teledyne Continental
Motors and Teledyne Cast Parts, focuses on the design, development and
manufacture of piston engines, turbine engines, electronic engine controls,
batteries and metal castings.
1999 Compared with 1998
Our Aerospace Engines and Components segment's 1999 sales were $236.2
million, which represented an increase of 10% from 1998 sales of $215.1 million.
For the year, 1999 operating profit rose 7% to $27.8 million compared with $26.1
million for 1998.
Engine related sales grew by over 15% in 1999, led by revenue increases of
over 50% in turbine engines relative to 1998. Strong profit improvement in
turbines was partially offset by a $3 million charge taken in the second quarter
for a piston engine product recall. Sales and operating profit in our Teledyne
Cast Parts business declined from the prior year due to production
inefficiencies, difficult market conditions and a shift in product mix.
1998 Compared with 1997
Sales for our Aerospace Engines and Components segment increased 4% and
operating profit increased 4% in 1998 compared with 1997. These sales and
operating profit increases were due principally to a $10.6 million increase in
sales and a $4.7 million increase in operating profit for new piston engine and
turbine engine programs. These increases offset higher costs associated with
manufacturing plant reconfiguration and the development of new products,
including new digital electronic piston engine controls and a NASA-sponsored new
piston engine program, as well as sales decreases of $1.7 million and a decrease
in operating profit of $3.6 million as a result of production inefficiencies and
delays in shipments experienced at Teledyne Cast Parts.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are to fund working capital needs,
capital expenditures and debt service requirements. It is anticipated that
operating cash flow, together with available borrowings under the credit
facility described below, will be sufficient to meet these requirements in the
year 2000.
In 1999, cash provided from operations amounted to $47.4 million, compared
with $67.1 million in 1998 and $72.9 million in 1997. The decrease in cash
provided from operations in 1999, compared with 1998, reflected an increase in
accounts receivables in 1999, compared with 1998, while in 1998 accounts
receivable decreased from the prior year. The impact of the increase in accounts
receivable in 1999 was partially offset by higher accounts payable and income
taxes payable compared with the prior year.
28
The January 2, 2000 balance sheet includes several accounts that were
transferred to Teledyne Technologies in connection with the spin-off that were
not included in the historical balance sheet at year end 1998. These amounts
include certain deferred tax assets of $10.8 million, deferred compensation
assets of $9.7 million, deferred compensation liabilities of $9.3 million, and
net unrecognized actuarial gains on pension obligation of $14.7 million.
Working capital increased to $105.3 million at year end 1999, compared with
$78.5 million at year end 1998. The increase in working capital was primarily
due to the increase in accounts receivable and current deferred tax asset
balances.
Net cash used in investing activities was primarily for capital
expenditures as presented below.
[Download Table]
1999 1998 1997
----- ----- -----
(IN MILLIONS)
Electronics and
Communications.............. $13.5 $10.3 $10.8
Systems Engineering
Solutions................... 2.0 2.6 2.3
Aerospace Engines and
Components.................. 16.0 5.2 2.7
----- ----- -----
$31.5 $18.1 $15.8
===== ===== =====
Our capital spending for 2000 is expected to be approximately $32.5
million. Commitments at January 2, 2000 for capital expenditures were less than
$2 million. The increase in property, plant and equipment primarily reflected
capital spending offset, in part, by depreciation.
Cash used in financing activities for 1999 primarily reflected net
transactions with ATI as well as net payments on long-term debt. Cash used in
financing activities for 1998 and 1997 only reflected net transactions with ATI.
A $200 million five-year revolving credit agreement that terminates in
November 2004 was arranged with a syndicate of banks in connection with the
spin-off. ATI drew $100 million under the facility prior to our assumption of
the facility. Teledyne Technologies assumed the repayment obligation for the
amount drawn by ATI. At January 2, 2000 we had $97 million outstanding under the
facility at an interest rate of 7.63%. Excluding interest and fees, no payments
are due under the credit facility until the facility terminates. The estimated
fair value of our long-term debt at January 2, 2000 was $97 million.
At year end 1999, Teledyne Technologies had approximately $103 million of
borrowing availability remaining under the credit facility. Borrowings under the
credit facility bear interest at variable rates based on the prevailing prime or
Eurodollar rates (or, in certain circumstances, the prevailing federal funds
rate) and these rates will depend, in part, on the ratio of consolidated total
indebtedness to consolidated total capitalization from time to time. The credit
facility requires the Company to comply with various financial covenants and
restrictions, including covenants and restrictions relating to indebtedness,
liens, investments, dividend payments, consolidated net worth, interest coverage
and the relationship of total consolidated indebtedness to earnings before
interest, taxes and depreciation and amortization. The credit agreement
prohibits the declaration of dividends or making other specified payments in
amounts exceeding 25% of cumulative net income after the effective date of the
credit agreement (which was $1.4 million as of January 2, 2000). The stock of
our wholly-owned subsidiary, Teledyne Brown Engineering, Inc., was pledged to
the lenders under the credit agreement as collateral to secure the obligations
under the credit agreement until certain conditions related to a public offering
of the Company's Common Stock are satisfied.
In connection with the spin-off, a new defined benefit pension plan was
established and we assumed the existing pension obligations for all of the
employees, both active and inactive, at the operations which perform government
contract work and for active employees at operations which do not perform
government contract work. ATI transferred pension assets to fund the new defined
benefit pension plan, which at the time of the transfer then had assets in
excess of liabilities.
In connection with the spin-off, ATI received a tax ruling from the IRS
stating in principle that the spin-off will be tax-free to ATI and to ATI's
stockholders. The continuing
29
validity of the IRS tax ruling is subject to certain factual representations and
assumptions, including the completion of a public offering of our Common Stock
within one year following the spin-off and use of anticipated gross proceeds of
approximately $125 million (less associated costs) for research and development
and related capital projects, for the further development of manufacturing
capabilities and for acquisitions and/or joint ventures. Pursuant to the
Separation and Distribution Agreement, Teledyne Technologies agreed with ATI to
undertake such a public offering. In light of current market conditions and
other factors, we cannot provide any assurances that we will be able to complete
a public offering of such size in the required time period. Our management is
currently reviewing this public offering requirement.
The Tax Sharing and Indemnification Agreement between ATI and Teledyne
Technologies provides that we will indemnify ATI and its agents or
representatives for taxes imposed on, and other amounts paid by, them or ATI's
stockholders if we take actions or fail to take actions (such as completing the
public offering) that result in the spin-off not qualifying as a tax-free
distribution. If any of the taxes or other amounts described above were to
become payable by Teledyne Technologies, the payment could have a material
adverse effect on our financial condition, results of operations and cash flow
and could exceed Teledyne Technologies net worth by a substantial amount.
OTHER MATTERS
Taxes
The effective income tax rate was 40.2%, 41.3% and 39.4% in 1999, 1998 and
1997, respectively. Based on our 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, 2000 will be
realized.
Costs and Pricing
Inflationary trends in recent years have been moderate. We primarily use
the last-in, first-out method of inventory accounting that reflects current
costs in the costs of products 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
Teledyne Technologies generally does not actively engage in derivative
financial instruments such as futures contracts, options and swaps, forward
exchange contracts or interest rate swaps and futures. While we believe that
adequate controls are in place to monitor any hedging activities in which we may
engage, many factors, including those beyond our control such as changes in
domestic and foreign political and economic conditions, could adversely affect
these activities. At January 2, 2000 and January 3, 1999, there were no hedging
contracts outstanding.
Our primary exposure to market risk relates to changes in interest rates
and foreign currency exchange rates. We periodically evaluate these risks and
have taken measures to mitigate these risks. We own assets and operate
facilities in countries that have been politically stable. Also, our foreign
risk management objectives are geared towards stabilizing cash flow from the
effects of foreign currency fluctuations. We will, whenever practical, offset
local investments in foreign currencies with borrowings denominated in the same
currencies. All of the Company's long-term debt is based on a market interest
rate and, consequently, the fair value should not be affected materially by
changes in market interest rates. Overall, we believe that our exposure to
interest rate risk and foreign currency exchange rate changes is not material to
our financial condition or results of operations.
Environmental
Teledyne Technologies is subject to various federal, state, local and
international environmental laws and regulations which require that we
investigate and remediate the effects of the release or disposal of materials at
sites associated with past and present operations. This includes sites at which
we have been identified as a potentially responsible party under the Compre-
30
hensive 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 $1.2 million at January 2,
2000. As investigation and remediation of these sites proceed and new
information is received, we expect that accruals will be adjusted to reflect new
information. Based on current information, we do not believe that future
environmental costs, in excess of those already accrued, will materially and
adversely affect our financial condition or liquidity. However, resolution of
one or more of these environmental matters or future accrual adjustments in any
one reporting period could have a material adverse effect on our results of
operations for that period.
