Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Teledyne Technologies Incorporated provides enabling technologies for industrial growth markets that require advanced technology and high reliability. These markets include aerospace and defense, factory automation, air and water quality environmental monitoring, oceanographic research, deepwater oil and gas exploration and production, medical imaging and pharmaceutical research. Our products include digital imaging sensors, cameras and systems within the visible, infrared and X-ray spectra, monitoring instrumentation for marine and environmental applications, harsh environment interconnects, electronic test and measurement equipment, aircraft information management systems, and defense electronics and satellite communication subsystems. We also supply engineered systems for defense, space, environmental and energy applications. We differentiate ourselves from many of our direct competitors by having a customer- and company-sponsored applied research center that augments our product development expertise.

Strategy/Overview

Our strategy continues to emphasize growth in our core markets of instrumentation, digital imaging, aerospace and defense electronics and engineered systems. Our core markets are characterized by high barriers to entry and include specialized products and services not likely to be commoditized. We intend to strengthen and expand our core businesses with targeted acquisitions and through product development. We continue to focus on balanced and disciplined capital deployment among capital expenditures, acquisitions, product development and share repurchases. We aggressively pursue operational excellence to continually improve our margins and earnings by emphasizing cost containment and cost reductions in all aspects of our business. At Teledyne, operational excellence includes the rapid integration of the businesses we acquire. Using complementary technology across our businesses and internal research and development, we seek to create new products to grow our company and expand our addressable markets. We continue to evaluate our businesses to ensure that they are aligned with our strategy.

Consistent with this strategy, we made three acquisitions in 2019 and in March 2017, we made our largest acquisition to date, e2v technologies plc (“e2v”). See the Recent Acquisitions section following this section.

In the third quarter of 2019, we realigned the segment reporting structure for certain business units, primarily related to certain refinements of our management reporting structure. This change primarily related to moving certain electronic manufacturing services products from the Aerospace and Defense Electronics segment to the Engineered Systems segment. Total net sales for these products were $76.2 million for fiscal year 2018. Other immaterial changes included moving certain United Kingdom (“U.K.”) microwave product lines (previously within the Digital Imaging segment) and certain U.K. manufactured composite parts (previously within the Engineered Systems segment) into the Aerospace and Defense Electronics segment. Total net sales for these U.K. product lines was less than $20.0 million for fiscal year 2018. The realignment had no impact on the Instrumentation segment or the Consolidated Financial Statements. See Note 12 of the Notes to Consolidated Financial Statements for additional information on the realignment. Previously reported segment data has been adjusted to reflect these changes.

As part of a continuing effort to reduce costs and improve operating performance, we may take and have taken actions to consolidate and relocate certain facilities and reduce headcount across various businesses, reducing our exposure to weak end markets and high cost locations. We continue to seek cost reductions in our businesses. At December 29, 2019, $1.5 million remains to be paid related to these actions.

The following pre-tax charges were incurred related to severance and facility consolidations (in millions):

						2019						2018						2017
Instrumentation						$	1.5					$	5.6					$	2.1
Digital Imaging						1.1						0.7						—
Aerospace and Defense Electronics						0.5						1.3						2.1
Engineered Systems						0.1						0.2						—
Total						$	3.2					$	7.8					$	4.2

						2019						2018						2017
Severance						$	3.5					$	5.6					$	3.8
Facility consolidations (a)						(0.3)						2.2						0.4
Total						$	3.2					$	7.8					$	4.2

(a) 2019 includes the reversal of certain amounts recorded in 2018 no longer needed.

Table of Contents

						2019						2018						2017
Cost of sales						$	0.8					$	4.9					$	2.8
Selling, general and administrative expenses						2.4						2.9						1.4
Total						$	3.2					$	7.8					$	4.2

Recent Acquisitions

The Company spent $484.0 million, $3.1 million and $774.1 million on acquisitions and other investments, net of cash acquired in 2019, 2018 and 2017, respectively.

2019 Acquisitions

On February 5, 2019, we acquired the scientific imaging businesses of Roper Technologies, Inc. for $224.8 million in cash. The acquired businesses include Princeton Instruments, Photometrics and Lumenera. The acquired businesses provide a range of imaging solutions, primarily for life sciences, academic research and customized OEM industrial imaging solutions. Princeton Instruments and Photometrics manufacture state-of-the-art cameras, spectrographs and optics for advanced research in physical sciences, life sciences research and spectroscopy imaging. Applications and markets include materials analysis, quantum technology and cell biology imaging using fluorescence and chemiluminescence. Lumenera primarily provides rugged USB-based customized cameras for markets such as traffic management, as well as life sciences applications. Principally located in the United States and Canada, the acquired businesses are part of the Digital Imaging segment.