With respect to proceedings brought under the federal Superfund laws, or
similar state statutes, the Company has been identified as a potentially
responsible party at approximately 17 such sites, excluding those sites at which
we believe we have no future liability. Our involvement is very limited or de
minimis at approximately 10 of these sites, and the potential loss exposure with
respect to any of the remaining seven sites is not considered to be material.
For additional discussion of environmental matters, see Notes 2 and 13 to
Notes to Consolidated Financial Statements.
Government Contracts
Teledyne Technologies performs work on a number of contracts with the
Department of Defense and other agencies and departments of the U.S. Government.
Sales under contracts with the U.S. Government, which included contracts with
the Department of Defense, were approximately 43% of total sales in 1999 and 40%
of our total sales in both 1998 and 1997. For a breakdown of sales to the U.S.
Government by segment, see Note 12 to Notes to Consolidated Financial
Statements. Defense sales represented approximately 31%, 27% and 26% of our
total sales for 1999, 1998 and 1997, respectively.
Performance under government contracts has certain inherent risks that
could have material adverse effect on the Company's business, results of
operations and financial condition. Government contracts are conditioned upon
the continuing availability of Congressional appropriations, which usually
occurs on a fiscal year basis even though contract performance may take more
than one year. The overall U.S. military budget declined in real dollars from
the mid-1980s through the early 1990s. Although U.S. military budgets have
stabilized in recent years, future levels of defense spending cannot be
predicted. Delays or further declines in U.S. military expenditures could
adversely affect our business, results of operations and financial condition,
depending on the programs affected, the timing and size of the changes and our
ability to offset the impact with new business or cost reductions.
For information on accounts receivable from the U.S. Government, see Note 4
to Notes to Consolidated Financial Statements.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133--"Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives in the statement of financial
position and measure those instruments at fair value. In 1999, the FASB issued
SFAS No. 137--"Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133--an amendment of FASB
Statement No. 133," which defers the effective date of SFAS No. 133 for one
year. Teledyne Technologies must implement SFAS No. 133 by the first quarter of
2001 and has not yet made a final determination of its impact on the financial
statements.
YEAR 2000 READINESS DISCLOSURE
We spent approximately $1.3 million in 1999 and $2.0 million in 1998 to
address Year 2000 issues which excludes expenditures necessi-
31
tated by ordinary business needs and continuing
technological advancements in the computer industry.
We have experienced no significant Year 2000 problems. We plan to monitor
our critical computer applications and those of our suppliers and vendors
throughout the year in the event that any latent Year 2000 matters arise.
CAUTIONARY STATEMENT AS TO FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations, contains forward-looking statements, as defined in the
Private Securities Litigation Reform Act of 1995, relating to growth
opportunities and strategic plans. Actual results could differ materially from
these forward-looking statements. Many factors, including the extent and timing
of the required public offering, market, economic and political conditions, and
implementation difficulties, could change the anticipated results. Additional
information concerning factors that could cause actual results to differ
materially from those projected in the forward-looking statements is contained
on pages 16 to 21 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 undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information or otherwise.
REPORT OF MANAGEMENT
The management of Teledyne Technologies is responsible for the integrity of
our financial data. Fulfilling this responsibility requires the preparation and
presentation of consolidated financial statements in accordance with generally
accepted accounting principles. Management uses internal accounting controls,
corporate-wide policies and procedures and judgment so that such statements
reflect fairly our consolidated financial position, results of operations and
cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The information required by this item is included in this Report at page 30
under the caption "Other Matters--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 page
F-1 through F-28. See the "Index to Financial Statements and Related
Information" at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
In addition to the information set forth under the caption "Executive
Management" in Part I of this Report, the information concerning the directors
of Teledyne Technologies required by this item is set forth in the 2000 Proxy
Statement under the caption "Election of Directors" and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is set forth in the 2000 Proxy
Statement under the captions "Director Compensation", "Executive Compensation"
and "Compensation Committee Interlocks and Insider Participation" and is
incorporated herein by reference. TDY does not incorporate by reference in this
Form 10-K either the "1999 Report on Executive Compensation" or the "Cumulative
Total Stockholder Return" section of the 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is set forth in the 2000 Proxy
Statement under the caption "Stock Ownership Information" and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is set forth in the 2000 Proxy
Statement under the caption "Certain Transactions" and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits and Financial Statement Schedules:
(1) Financial Statements
See the "Index to Financial Statements and Related Information" at page F-1
of this Report, which is incorporated herein by reference.
(2) Financial Statement Schedules
See Schedule II captioned "Valuation and Qualifying Accounts" at page F-28
of this Report, which is incorporated herein by reference.
(3) Exhibits
A list of exhibits filed with this Form 10-K or incorporated by reference
is found in the Exhibit Index immediately following the signature page of this
Report and incorporated herein by reference.
(4) Reports on Form 8-K filed in the fourth quarter of 1999:
Current Report on Form 8-K dated as of November 29, 1999, as amended by
Amendment No. 1 (filed to report consummation of the spin-off and distribution
of TDY's Common Stock to ATI's stockholders).
33
INDEX TO FINANCIAL STATEMENTS AND RELATED INFORMATION
[Download Table]
Financial Statements:
Report of Independent Auditors............................ F-2
Consolidated Statements of Income......................... F-3
Consolidated Balance Sheets............................... F-4
Consolidated Statements of Stockholders' Equity........... F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
Quarterly Financial Data (Unaudited)...................... F-27
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts............ F-28
F-1
REPORT OF INDEPENDENT AUDITORS
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, 2000 and January 3, 1999, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three fiscal years in the period ended January 2, 2000. Our
audits also included the financial statement schedule listed in the index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Teledyne
Technologies Incorporated at January 2, 2000 and January 3, 1999, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended January 2, 2000, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Los Angeles, California
January 26, 2000
F-2
TELEDYNE TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
[Enlarge/Download Table]
1999 1998 1997
-------- -------- --------
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
SALES.............................................. $803.4 $780.4 $756.6
COSTS AND EXPENSES
Cost of sales.................................... 587.7 572.1 551.1
Selling, general and administrative expenses..... 133.9 126.9 138.2
------ ------ ------
721.6 699.0 689.3
------ ------ ------
OPERATING PROFIT................................... 81.8 81.4 67.3
Interest and debt expense, net................... .8 -- --
Other income..................................... 1.0 1.6 1.4
------ ------ ------
EARNINGS BEFORE INCOME TAXES....................... 82.0 83.0 68.7
Provision for income taxes......................... 33.0 34.3 27.1
------ ------ ------
NET INCOME......................................... $ 49.0 $ 48.7 $ 41.6
====== ====== ======
BASIC EARNINGS PER COMMON SHARE.................... $ 1.79 $ 1.73 $ 1.48
====== ====== ======
DILUTED EARNINGS PER COMMON SHARE.................. $ 1.79 $ 1.73 $ 1.48
====== ====== ======
The accompanying notes are an integral part of these financial statements.
F-3
TELEDYNE TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
[Download Table]
1999 1998
------- -------
(IN MILLIONS,
EXCEPT SHARE AMOUNTS)
CURRENT ASSETS
Cash and cash equivalents................................. $ 7.1 $ --
Accounts receivable, net.................................. 117.6 103.2
Inventories, net.......................................... 53.7 53.2
Deferred income taxes, net................................ 21.7 12.9
Prepaid expenses and other current assets................. 4.5 1.7
------ ------
TOTAL CURRENT ASSETS................................... 204.6 171.0
------ ------
Property, plant and equipment, net........................ 62.1 43.0
Deferred income taxes, net................................ 25.6 22.1
Cost in excess of net assets acquired, net................ 8.2 9.4
Other assets.............................................. 16.9 5.3
------ ------
TOTAL ASSETS........................................... $317.4 $250.8
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.......................................... $ 46.9 $ 43.4
Accrued liabilities....................................... 48.6 49.1
Income taxes payable...................................... 3.8 --
------ ------
TOTAL CURRENT LIABILITIES.............................. 99.3 92.5
Long-term debt............................................ 97.0 --
Net unrecognized actuarial gains on pension obligation.... 14.7 --
Accrued postretirement benefits........................... 33.6 32.9
Other long-term liabilities............................... 28.3 19.0
------ ------
TOTAL LIABILITIES...................................... 272.9 144.4
------ ------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value issued in 1999; authorized
125 million shares; outstanding shares:
1999--26,687,002....................................... .3 --
Additional paid-in capital................................ 37.9 --
Net advances from ATI..................................... -- 104.7
Retained earnings......................................... 5.6 --
Accumulated other comprehensive income.................... .7 1.7
------ ------
TOTAL STOCKHOLDERS' EQUITY............................. 44.5 106.4
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $317.4 $250.8
====== ======
The accompanying notes are an integral part of these financial statements.
F-4
TELEDYNE TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
ACCUMULATED
ADVANCES ADDITIONAL OTHER TOTAL
(TO) FROM COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
ATI STOCK CAPITAL EARNINGS INCOME EQUITY
--------- ------- ---------- -------- ------------- -------------
(IN MILLIONS)
BALANCE, DECEMBER 29, 1996......... $ 126.1 $ -- $ -- $ -- $ 1.9 $ 128.0
Net income/comprehensive income.... 41.6 -- -- -- -- 41.6
Net transactions with ATI.......... (60.2) -- -- -- -- (60.2)
-------- ------- ------- ------- ------- -------
BALANCE, DECEMBER 28, 1997......... $ 107.5 $ -- $ -- $ $ 1.9 $ 109.4
Net income......................... 48.7 -- -- -- -- 48.7
Other comprehensive income,
net of tax:
Foreign currency translation
losses....................... -- -- -- -- (.2) (.2)
-------- ------- ------- ------- ------- -------
Comprehensive income............... 48.7 -- -- -- (.2) 48.5
Net transactions with ATI.......... (51.5) -- -- -- -- (51.5)
-------- ------- ------- ------- ------- -------
BALANCE, JANUARY 3, 1999........... $ 104.7 $ -- $ -- $ -- $ 1.7 $ 106.4
Net income......................... 43.4 -- -- -- -- 43.4
Other comprehensive income,
net of tax:
Foreign currency translation
losses....................... -- -- -- -- (.1) (.1)
-------- ------- ------- ------- ------- -------
Comprehensive income............... 43.4 -- -- -- (.1) 43.3
Net transactions with ATI.......... (47.5) -- -- -- -- (47.5)
-------- ------- ------- ------- ------- -------
BALANCE PRIOR TO SPIN-OFF, NOVEMBER
29, 1999......................... $ 100.6 $ -- $ -- $ -- $ 1.6 $ 102.2
Spin-off capitalization
transactions..................... (100.6) .3 37.9 -- (.9) (63.3)
-------- ------- ------- ------- ------- -------
Balance after spin-off $ -- $ .3 $ 37.9 $ -- $ .7 $ 38.9
Net income/comprehensive income.... -- -- -- 5.6 -- 5.6
-------- ------- ------- ------- ------- -------
BALANCE, JANUARY 2, 2000........... $ -- $ .3 $ 37.9 $ 5.6 $ .7 $ 44.5
======== ======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-5
TELEDYNE TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
1999 1998 1997
------- ------- -------
(IN MILLIONS)
OPERATING ACTIVITIES
Net income................................................ $ 49.0 $ 48.7 $ 41.6
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of assets................ 11.9 11.1 11.3
Deferred income taxes.................................. (1.4) (.4) .3
Gains on sale of property, plant and equipment......... (.1) (.4) --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable............. (14.4) 17.8 .2
Increase in inventories................................ (.5) (6.1) (2.9)
Increase in prepaid expenses and other assets.......... (2.8) -- --
Increase in accounts payable........................... 3.6 .8 14.3
Increase (decrease) in accrued liabilities............. (.5) (5.5) 2.8
Increase in current income taxes payable............... 3.8 -- --
Increase in other long-term liabilities................ -- 2.9 3.1
Increase in accrued postretirement benefits............ .6 .2 .4
Other operating, net...................................... (1.8) (2.0) 1.8
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............. 47.4 67.1 72.9
------- ------- -------
INVESTING ACTIVITIES
Purchases of property, plant and equipment................ (31.5) (18.1) (15.8)
Disposals of property, plant and equipment................ .1 .7 .1
Other investing, net...................................... (.7) 1.8 2.9
------- ------- -------
NET CASH USED BY INVESTING ACTIVITIES.................. (32.1) (15.6) (12.8)
------- ------- -------
FINANCING ACTIVITIES
Net payments on revolving credit agreement................ (3.0) -- --
Net advances/spin-off capitalization with ATI............. (5.2) (51.5) (60.2)
------- ------- -------
NET CASH USED BY FINANCING ACTIVITIES.................. (8.2) (51.5) (60.2)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 7.1 -- (.1)
Cash and cash equivalents -- beginning of year.............. -- -- .1
------- ------- -------
CASH AND CASH EQUIVALENTS -- END OF YEAR.................... $ 7.1 $ -- $ --
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ALLEGHENY TELEDYNE INCORPORATED'S SPIN-OFF OF TELEDYNE TECHNOLOGIES
INCORPORATED
--------------------------------------------------------------------------------
Effective November 29, 1999 (the Distribution Date), Teledyne Technologies
Incorporated (Teledyne Technologies 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-off). The spin-off has been
treated as a tax-free distribution for federal income tax purposes. Immediately
prior to the spin-off, ATI transferred certain of the businesses of ATI's
Aerospace and Electronics segment to the new corporation. ATI no longer has a
financial investment in Teledyne Technologies.
Teledyne Technologies consists of the operations of the Teledyne Electronic
Technologies division with operations in the United States, United Kingdom and
Mexico; Teledyne Brown Engineering division with operations in the United States
and United Kingdom; Teledyne Continental Motors and Teledyne Cast Parts
divisions, both with operations in the United States. Prior to the spin-off,
these operations were divisions of wholly-owned subsidiaries of ATI.
A $200 million five-year revolving credit agreement was arranged with a
syndicate of banks in connection with the spin-off. ATI drew $100 million under
the facility prior to the assumption of the facility by Teledyne Technologies.
Teledyne Technologies assumed the repayment obligation for the amount drawn by
ATI. In addition, prior to and in connection with the spin-off, Teledyne
Technologies and ATI entered into agreements providing for the separation of the
companies and governing various relationships for separating employee benefits
and tax obligations, indemnification and transition services.
The consolidated financial statements for periods prior to the spin-off
included certain expenses (primarily corporate expenses) based on an allocation
of the overall expense of ATI. ATI's historical cost basis of assets and
liabilities has been reflected in Teledyne Technologies' financial statements.
The financial information in these financial statements is not necessarily
indicative of results of operations, financial position and cash flows that
would have occurred if Teledyne Technologies had been a separate stand-alone
entity during the periods presented or of future results. The consolidated
financial statements included herein do not reflect changes that occurred in the
capitalization and operations of Teledyne Technologies as a result of, or after,
the spin-off other than for the period following the spin-off.
The following unaudited pro forma financial information is presented for
informational purposes only and may not reflect the results of operations or
financial position of Teledyne Technologies that would have occurred had
Teledyne Technologies operated as a separate, independent company for the
periods presented. The pro forma financial information should not be relied upon
as being indicative of future results. Pro forma adjustments reflect the
estimated expense impacts (primarily interest expense and corporate expenses)
that would have been incurred had Teledyne Technologies been operated as a
separate company as of the beginning of each year and as capitalized at the time
of the spin-off for each period presented. As part of the spin-off, Teledyne
Technologies assumed $100 million of long-term debt incurred by ATI. Pro forma
income includes pro forma interest expense on the long-term debt as if it had
been outstanding for all periods presented. Pro forma income adjusts corporate
expenses to an annual level of $15 million from the amount previously allocated,
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which was lower. The following is Teledyne Technologies unaudited pro forma
financial information for the 1999, 1998 and 1997 fiscal years:
[Enlarge/Download Table]
1999 1998 1997
-------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE-DATA)
SALES........................................... $803.4 $780.4 $756.6
COSTS AND EXPENSES
Cost of sales................................. 587.7 572.1 551.1
Selling, general and administrative
expenses................................... 140.2 134.1 146.6
------ ------ ------
727.9 706.2 697.7
------ ------ ------
OPERATING PROFIT................................ 75.5 74.2 58.9
Interest and debt expense, net................ 8.1 8.0 8.0
Other income.................................. 1.0 1.6 1.4
------ ------ ------
INCOME BEFORE INCOME TAXES...................... 68.4 67.8 52.3
Provision for income taxes...................... 27.5 28.0 20.1
------ ------ ------
NET INCOME...................................... $ 40.9 $ 39.8 $ 32.2
====== ====== ======
BASIC EARNINGS PER COMMON SHARE................. $ 1.50 $ 1.41 $ 1.15
====== ====== ======
DILUTED EARNINGS PER COMMON SHARE............... $ 1.50 $ 1.41 $ 1.15
====== ====== ======
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Teledyne Technologies include the
accounts of the businesses distributed by ATI and its subsidiaries as described
in Note 1. Significant intercompany accounts and transactions have been
eliminated. Certain financial statements, notes and supplementary data for prior
years have been changed to conform to the 1999 presentation.