On August 1, 2019, we acquired the gas and flame detection businesses of 3M Company for $233.5 million in cash. The gas and flame detection businesses includes Oldham, Simtronics, Gas Measurement Instruments, Detcon and select Scott Safety products. The gas and flame detection businesses provides a portfolio of fixed and portable industrial gas and flame detection instruments used in a variety of industries including petrochemical, power generation, oil and gas, food and beverage, mining and waste water treatment. Principally located in France, the United Kingdom and the United States, the acquired businesses are part of the Environmental Instrumentation product line of the Instrumentation segment.

On August 30, 2019, we acquired Micralyne Inc. (“Micralyne”) for $25.7 million in cash. Micralyne provides micro electromechanical systems (“MEMS”) devices. In particular, Micralyne possesses unique microfluidic technology for biotech applications, as well as capabilities in non-silicon-based MEMS (e.g. gold, polymers) often required for human body compatibility. Based in Edmonton, Alberta, Canada, the acquired business is part of the Digital Imaging segment.

2017 Acquisitions

On March 28, 2017, we completed the acquisition of all of the outstanding common stock of e2v for $770.7 million, including stock options and assumed debt, net of $24.4 million of cash acquired. Most of e2v’s operations are included in the Digital Imaging and Aerospace and Defense Electronics segments. The Instrumentation segment includes a small portion of e2v’s operations. Principally located in Chelmsford, United Kingdom and Grenoble, France, e2v’s results have been included since the date of the acquisition and include $273.7 million in net sales and operating income of $37.3 million, which included $8.3 million in acquisition-related costs and $11.2 million in additional intangible asset amortization expense for fiscal year 2017.

Fiscal year 2017 includes pretax charges of $27.0 million related to the acquisition of e2v, which included $13.0 million in transaction costs, including stamp duty, advisory, legal and other consulting fees and other costs recorded to selling, general and administrative expenses, $5.7 million in inventory fair value step-up amortization expense recorded to cost of sales, $6.0 million related to a foreign currency option contract expense to hedge the e2v purchase price recorded as other expense and $2.3 million in bank bridge facility commitment expense recorded to interest expense. Of these amounts, $8.3 million impacted segment operating income.

On July 20, 2017, Teledyne Instruments, Inc. completed the acquisition of assets of Scientific Systems, Inc. (“SSI”) for $31.0 million in cash. Headquartered in State College, Pa., SSI is a manufacturer of precision components and specialized subassemblies used primarily in analytical and diagnostic instrumentation, such as high performance liquid chromatography systems and specific medical devices. SSI designs and manufactures high pressure positive-displacement piston pumps for a wide variety of analytical, clinical, sample prep and fluid-metering applications and is part of the Environmental Instrumentation product line of the Instrumentation segment.

See Note 3 of the Notes to Consolidated Financial Statements for additional information about our recent acquisitions.

Table of Contents

Consolidated Operating Results

Our fiscal year is determined based on a 52- or 53-week convention ending on the Sunday nearest to December 31. Fiscal years 2019, 2018 and 2017 each contained 52 weeks. The following are selected financial highlights for 2019, 2018 and 2017 (in millions, except per-share amounts):

						2019						2018						2017
Net sales						$	3,163.6					$	2,901.8					$	2,603.8
Costs and expenses
Cost of sales						1,920.3						1,791.0						1,624.0
Selling, general and administrative expenses						751.6						694.2						658.1
Total costs and expenses						2,671.9						2,485.2						2,282.1
Operating income						491.7						416.6						321.7
Interest and debt expense, net						(21.0)						(25.5)						(33.1)
Non-service retirement benefit income						8.0						13.5						13.9
Other expense, net						(5.0)						(10.7)						(15.5)
Income before income taxes						473.7						393.9						287.0
Provision for income taxes						71.4						60.1						59.8
Net income						$	402.3					$	333.8					$	227.2
Basic earnings per common share						$	11.08					$	9.32					$	6.45
Diluted earnings per common share						$	10.73					$	9.01					$	6.26

Our businesses are aligned in four business segments: Instrumentation, Digital Imaging, Aerospace and Defense Electronics and Engineered Systems. Our four business segments and their respective percentage contributions to our total sales in 2019, 2018 and 2017 are summarized in the following table:

						Percentage of Total Net Sales
Segment contribution to total net sales:						2019						2018						2017
Instrumentation						35		%				35		%				37		%
Digital Imaging						31		%				30		%				27		%
Aerospace and Defense Electronics						22		%				22		%				23		%
Engineered Systems						12		%				13		%				13		%
						100		%				100		%				100		%

Table of Contents

Results of Operations

2019 compared with 2018

Net sales (dollars in millions)												2019						2018						% Change
Instrumentation												$	1,105.1					$	1,021.2					8.2		%
Digital Imaging												992.9						875.3						13.4		%
Aerospace and Defense Electronics												690.1						640.2						7.8		%
Engineered Systems												375.5						365.1						2.8		%
Total net sales												$	3,163.6					$	2,901.8					9.0		%
Results of operations (dollars in millions)												2019						2018						% Change
Instrumentation												$	200.4					$	147.4					36.0		%
Digital Imaging												176.5						155.5						13.5		%
Aerospace and Defense Electronics												143.4						131.8						8.8		%
Engineered Systems												36.5						37.9						(3.7)		%
Corporate expense												(65.1)						(56.0)						16.3		%
Operating income												491.7						416.6						18.0		%
Interest and debt expense, net												(21.0)						(25.5)						(17.6)		%
Non-service retirement benefit income												8.0						13.5						(40.7)		%
Other expense, net												(5.0)						(10.7)						(53.3)		%
Income before income taxes												473.7						393.9						20.3		%
Provision for income taxes												71.4						60.1						18.8		%
Net income												$	402.3					$	333.8					20.5		%

Sales and cost of sales by segment and total company (dollars in millions):

			2019						2018						Change
Instrumentation
Net sales			$	1,105.1					$	1,021.2					$	83.9
Cost of sales			$	612.8					$	575.2					$	37.6
Cost of sales % of net sales			55.5		%				56.3		%
Digital Imaging
Net sales			$	992.9					$	875.3					$	117.6
Cost of sales			$	580.6					$	529.4					$	51.2
Cost of sales % of net sales			58.5		%				60.5		%
Aerospace and Defense Electronics
Net sales			$	690.1					$	640.2					$	49.9
Cost of sales			$	414.7					$	385.9					$	28.8
Cost of sales % of net sales			60.1		%				60.3		%
Engineered Systems
Net sales			$	375.5					$	365.1					$	10.4
Cost of sales			$	312.2					$	300.5					$	11.7
Cost of sales % of net sales			83.1		%				82.3		%
Total Company
Net sales			$	3,163.6					$	2,901.8					$	261.8
Cost of sales			$	1,920.3					$	1,791.0					$	129.3
Cost of sales % of net sales			60.7		%				61.7		%

Table of Contents

We reported net sales of $3,163.6 million in 2019, compared with net sales of $2,901.8 million for 2018, an increase of 9.0%. Net income was $402.3 million ($10.73 per diluted share) in 2019, compared with net income of $333.8 million ($9.01 per diluted share) in 2018, an increase of 20.5%.

Total year 2019 and 2018 reflected pretax charges totaling $3.2 million and $7.8 million, respectively, for severance and facility consolidation charges. Net income for 2019 and 2018 also included net discrete tax benefits of $26.1 million and $23.8 million, respectively.

Net sales

The increase in net sales in 2019, compared with 2018, reflected higher net sales in each segment. Net sales in 2019 included revenue growth of $128.7 million plus $133.1 million in incremental net sales from recent acquisitions.

Sales under contracts with the U.S. Government were approximately 24% of net sales in 2019 and 23% of net sales in 2018. Sales to international customers represented approximately 44% of net sales in 2019 and 47% of net sales in 2018.

Cost of Sales

Total cost of sales increased by $129.3 million in 2019, compared with 2018, which primarily reflected the impact of higher net sales. The total company cost of sales as a percentage of net sales for 2019 was 60.7%, compared with 61.7% for 2018.

Selling, general and administrative expenses

Selling, general and administrative expenses, including research and development and bid and proposal expense, were higher in 2019, compared with 2018. The increase primarily reflected the impact of higher sales and higher research and development and bid and proposal expense. Corporate administrative expense in 2019 was $65.1 million, compared with $56.0 million in 2018. The higher 2019 amount reflected higher compensation expense including higher stock option expense. For 2019, we recorded a total of $26.1 million in stock option expense, of which $9.7 million was recorded within corporate expense and $16.4 million was recorded in the operating segment results. For 2018, we recorded a total of $19.8 million in stock option expense, of which $6.3 million was recorded within corporate expense and $13.5 million was recorded in the operating segment results. Selling, general and administrative expenses as a percentage of sales was 23.8% for 2019, compared with 23.9% for 2018.