FISCAL YEAR
The Company is on a 53/52-week fiscal year convention. Fiscal years 1999
and 1997 were 52-week years and ended on January 2, 2000 and December 28, 1997,
respectively and fiscal year 1998 was a 53-week year and ended on January 3,
1999. References to 1999, 1998 and 1997 are intended to refer to the respective
fiscal year unless otherwise noted.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates. Management believes that the estimates are
reasonable.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REVENUE RECOGNITION
Commercial sales and revenue from U.S. Government fixed-price type
contracts generally are recorded as shipments are made or as services are
rendered. Occasionally, for certain fixed-price type contracts that require
substantial performance over a long time period (one or more years) before
shipments begin, sales 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 effect 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.
RESEARCH AND DEVELOPMENT
Company-funded research and development costs were $27.8 million in 1999,
$24.8 million in 1998 and $27.7 million in 1997, and include bid and proposal
costs, are expensed as incurred. Costs related to customer-funded research and
development contracts were $188.1 million in 1999, $150.3 million in 1998 and
$160.7 million in 1997 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 allowances on government
contracts.
INCOME TAXES
Provision for income taxes includes deferred taxes resulting from temporary
differences in income for financial and tax purposes using the liability method.
Such temporary differences result primarily from differences in the carrying
value of assets and liabilities.
NET INCOME PER COMMON SHARE
The average number of shares of Teledyne Technologies' Common Stock used in
the computation of basic net income per common share was 27,303,421, 28,107,241
and 28,085,823 for the fiscal years ended January 2, 2000, January 3, 1999 and
December 28, 1997, respectively. Prior to the spin-off, the number of shares
outstanding was based on a distribution ratio of one share of Teledyne
Technologies' Common Stock for every seven shares of ATI common stock. The
average number of shares of Teledyne Technologies' Common Stock used in the
computation of diluted net income per common share was 27,334,737, 28,133,879
and 28,120,380 for the fiscal years ended January 2, 2000, January 3, 1999 and
December 28, 1997, respectively.
ACCOUNTS RECEIVABLE
Receivables are presented net of a reserve for doubtful accounts of $3.5
million at January 2, 2000 and $2.9 million at January 3, 1999. Expense recorded
for the reserve for doubtful accounts was $608 thousand, $1.4 million and $1.3
million for the 1999, 1998 and 1997 fiscal years, respectively. 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
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
upon evaluations of each customer's ability to perform its obligations, which
are updated periodically.
CASH AND 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 approximately $5.5 million at January 2, 2000 and included only bank
deposits.
INVENTORIES
Inventories are stated at the lower of cost (last-in, first-out; first-in,
first-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. The method of
depreciation adopted for all property, plant and equipment placed into service
after July 1, 1996 is the straight-line method. For property, plant and
equipment acquired prior to July 1, 1996, depreciation is computed using a
combination of accelerated and straight-line methods. The Company believes the
straight-line method more appropriately reflects its financial results by better
allocating costs of new property over the useful lives of these assets.
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired related to businesses purchased prior
to November 1970 is not being amortized. Cost in excess of net assets acquired
related to businesses purchased after November 1970 is being amortized on a
straight-line basis over periods not exceeding 15 years. Goodwill amortization
expense was $672 thousand, $582 thousand and $510 thousand in 1999, 1998 and
1997, respectively.
OTHER LONG-LIVED ASSETS
The carrying value of long-lived assets is periodically evaluated in
relation to the operating performance and future undiscounted cash flows of the
underlying businesses. Adjustments are made if the sum of expected future net
cash flows is less than book value. In 1997, the Company recorded an impairment
loss of approximately $1.8 million in general and administrative expenses
primarily to write off its investment in a limited liability corporation that
was determined to have no value. This determination was made as a result of
programs that were discontinued in the Systems Engineering Solutions business
segment in 1997.
ENVIRONMENTAL
Costs that mitigate or prevent future environmental contamination or extend
the life, increase the capacity or improve the safety or efficiency 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
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
periodically and, as investigations and remediations proceed, adjustments are
made as necessary. Accruals for losses from environmental remediation
obligations do not consider the effects of inflation, 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 reflect 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 fulfill 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 are translated at the
exchange rate in effect at year-end. Revenues and expenses are translated at the
rates of exchange prevailing during the year. Unrealized translation gains and
losses arising from differences in exchange rates from period to period are
included as a component of accumulated other comprehensive income in
stockholders' equity.
ACCOUNTING PRONOUNCEMENTS
SFAS No. 137 and 133 -- In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No.
133--"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives in the
statement of financial position and measure those instruments at fair value. In
1999, the FASB issued SFAS No. 137--"Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133--an
amendment of FASB Statement No. 133," which defers the effective date of SFAS
No. 133 for one year. Teledyne Technologies must implement SFAS No. 133 by the
first quarter of 2001 and has not yet made a final determination of its impact
on the financial statements.
SFAS No. 132 -- Effective for 1998, Teledyne Technologies adopted the
provisions of SFAS No. 132--"Employers' Disclosures about Pensions and Other
Postretirement Benefits." This statement standardized the disclosure
requirements for pensions and other postretirement benefits and amends SFAS No.
87--"Employers' Accounting for Pensions", SFAS No. 88--"Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans" and SFAS No.
106--"Employers' Accounting for Postretirement Benefits Other Than Pensions."
The provisions of SFAS No. 132 are disclosure oriented and do not change the
measurement or recognition of the plans. Accordingly, the implementation of SFAS
No. 132 did not have an impact on Teledyne Technologies' consolidated financial
position or results of operations.
SFAS No. 131 -- Effective for 1998, Teledyne Technologies adopted the
provisions of SFAS No. 131--"Disclosures about Segments of an Enterprise and
Related Information." This statement establishes standards for reporting and
display of information about operating
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
segments. It supersedes or amends several FASB statements, most notably, SFAS
No. 14--"Financial Reporting for Segments of a Business Enterprise." The
implementation of SFAS No. 131 did not have an impact on Teledyne Technologies'
consolidated financial position or results of operations.
SFAS No. 130 -- Effective for 1998, Teledyne Technologies adopted the
provisions of SFAS No. 130--"Reporting Comprehensive Income." This statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The
implementation of SFAS No. 130 did not have an impact on Teledyne Technologies'
results of operations. Teledyne Technologies' comprehensive income is primarily
composed of net income and foreign currency translation adjustments. Teledyne
Technologies' comprehensive income was $48.9 million, $48.5 million and $41.6
million for 1999, 1998 and 1997, respectively.
HEDGING ACTIVITIES
Teledyne Technologies generally does not actively engage in derivative
financial instruments such as futures contracts, options and swaps, forward
exchange contracts or interest rate swaps and futures. While Teledyne
Technologies believes that adequate controls are in place to monitor any hedging
activities in which the Company may engage, many factors, including those beyond
its control such as changes in domestic and foreign political and economic
conditions, could adversely affect these activities. At January 2, 2000 and
January 3, 1999, there were no hedging contracts outstanding.
SUPPLEMENTAL CASH FLOW INFORMATION
Until the spin-off date, ATI was responsible for cash payments for federal,
foreign and state income taxes. No tax payments were made by Teledyne
Technologies from the date of the spin-off through year end. Interest paid by
Teledyne Technologies from the date of the spin-off to year end 1999 totaled
approximately $565 thousand.
NOTE 3. FINANCIAL INSTRUMENTS
--------------------------------------------------------------------------------
Teledyne Technologies values financial instruments as required by SFAS No.
107--"Disclosures about Fair Value of Financial Instruments." The carrying
amounts of cash and cash equivalents approximate fair value because of the short
maturity of those instruments. Teledyne Technologies estimates the fair value of
its long-term debt based on the value of debt of similar maturity and
characteristics. The estimated fair value of Teledyne Technologies' long-term
debt at January 2, 2000 approximated the carrying value of $97 million.