Pension Service Expense

Pension service expense is included in both cost of sales and selling, general and administrative expense. Pension service expense in 2019 was $9.4 million compared with $10.8 million in 2018.

Operating Income

Operating income for 2019 was $491.7 million, compared with $416.6 million for 2018, an increase of 18.0%. The increase in operating income primarily reflected higher operating income in each segment, except the Engineered Systems segment. Operating income in 2019 and 2018 reflected $3.2 million and $7.8 million in severance and facility consolidation costs, respectively. The incremental operating income included in the results for 2019 from recent acquisitions was $16.2 million.

Interest Expense, Interest Income, Non-Service Retirement Benefit Income and Other Expense

Total interest expense, including credit facility fees and other bank charges, was $22.0 million in 2019 compared with $29.2 million in 2018 and reflected the impact of lower average debt levels in 2019. Interest income was $1.0 million in 2019 and $3.7 million in 2018. Non-service retirement benefit income was $8.0 million in 2019, compared with $13.5 million in 2018. Other expense was $5.0 million for 2019, compared with expense of $10.7 million and reflected lower foreign currency expense in 2019.

Income Taxes

The Company’s effective tax rate for 2019 was 15.1%, compared with 15.3% for 2018. For 2019 net discrete income tax benefits were $26.1 million, which included a $15.4 million income tax benefit related to share-based accounting, $13.1 million in income tax benefit as a result of the remeasurement of uncertain tax positions due to expiration of statute of limitations, a favorable tax settlement and a tax benefit related to U.S. export sales. For 2018 net discrete income tax benefits were $23.8 million, which included a $12.9 million income tax benefit related to share-based accounting, $5.1 million in income tax benefit as a result of the remeasurement of uncertain tax positions due to expiration of statute of limitations and a $4.8 million income tax benefit related to the release of a valuation allowance for which the deferred tax assets are now determined more-likely-than-not to be realizable. Excluding the net discrete income tax benefits in both years, the effective tax rates would have been 20.6% for 2019 and 21.3% for 2018.

Table of Contents

2018 compared with 2017

Sales (dollars in millions)												2018						2017						% Change
Instrumentation												$	1,021.2					$	953.9					7.1		%
Digital Imaging												875.3						710.4						23.2		%
Aerospace and Defense Electronics												640.2						591.2						8.3		%
Engineered Systems												365.1						348.3						4.8		%
Total sales												$	2,901.8					$	2,603.8					11.4		%
Results of operations (dollars in millions)												2018						2017						% Change
Instrumentation												$	147.4					$	126.0					17.0		%
Digital Imaging												155.5						110.2						41.1		%
Aerospace and Defense Electronics												131.8						113.0						16.6		%
Engineered Systems												37.9						35.5						6.8		%
Corporate expense												(56.0)						(63.0)						(11.1)		%
Operating income												416.6						321.7						29.5		%
Interest and debt expense, net												(25.5)						(33.1)						(23.0)		%
Non-service retirement benefit income												13.5						13.9						(2.9)		%
Other expense, net												(10.7)						(15.5)						(31.0)		%
Income before income taxes												393.9						287.0						37.2		%
Provision for income taxes												60.1						59.8						0.5		%
Net income												$	333.8					$	227.2					46.9		%

Sales and cost of sales by segment and total company (dollars in millions):

			2018						2017						Change
Instrumentation
Net sales			$	1,021.2					$	953.9					$	67.3
Cost of sales			$	575.2					$	547.2					$	28.0
Cost of sales % of net sales			56.3		%				57.4		%
Digital Imaging
Net sales			$	875.3					$	710.4					$	164.9
Cost of sales			$	529.4					$	442.8					$	86.6
Cost of sales % of net sales			60.5		%				62.3		%
Aerospace and Defense Electronics
Net sales			$	640.2					$	591.2					$	49.0
Cost of sales			$	385.9					$	348.9					$	37.0
Cost of sales % of net sales			60.3		%				59.0		%
Engineered Systems
Net sales			$	365.1					$	348.3					$	16.8
Cost of sales			$	300.5					$	285.1					$	15.4
Cost of sales % of net sales			82.3		%				81.9		%
Total Company
Net sales			$	2,901.8					$	2,603.8					$	298.0
Cost of sales			$	1,791.0					$	1,624.0					$	167.0
Cost of sales % of net sales			61.7		%				62.4		%

Table of Contents

We reported net sales of $2,901.8 million in 2018, compared with net sales of $2,603.8 million for 2017, an increase of 11.4%. Net income was $333.8 million ($9.01 per diluted share) in 2018, compared with net income of $227.2 million ($6.26 per diluted share) in 2017, an increase of 46.9%.