The carrying value of other on-balance sheet financial instruments
approximates fair value, and the cost, if any, to terminate off-balance sheet
financial instruments is not significant.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. ACCOUNTS RECEIVABLE
--------------------------------------------------------------------------------
Accounts receivable are summarized as follows:
[Download Table]
1999 1998
------ ------
Balance at year end (IN MILLIONS)
U.S. Government and prime contractors contract
receivables:
Billed receivables................................. $ 27.1 $ 18.1
Unbilled receivables............................... 20.4 21.3
Other receivables, primarily commercial.............. 73.6 66.7
------ ------
121.1 106.1
Reserve for doubtful accounts........................ (3.5) (2.9)
------ ------
Total accounts receivable, net....................... $117.6 $103.2
====== ======
The billed contract receivables from the U.S. Government and prime
contractors contain $9.8 million and $5.9 million at January 2, 2000 and January
3, 1999, respectively, due to long-term contracts. The unbilled contract
receivables from the U.S. Government and prime contractors contain $10.5 million
and $21.3 million at January 2, 2000 and January 3, 1999, respectively, due to
long-term contracts.
Unbilled contract receivables represent accumulated costs and profits
earned but not yet billed to customers. The Company believes that substantially
all such amounts will be billed and collected within one year.
NOTE 5. INVENTORIES
--------------------------------------------------------------------------------
Inventories consisted of the following:
[Download Table]
1999 1998
------ ------
Balance at year end (IN MILLIONS)
Raw materials and supplies............................ $ 24.2 $ 23.3
Work in process....................................... 62.5 65.3
Finished goods........................................ 9.1 10.4
------ ------
Total inventories at current cost (first-in,
first-out).......................................... 95.8 99.0
LIFO reserve.......................................... (36.8) (39.0)
Progress payments..................................... (5.3) (6.8)
------ ------
Total inventories, net................................ $ 53.7 $ 53.2
====== ======
Inventories, before progress payments, determined on the last-in, first-out
method were $55.8 million at January 2, 2000 and $56.3 million at January 3,
1999. The remainder of the inventory was determined using the first-in,
first-out and average cost methods. These inventory values do not differ
materially from current cost.
During 1999, 1998 and 1997, inventory usage resulted in liquidations of
last-in, first-out inventory quantities. These inventories were carried at the
lower costs prevailing in prior years as compared with the cost of current
purchases. The effect of these last-in, first-out
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
liquidations was to increase net income by $2.2 million in 1999, $264 thousand
in 1998 and $2.2 million in 1997.
Total inventories at current cost were net of $6.1 million and $5.1 million
at January 2, 2000 and January 3, 1999, respectively, which were related to
reserves for obsolete inventories.
Inventories, before progress payments, related to long-term contracts were
$8.8 million and $2.0 million at January 2, 2000 and January 3, 1999,
respectively. Progress payments related to long-term contracts were $1.9 million
and $125 thousand at January 2, 2000 and January 3, 1999, respectively.
Under the contractual arrangements by which progress payments are received,
the customer has a security interest in the inventories associated with specific
contracts.
NOTE 6. SUPPLEMENTAL BALANCE SHEET INFORMATION
--------------------------------------------------------------------------------
Property, plant and equipment were as follows:
[Download Table]
1999 1998
------- -------
Balance at year end (IN MILLIONS)
Land................................................ $ 5.5 $ 5.5
Buildings........................................... 36.2 36.7
Equipment........................................... 152.7 135.5
------- -------
194.4 177.7
Accumulated depreciation and amortization........... (132.3) (134.7)
------- -------
Total property, plant and equipment, net............ $ 62.1 $ 43.0
======= =======
Accrued liabilities included salaries and wages of $24.7 million and $22.6
million at January 2, 2000 and January 3, 1999, respectively. Other long-term
liabilities included reserves for self-insurance and deferred compensation
liabilities.
NOTE 7. STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
COMMON STOCK
In connection with the spin-off 26,687,002 shares of Teledyne Technologies'
Common Stock were issued and are outstanding at year end 1999. This amount
includes 943 shares issued under the Non-Employee Director Stock Compensation
Plan.
PREFERRED STOCK
Authorized preferred stock may be issued with designations, powers and
preferences designated from time to time by the Board of Directors. At January
2, 2000, there were no shares of preferred stock issued.
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 Technologies' Common Stock
distributed to ATI's
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stockholders in connection with the spin-off and each share to become
outstanding between the effective date of the spin-off and the earliest of the
distribution date, redemption date and final 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 offer, 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. 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 Technologies as described in the plan. The rights distribution is not
taxable to stockholders.
STOCK INCENTIVE PLAN
ATI sponsored an incentive plan that provided for stock option awards to
officers and key employees. Teledyne Technologies has officers and key employees
that have participated in this plan. In connection with the spin-off,
outstanding stock options held by Teledyne Technologies' employees were
converted into options to purchase Teledyne Technologies' Common Stock. The
number of shares and the exercise price of each ATI option that was converted to
a Teledyne Technologies' 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 Technologies' Common Stock, upon active trading, also impacted the
number of options issued to Teledyne Technologies' employees.
Teledyne Technologies has established its own long-term incentive plan
which provides its Board of Directors the flexibility to grant restricted stock,
incentive stock options, stock appreciation rights and non-qualified stock
options to officers and employees of Teledyne Technologies.
The following disclosures are based on stock options held by Teledyne
Technologies' employees and have been converted from ATI options to Teledyne
Technologies' options as noted above. Teledyne Technologies accounts for its
stock option plans in accordance with APB Opinion 25--"Accounting for Stock
Issued to Employees" (APB 25), and related Interpretations. Under APB 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.
If compensation cost for these options had been determined using the
fair-value method prescribed by FASB Statement No. 123, "Accounting for
Stock-based Compensation" (SFAS No. 123) net income would have been reduced by
$1.6 million, $673 thousand and $154 thousand for the fiscal years 1999, 1998
and 1997, respectively. Under SFAS No. 123, the fair value of each option grant
is estimated on the date of grant using the Black-Scholes
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
option-pricing model with the following weighted-average assumptions (there were
no option grants in 1997):
[Download Table]
1999 1998
----- -----
Expected dividend yield..................................... -- 2.8%
Expected volatility......................................... 40.1% 31.0%
Risk-free interest rate..................................... 5.5% 5.0%
Expected lives.............................................. 8.0 8.0
Weighted-average fair value of options granted during the
year...................................................... $4.91 $7.25
Stock option transactions in ATI common stock under ATI's incentive plan
for Teledyne Technologies' employees have been converted to Teledyne
Technologies as noted above and are summarized as follows:
[Enlarge/Download Table]
1999 1998 1997
-------------------- -------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- ------- --------
Beginning balance......... 1,757,392 $12.36 643,985 $ 7.66 708,816 $ 7.58
Granted or issued......... 487,500 $ 8.93 1,123,968 $14.99 -- $ --
Exercised................. (91,329) $ 5.76 (12,213) $ 6.64 (64,831) $ 6.87
Canceled or expired....... (30,266) $13.42 -- $ -- -- $ --
--------- ------ --------- ------ ------- ------
Ending balance............ 2,123,297 $11.84 1,757,392 $12.36 643,985 $ 7.66
========= ====== ========= ====== ======= ======
Options exercisable at
year-end................ 856,087 $10.93 495,891 $ 7.27 409,997 $ 6.85
========= ====== ========= ====== ======= ======
For options outstanding at year end 1999, the exercise prices were between
$5.57 and $17.60 and the weighted-average remaining contractual life was
approximately 8 years. For options exercisable at year end 1999 the exercise
prices were also between $5.57 and $17.60.
NON-EMPLOYEE DIRECTOR STOCK COMPENSATION PLAN
Teledyne Technologies also sponsors a stock option plan for non-employee
directors. At year end 1999, options for 15,073 shares were issued and
outstanding under the plan with exercise prices between $6.62 and $9.94 and a
weighted-average exercise price of $9.70. All of these options become
exercisable on November 29, 2000.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------
The accompanying financial statements include transactions with ATI for the
year-to-date period ended November 29, 1999 and the 1998 and 1997 fiscal years:
[Enlarge/Download Table]
1999(A) 1998 1997
------- ------- -------
(IN MILLIONS)
Net advances from ATI, beginning of the year.............. $104.7 $ 107.5 $ 126.1
Net cash transactions with ATI:
Current provision for income taxes...................... 26.5 34.7 26.8
Insurance expense....................................... 15.9 17.2 18.6
Pension expense (income)................................ (5.8) (1.7) .7
Corporate general and administrative expense............ 7.3 7.8 7.6
Other net cash to ATI(b)................................ (91.4) (109.5) (113.9)
------ ------- -------
Net cash transactions with ATI.......................... (47.5) (51.5) (60.2)
Net income................................................ 43.4 48.7 41.6
------ ------- -------
Net advances from ATI, end of period...................... $100.6 $ 104.7 $ 107.5
====== ======= =======
-------------------------
(a) For the year-to-date period ending November 29, 1999.