Total year 2018 and 2017 reflected pretax charges totaling $7.8 million and $4.2 million, respectively, for severance and facility consolidation charges. Net income for 2018 and 2017 also included net discrete tax benefits of $23.8 million and $17.2 million, respectively. The total year 2017 amount included provisional charges of $4.7 million for the estimated impact of the Tax Cuts and Jobs Act (“Tax Act”). Net income for 2017 included pretax charges totaling $27.0 million related to e2v acquisition related expenses, of which, $5.7 million was recorded to cost of sales, $13.0 million was recorded to selling, general and administrative expenses, $2.3 million was recorded to interest expense and $6.0 million was recorded as other expense. The amount recorded to cost of sales related to the inventory fair value step-up amortization expense. The amount recorded to selling, general and administrative expenses related to transaction costs, including stamp duty, advisory, legal and other consulting fees and other costs. The amount recorded to interest expense related to funds-certain bank bridge facility commitment expense. The amount recorded to other expense related to a foreign currency option contract.

Net sales

The increase in net sales in 2018, compared with 2017, reflected higher net sales in each segment. Net sales in 2018 included revenue growth of $182.9 million plus $115.1 million in incremental net sales from recent acquisitions, primarily e2v. The incremental net sales from the March 2017 e2v acquisition in 2018 was $103.0 million.

Sales under contracts with the U.S. Government were approximately 23% of net sales in 2018 and 24% of net sales in 2017. Sales to international customers represented approximately 47% of net sales in 2018 and 46% of net sales in 2017.

Cost of Sales

Total company cost of sales increased by $167.0 million in 2018, compared with 2017, which primarily reflected the impact of higher net sales. The total company cost of sales as a percentage of sales for 2018 was 61.7%, compared with 62.4% for 2017.

Selling, general and administrative expenses

Selling, general and administrative expenses, including Company-funded research and development and bid and proposal expense, were higher in 2018, compared with 2017. The increase primarily reflected the impact of higher sales and higher research and development and bid and proposal expense. The 2017 amount included $13.0 million in acquisition related expenses for the e2v acquisition. Corporate administrative expense in 2018 was $56.0 million, compared with $63.0 million in 2017. The 2017 amount included $10.4 million in acquisition related expenses for the e2v acquisition. For 2018, we recorded a total of $19.8 million in stock option expense, of which $6.3 million was recorded within corporate expense and $13.5 million was recorded in the operating segment results. For 2017, we recorded a total of $14.2 million in stock option expense, of which $4.5 million was recorded within corporate expense and $9.7 million was recorded in the operating segment results. Selling, general and administrative expenses as a percentage of sales was 23.9% for 2018, compared with 25.3% for 2017. The higher percentage in 2017 reflected the impact of acquisition related expenses for the e2v acquisition.

Pension Service Expense

Pension service expense is included in both cost of sales and selling, general and administrative expense. Pension service expense in 2018 was $10.8 million compared with pension service expense of $11.2 million in 2017.

Operating Income

Operating income for 2018 was $416.6 million, compared with $321.7 million for 2017, an increase of 29.5%. The increase in operating income primarily reflected higher operating income in each segment, as well as lower corporate expense. Operating income in 2018 and 2017 reflected $7.8 million and $4.2 million in severance and facility consolidation costs, respectively. The incremental operating income included in the results for 2018 from recent acquisitions was $43.3 million.

Interest Expense, Interest Income, Non-Service Retirement Benefit Income and Other Expense

Total interest expense, including credit facility fees and other bank charges, was $29.2 million in 2018 compared with $35.5 million in 2017 and reflected the impact of lower debt levels in 2018. Interest expense in 2017 included $2.3 million in fees related to the terminated bridge facility in connection with the acquisition of e2v. Interest income was $3.7 million in 2018 and $2.4 million in 2017. Non-service retirement benefit income was $13.5 million in 2018, compared with $13.9 million in 2017. Other expense was $10.7 million for 2018, compared with expense of $15.5 million. Other expense in 2017 included $6.0 million of expense for a foreign currency option contract related to the e2v acquisition.