(b) Includes $100 million in long-term debt incurred by ATI and assumed by
Teledyne Technologies.
Until the spin-off date, Teledyne Technologies participated in ATI's
centralized cash management system. Cash receipts in excess of cash requirements
were transferred to ATI. These transactions with ATI were non-interest bearing
and the net advances fluctuated on a daily basis.
Corporate general and administrative expenses represent allocations for
expenses incurred by ATI on the Company's behalf including costs for finance,
legal, tax and human resources functions. Amounts above were allocated based on
net sales, which management believes to be reasonable. Teledyne Technologies
participated in the defined benefit pension plan sponsored by ATI through the
date of the spin-off. The expense for the plan was allocated to Teledyne
Technologies based upon actuarially-determined amounts for the pension
obligation and assets ultimately transferred from ATI to Teledyne Technologies
at the time of the spin-off. Teledyne Technologies also participated in
casualty, medical and life insurance programs sponsored by ATI. Insurance
expense was allocated to Teledyne Technologies based upon actual losses incurred
plus a share of pooled catastrophic losses under the ATI self-insurance program.
In the opinion of management, the allocations of these expenses were reasonable.
In addition, prior to and in connection with the spin-off, Teledyne
Technologies and ATI entered into agreements providing for the separation of the
companies and governing various relationships for separating employee benefits
and tax obligations, indemnification and transition services.
Net sales include $1.4 million, $1.1 million and $293 thousand of sales to
other ATI subsidiaries for the eleven month period ended November 30, 1999 and
the fiscal years ended January 3, 1999 and December 28, 1997, respectively.
There was a receivable of $532 thousand at year end 1998 from other ATI
subsidiaries.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. LONG-TERM DEBT
--------------------------------------------------------------------------------
Long-term debt at January 2, 2000, was $97 million in the form of bank
borrowings under a $200 million long-term, revolving credit agreement.
Borrowings under the agreement are on a revolving basis under commitments
available until November 2004. The Company had approximately $103 million of
borrowing availability under the credit facility at January 2, 2000.
The interest-rate applicable to borrowings under the agreement is, indexed
to the bank prime rate or the London Interbank Offered Rate (LIBOR), plus
appropriate spreads over such indices during the period of the credit agreement
and was 7.63% at January 2, 2000. The agreement also provides for a facility fee
which are currently equal to .35% of the credit line. The facility fee will vary
between .35% and .20% depending on Teledyne Technologies' capitalization ratio
as calculated from time to time. Interest expense incurred on long-term debt and
facility fees in 1999 were $796 thousand from the date of the spin-off.
The financial covenants of the revolving credit agreement require the
Company to maintain specified minimum consolidated net worth and ratios of
consolidated debt and interest expense to certain measures of income. Under the
most restrictive of these covenants, approximately $1.4 million of stockholders'
equity was available for dividends as of January 2, 2000.
NOTE 10. INCOME TAXES
--------------------------------------------------------------------------------
Until the effective date of the spin-off, Teledyne Technologies was
included in the consolidated federal and certain state income tax returns of
ATI. ATI is responsible for paying the taxes related to such returns including
any subsequent adjustment resulting from the redetermination of such tax
liability by the applicable taxing authorities. Provision for income taxes was
calculated as if Teledyne Technologies had filed separate income tax returns for
all years presented. Provision for income taxes was as follows:
[Download Table]
1999 1998 1997
----- ----- -----
(IN MILLIONS)
Current
Federal.............................................. $27.7 $29.1 $22.3
State................................................ 6.4 5.1 4.1
Foreign.............................................. .3 .5 .4
----- ----- -----
34.4 34.7 26.8
----- ----- -----
Deferred
Federal.............................................. (1.3) (.4) .2
State................................................ (.1) -- .1
----- ----- -----
(1.4) (.4) .3
----- ----- -----
Provision for income taxes............................. $33.0 $34.3 $27.1
===== ===== =====
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income before income taxes included income from domestic operations of
$81.9 million for 1999, $82.2 million for 1998 and $68.8 million for 1997. The
following is a reconciliation of the statutory federal income tax rate to the
actual effective income tax rate:
[Download Table]
1999 1998 1997
---- ---- ----
U.S. federal statutory tax rate........................... 35.0% 35.0% 35.0%
State and local taxes, net of federal benefit............. 5.2 4.5 3.8
Other..................................................... -- 1.8 .6
---- ---- ----
Effective income tax rate................................. 40.2% 41.3% 39.4%
==== ==== ====
Deferred income taxes result from temporary differences in the recognition
of income and expense for financial and income tax reporting purposes, and
differences between the fair value of assets acquired in business combinations
accounted for as purchases for financial reporting purposes and their
corresponding tax bases. Deferred income taxes represent future tax benefits or
costs to be recognized when those temporary differences reverse. No valuation
allowance has been recorded for 1999 or 1998. The categories of assets and
liabilities that have resulted in differences in the timing of the recognition
of income and expense were as follows:
[Download Table]
1999 1998
----- -----
(IN MILLIONS)
Deferred income tax assets:
Postretirement benefits other than pensions.......... $12.6 $12.9
Reserves............................................. 16.1 10.0
Deferred compensation and other benefit plans........ 9.8 --
Inventory valuation.................................. 6.7 5.4
Accrued vacation..................................... 5.2 4.2
Other items.......................................... -- 4.2
----- -----
Total deferred income tax assets....................... 50.4 36.7
----- -----
Deferred income tax liabilities:
Property, plant and equipment differences............ 3.0 1.7
Other items.......................................... .1 --
----- -----
Total deferred income tax liabilities.................. 3.1 1.7
----- -----
Net deferred income tax asset.......................... $47.3 $35.0
===== =====
NOTE 11. PENSION PLANS AND POSTRETIREMENT BENEFITS
--------------------------------------------------------------------------------
Prior to the spin-off, certain Teledyne Technologies' employees
participated in the noncontributory defined benefit plan sponsored by ATI.
Benefits under the defined benefit plan are generally based on years of service
and/or final 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.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic pension income or expense allocated to Teledyne Technologies
was $6.6 million of income, $1.7 of income and $722 thousand of expense in the
years ended January 2, 2000, January 3, 1999 and December 28, 1997,
respectively.
As of the spin-off date, Teledyne Technologies assumed the existing defined
benefit plan obligations for all of Teledyne Technologies' employees, both
active and inactive, at its companies that perform government contract work and
for Teledyne Technologies' active employees at its companies that do not perform
government contract work. ATI transferred pension assets to fund the new
Teledyne Technologies' defined benefit pension plan, which at the time of the
transfer then had assets in excess of liabilities.
Teledyne Technologies also participates in a 401(k) plan that is open to
all full time U.S. employees which is currently sponsored by ATI. The costs
associated with this plan were $2.9 million, $3.3 million, and $1.2 million for
fiscal 1999, 1998 and 1997, respectively. Teledyne Technologies intends to
establish its own 401(k) plan effective April 2000.
The Company sponsors several postretirement defined benefit plans covering
certain salaried and hourly employees. The plans provide health care and life
insurance benefits for eligible retirees. The following table sets forth the
components of net period pension benefit (income) expense for Teledyne
Technologies' defined benefit pension plans and post-retirement benefit plans
for fiscal 1999, 1998 and 1997:
[Enlarge/Download Table]
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------------- -----------------------
1999 1998 1997 1999 1998 1997
------ ------ ------ ----- ----- -----
(IN MILLIONS)
Service cost -- benefits
earned during the period.... $ 12.7 $ 12.8 $ 13.2 $ .4 $ .3 $ .3
Interest cost on benefit
obligation.................. 23.6 22.6 21.0 1.8 1.7 1.8
Expected return on plan
assets...................... (35.9) (32.4) (28.4) -- -- --
Amortization of net transition
asset....................... (6.4) (6.4) (6.4) -- -- --
Amortization of prior service
cost........................ 2.1 2.1 1.3 (.4) (.4) (.4)
Recognized actuarial (gain)
loss........................ (2.7) (.4) -- (.4) (.1) --
------ ------ ------ ---- ---- ----
Net periodic benefit (income)
expense..................... $ (6.6) $ (1.7) $ .7 $1.4 $1.5 $1.7
====== ====== ====== ==== ==== ====
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the reconciliation of the beginning and
ending balances of the benefit obligation of the defined benefit pension and
postretirement benefit plans:
[Download Table]
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------
1999 1998 1999 1998
------ ------ ----- -----
(IN MILLIONS)
Changes in benefit obligation:
Benefit obligation -- beginning of year... $344.8 $329.3 $25.1 $26.6
Service cost -- benefits earned during the
period................................. 12.7 12.8 .3 .3
Interest cost on projected benefit
obligation............................. 23.6 22.6 1.8 1.7
Actuarial (gain) loss..................... (.2) (16.1) .7 (2.2)
Amendments................................ -- 9.5 -- --
Benefits paid............................. (13.9) (13.3) (.8) (1.3)
------ ------ ----- -----
Benefit obligation -- end of year........... $367.0 $344.8 $27.1 $25.1
====== ====== ===== =====
The following table sets forth the reconciliation of the beginning and
ending balances of the fair value of plan assets for Teledyne Technologies'
defined benefit pension plans:
[Download Table]
PENSION BENEFITS
----------------
1999 1998
------ ------
(IN MILLIONS)
Changes in plan assets:
Fair value of plan assets -- beginning of year.............. $403.9 $367.0
Actual return on plan assets.............................. 47.5 50.0
Employer contribution..................................... .2 .2
Benefits paid............................................. (13.9) (13.3)
------ ------
Fair value of plan assets -- end of year.................... $437.7 $403.9
====== ======
The weighted average discount rate used in determining the benefit
obligations was 7.0% as of January 2, 2000 and January 3, 1999. The weighted
average rate of increase in future compensation levels used in determining the
benefit obligations was approximately 4.5% in 1999 and 1998. The expected
weighted average long-term rate of return on assets was 9.0% in 1999 and 1998.
The following table sets forth the funded status and amounts recognized in
Teledyne Technologies' consolidated balance sheets for the postretirement
benefit plans at year end 1999 and year end 1998. The following table also sets
forth the funded status and amounts recognized in Teledyne Technologies'
consolidated balance sheets for the defined benefit pension plan at year end
1999. The amounts shown for 1998 for the defined benefit pension
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
plan are not reflected in consolidated balance sheet at year end 1998 since the
plan was not transferred until the date of the spin-off:
[Download Table]
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- ------------------
1999 1998 1999 1998
------ ------ ------ ------
(IN MILLIONS)
Funded status.............................. $ 70.7 $ 59.1 $(27.1) $(25.1)
Unrecognized net transition obligation
(asset).................................. (11.1) (17.6) -- --
Unrecognized prior service cost............ 15.4 17.6 (1.1) (1.4)
Unrecognized net gain...................... (89.7) (80.5) (5.4) (6.4)
------ ------ ------ ------
Net amount recognized...................... $(14.7) $(21.4) $(33.6) $(32.9)
====== ====== ====== ======
Prepaid benefit cost....................... $(10.6) $(18.2) $ -- $ --
Accrued benefit liability.................. (5.5) (5.0) (33.6) (32.9)
Intangible asset........................... 1.4 1.7 -- --
Other...................................... -- .1 -- --
------ ------ ------ ------
Net amount recognized...................... $(14.7) $(21.4) $(33.6) $(32.9)
====== ====== ====== ======
The annual assumed rate of increase in the per capita cost of covered
benefits (the health care cost trend rate) for health care plans was 8.4% in
2000 and was assumed to decrease to 5.0% in the year 2002 and remain at that
level thereafter. Assumed health care cost trend rates have a significant effect
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 $273 thousand for 1999 and would
result in an increase in the postretirement benefit obligation by $3.4 million
at January 2, 2000. 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 $238 thousand for 1999 and would result in a decrease in the
postretirement benefit obligation by $3.0 million at January 2, 2000.
NOTE 12. BUSINESS SEGMENTS
--------------------------------------------------------------------------------
Effective January 1, 1998, Teledyne Technologies adopted the provisions of
SFAS No. 131--"Disclosures about Segments of an Enterprise and Related
Information." Teledyne Technologies operates in three business segments:
Electronics and Communications, Systems Engineering Solutions and Aerospace
Engines and Components. 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, through Teledyne
Electronic Technologies, applies proprietary technology, advanced software and
hardware design skills and manufacturing capabilities in three areas: Data
Acquisition and Communications Products; Precision Electronic Devices; and
Electronic Manufacturing Services. The Systems Engineering Solutions segment,
through Teledyne Brown Engineering, offers a wide range of engineering solutions
and information services to government defense, aerospace and commercial
customers. The Aerospace Engines and Components segment, through Teledyne
Continental Motors and Teledyne Cast Parts, focuses on the design, development
and
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
manufacture of piston engines, turbine engines, electronic engine controls,
batteries and metal castings.
Identifiable assets are those assets used in the operations of the
segments. Corporate assets primarily consist of cash and cash equivalents,
deferred tax assets, pension assets and other assets.
Information on the Company's business segments was as follows:
[Download Table]
1999 1998 1997
------ ------ ------
(IN MILLIONS)
SALES
Electronics and Communications.................... $340.7 $342.1 $340.0
Systems Engineering Solutions..................... 226.5 223.2 210.4
Aerospace Engines and Components.................. 236.2 215.1 206.2
------ ------ ------
TOTAL SALES......................................... $803.4 $780.4 $756.6
====== ====== ======
OPERATING PROFIT
Electronics and Communications.................... $ 42.6 $ 42.6 $ 36.8
Systems Engineering Solutions..................... 20.2 20.5 13.1
Aerospace Engines and Components.................. 27.8 26.1 25.0
------ ------ ------
SEGMENT OPERATING PROFIT....................... 90.6 89.2 74.9
Corporate expense including interest........... (9.6) (7.8) (7.6)
Other income................................... 1.0 1.6 1.4
------ ------ ------
INCOME BEFORE TAXES............................... $ 82.0 $ 83.0 $ 68.7
====== ====== ======
DEPRECIATION AND AMORTIZATION
Electronics and Communications.................... $ 6.6 $ 5.7 $ 5.7
Systems Engineering Solutions..................... 2.5 2.9 3.1
Aerospace Engines and Components.................. 2.8 2.5 2.5
------ ------ ------
TOTAL DEPRECIATION AND AMORTIZATION................. $ 11.9 $ 11.1 $ 11.3
====== ====== ======
CAPITAL EXPENDITURES
Electronics and Communications.................... $ 13.5 $ 10.3 $ 10.8
Systems Engineering Solutions..................... 2.0 2.6 2.3
Aerospace Engines and Components.................. 16.0 5.2 2.7
------ ------ ------
TOTAL CAPITAL EXPENDITURES.......................... $ 31.5 $ 18.1 $ 15.8
====== ====== ======
IDENTIFIABLE ASSETS
Electronics and Communications.................... $109.0 $ 96.2 $ 93.1
Systems Engineering Solutions..................... 62.2 63.4 70.7
Aerospace Engines and Components.................. 79.0 56.2 57.0
Corporate......................................... 67.2 35.0 34.6
------ ------ ------
TOTAL IDENTIFIABLE ASSETS........................... $317.4 $250.8 $255.4
====== ====== ======
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's backlog of confirmed orders was approximately $373.7 million
at January 2, 2000 and $401.8 million at January 3, 1999.
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:
[Download Table]
1999 1998 1997
------ ------ ------
(IN MILLIONS)
Electronics and Communications.................... $101.1 $102.4 $102.7
Systems Engineering Solutions..................... 185.4 159.2 158.0
Aerospace Engines and Components.................. 61.7 46.8 42.6
------ ------ ------
Total U.S. Government sales......................... $348.2 $308.4 $303.3
====== ====== ======
Sales to the U.S. Government included sales to the Department of Defense of
$246.3 million in 1999, $214.1 million in 1998 and $198.5 million in 1997.
Total international sales were $148.1 million in 1999, $172.9 million in
1998 and $159.2 million in 1997. Of these amounts, sales by operations in the
United States to customers in other countries were $131.1 million in 1999,
$159.3 million in 1998 and $144.0 million in 1997. There were no sales to
individual countries outside of the United States in excess of 10% of the
Company's net sales. Sales between business segments, which were not material,
generally were priced at prevailing market prices.
NOTE 13. COMMITMENTS AND CONTINGENCIES
--------------------------------------------------------------------------------
Rental expense, under operating leases, net of sublease income, was $10.0
million in 1999, $10.4 million in 1998 and $10.2 million in 1997. Future minimum
rental commitments under operating leases with non-cancelable terms of more than
one year as of January 2, 2000, were as follows (in millions unless noted): $6.0
in 2000, $5.3 in 2001, $4.6 in 2002, $2.9 in 2003, $73 thousand in 2004 and $3.4
thereafter.
The Company is subject to federal, state and local environmental laws and
regulations which require that it investigate and remediate the effects of the
release or disposal of materials at sites associated with past and present
operations, including sites at which the Company has been identified as a
potentially responsible party under the federal Superfund laws and comparable
state laws. The Company has been identified as a potentially responsible party
at approximately 17 such sites, excluding those at which the Company believes it
has no future liability.
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
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 2000, the Company's reserves for environmental remediation
obligations totaled approximately $1.2 million, of which approximately $836
thousand 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 other than
participating potentially responsible 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
identified 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 classifications and actions under the False Claims Act.
Although such claims are generally resolved by detailed fact-finding 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 fines, 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 effect on the Company's financial condition or
liquidity, although the resolution in any reporting period of one or more of
these matters could have a material adverse effect on the Company's results of
operations for that period.
The Company learns from time to time that it has been named as a defendant
in civil actions filed under seal pursuant to the False Claims Act. Generally,
since such cases are under seal, the Company does not in all cases possess
sufficient 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 connection with the spin-off, ATI received a tax ruling from the
Internal Revenue Service stating that the spin-off will be tax-free to ATI and
to ATI's stockholders. The
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
continuing validity of the Internal Revenue Service tax ruling is subject to
certain factual representations and assumptions, including the Company's
completion of a public offering of the Company's Common Stock within one year
following the spin-off and use of the anticipated gross proceeds of
approximately $125 million (less associated costs) for research and development
and related capital projects, for the further development of the Company's
manufacturing capabilities and for acquisitions and/or joint ventures. Pursuant
to the Separation and Distribution Agreement that Teledyne Technologies signed
prior to the spin-off, the Company agreed with ATI to undertake such a public
offering.
The Tax Sharing and Indemnification Agreement between ATI and Teledyne
Technologies provides that the Company will indemnify ATI and its agents and
representatives for taxes imposed on, and other amounts paid by, them or ATI
stockholders if the Company takes actions or fails to take actions (such as
completing the public offering) that result in the spin-off not qualifying as a
tax-free distribution. If the Company were required to so indemnify ATI, such an
obligation could have a material adverse effect on its financial condition,
results of operations and cash flow and the amount the Company could be required
to pay could exceed its net worth by a substantial amount.
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 benefits. 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
effect on the Company's financial condition or liquidity, although the
resolution in any reporting period of one or more of these matters could have a
material adverse effect on the Company's results of operations for that period.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
--------------------------------------------------------------------------------
The following is Teledyne Technologies' quarterly information:
[Download Table]
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
FISCAL YEAR 1999(A)
SALES..................................... $202.0 $195.4 $205.6 $200.4
GROSS PROFIT.............................. $ 50.6 $ 50.2 $ 60.1 $ 54.8
NET INCOME................................ $ 11.9 $ 10.2 $ 13.8 $ 13.1
DILUTED EARNINGS PER SHARE................ $ .43 $ .37 $ .50 $ .49
FISCAL YEAR 1998(B)
Sales..................................... $198.8 $200.4 $189.5 $191.7
Gross profit.............................. $ 52.7 $ 55.1 $ 48.6 $ 51.9
Net income................................ $ 11.3 $ 13.9 $ 12.6 $ 10.9
Diluted earnings per share................ $ .40 $ .50 $ .45 $ .39
-------------------------
(a) Teledyne Technologies spun-off from ATI effective November 29, 1999.
(b) The 1998 third quarter results reflect the favorable impact of an adjustment
to product liability self-insurance reserves as a result of favorable
experience.
F-27
SCHEDULE II
TELEDYNE TECHNOLOGIES INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED
JANUARY 2, 2000, JANUARY 3, 1999 AND DECEMBER 28, 1997
(IN MILLIONS)
[Download Table]
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(A) PERIOD
----------- ---------- ---------- ---------- ------------- ----------
FISCAL 1999
RESERVE FOR DOUBTFUL
ACCOUNTS $2.9 0.6 -- -- $3.5
FISCAL 1998
Reserve for doubtful
accounts $3.2 1.4 -- (1.7) $2.9
FISCAL 1997
Reserve for doubtful
accounts $2.0 1.3 -- (0.1) $3.2
-------------------------
(a) Represents write-offs of doubtful accounts.
F-28
SIGNATURES
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 27, 2000.
TELEDYNE TECHNOLOGIES INCORPORATED
(Registrant)
By: /s/ ROBERT MEHRABIAN
-----------------------------------
Robert Mehrabian
President and Chief Executive
Officer
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.
[Enlarge/Download Table]
* Chairman and Director March 27, 2000
------------------------------------------
Thomas A. Corcoran
/s/ ROBERT MEHRABIAN President and Chief March 27, 2000
------------------------------------------ Executive Officer
Robert Mehrabian (Principal Executive Officer)
and Director
/s/ STEFAN C. RIESENFELD Executive Vice President March 27, 2000
------------------------------------------ and Chief Financial Officer
Stefan C. Riesenfeld (Principal Financial Officer)
/s/ DALE A. SCHNITTJER Controller March 27, 2000
------------------------------------------ (Principal Accounting Officer)
Dale A. Schnittjer
* Director March 27, 2000
------------------------------------------
Robert P. Bozzone
* Director March 27, 2000
------------------------------------------
Paul S. Brentlinger
* Director March 27, 2000
------------------------------------------
Frank V. Cahouet
* Director March 27, 2000
------------------------------------------
Diane C. Creel
* Director March 27, 2000
------------------------------------------
C. Fred Fetterolf
* Director March 27, 2000
------------------------------------------
Charles J. Queenan, Jr.
*By: /s/ JOHN T. KUELBS
--------------------------------------------------
John T. Kuelbs
Pursuant to Power of Attorney
filed as Exhibit 24.
EXHIBIT INDEX
[Download Table]
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 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))
3.1* Restated Certificate of Incorporation of Teledyne
Technologies Incorporated (including Certificate of
Designation of Series A Junior Participating Preferred
Stock)
3.2* Amended and Restated Bylaws of Teledyne Technologies
Incorporated
4.1 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))
4.2* Credit Agreement dated as of October 29, 1999 among
Allegheny Teledyne Incorporated, Teledyne Technologies
Incorporated, Bank of America, N.A., as Administrative
Agent, Swing Line Lender and Issuing Lender, and the other
financial institutions party thereto
4.3* First Amendment to the Credit Agreement dated as of November
10, 1999
10.1 Tax Sharing and Indemnification 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))
10.2 Interim Services Agreement between Allegheny Teledyne
Incorporated and Teledyne Technologies Incorporated
(incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K dated as of November 29, 1999
(File No. 1-15295))
10.3 Employee Benefits Agreement between Allegheny Teledyne
Incorporated and Teledyne Technologies 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))+
10.4 Trademark License Agreement between Allegheny Teledyne
Incorporated and Teledyne Technologies Incorporated
(incorporated by reference to Exhibit 10.4 to the Company's
Current Report on Form 8-K dated as of November 29, 1999
(File No. 1-15295))
10.5* Teledyne Technologies Incorporated 1999 Incentive Plan, as
amended+
10.6* Teledyne Technologies Incorporated 1999 Non-Employee
Director Stock Compensation Plan+
10.7 Fee Continuation Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form 10/A-1 filed on October 29,
1999 (File No. 1-15295))+
10.8* Employment Agreement dated as of December 31, 1999 between
Robert Mehrabian and Teledyne Technologies Incorporated+
10.9* Form of Change of Control Severance Agreement+
10.10* Teledyne Technologies Incorporated Executive Deferred
Compensation Plan+
10.11* Teledyne Technologies Incorporated Pension
Equalization/Benefit Restoration Plan+
21* Significant Subsidiary of Teledyne Technologies Incorporated
23* Consent of Ernst & Young LLP
24* Power of Attorney
27.1* Financial Data Schedule
27.2* Financial Data Schedule (Restated)
---------------
* Filed herewith.
+ Denotes management contract or compensatory plan or arrangement required to be
filed as an Exhibit to this Form 10-K.
Dates Referenced Herein and Documents Incorporated by Reference
6 Subsequent Filings that Reference this Filing
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