Table of Contents

Income Taxes

On December 22, 2017, the Tax Act was enacted, which significantly revised the U.S. corporate income tax by, among other things, lowering corporate income tax rates, implementing the territorial tax system and imposing a tax on deemed repatriation of non-U.S. earnings. The repatriation tax resulted in a net tax expense of $26.2 million and the remeasurement of U.S. deferred tax assets and liabilities resulted in a net tax benefit of $21.5 million, for a net provisional charge of $4.7 million recorded in the fourth quarter of 2017. The Company finalized its assessment of the Tax Act during the fourth quarter of 2018, resulting in a decrease of $0.8 million to the provisional charge and the repatriation tax.

The Company’s effective tax rate for 2018 was 15.3%, compared with 20.8% for 2017. For 2018 net discrete income tax benefits were $23.8 million, which included a $12.9 million income tax benefit related to share-based accounting, $5.1 million in income tax benefit as a result of the remeasurement of uncertain tax positions due to expiration of statute of limitations and a $4.8 million income tax benefit related to the release of a valuation allowance for which the deferred tax assets are now determined to be more-likely-than-not realizable. For 2017, net discrete income tax benefits were $17.2 million, which included an $8.5 million income tax benefit related to the release of valuation allowance for which the deferred tax assets are now determined more-likely-than-not to be realizable, $8.5 million income tax benefit as a result of the remeasurement of uncertain tax positions due to expiration of statute of limitation, and $8.8 million in net discrete tax benefits related to share-based accounting, partially offset by $4.6 million related to adjustments for uncertain tax positions and the $4.7 million provisional charge, related to the Tax Act.

Excluding the net discrete income tax benefits in both years, the effective tax rates would have been 21.3% for 2018 and 26.8% for 2017. The decrease in the effective tax rate in 2018, primarily reflects the lower corporate income tax rates as part of the Tax Act.

Segments

The following discussion of our four segments should be read in conjunction with Note 12 of the Notes to Consolidated Financial Statements.

Instrumentation

(Dollars in millions)						2019						2018						2017
Net sales						$	1,105.1					$	1,021.2					$	953.9
Cost of sales						$	612.8					$	575.2					$	547.2
Selling, general and administrative expenses						$	291.9					$	298.6					$	280.7
Operating income						$	200.4					$	147.4					$	126.0
Cost of sales % of net sales						55.5		%				56.3		%				57.4		%
Selling, general and administrative expenses % of net sales						26.4		%				29.3		%				29.4		%
Operating income % of net sales						18.1		%				14.4		%				13.2		%
International sales % of net sales						54.8		%				51.0		%				53.7		%
U.S. Government sales % of net sales						7.3		%				6.7		%				6.8		%

Our Instrumentation segment provides monitoring and control instruments for marine, environmental, industrial and other applications, as well as electronic test and measurement equipment. We also provide power and communications connectivity devices for distributed instrumentation systems and sensor networks deployed in mission critical, harsh environments.

2019 compared with 2018

Our Instrumentation segment net sales for 2019 increased 8.2%, compared with 2018. Operating income for 2019 increased 36.0%, compared with 2018.

The 2019 net sales increase primarily resulted from higher sales of environmental instrumentation, marine instrumentation and test and measurement instrumentation, as well as the contribution from the gas and flame detection business acquisition. Sales of environmental instrumentation increased $51.8 million and included $45.3 million in incremental sales from the gas and flame detection business acquisition. Sales of marine instrumentation increased by $17.2 million. Sales of test and measurement instrumentation increased $14.9 million. The increase in operating income reflected the impact of higher sales and higher margins across most product lines. The incremental operating income included in the results for 2019 from the gas and flame detection business acquisition was $4.1 million. Operating income in 2019 included $1.5 million in severance and facility consolidation costs compared with $5.6 million in severance and facility consolidation costs for 2018.

Table of Contents

Cost of sales increased by $37.6 million in 2019, compared with 2018, and primarily reflected the impact of higher net sales. The cost of sales percentage decreased slightly to 55.5% in 2019 from 56.3% in 2018. Selling, general and administrative expenses, including research and development and bid and proposal expense, in 2019, decreased by $6.7 million, compared with 2018, and reflected the impact of cost control efforts, lower severance and facility consolidation costs and lower research and development and bid and proposal expense of $3.2 million. Selling, general and administrative expenses for 2019, as a percentage of sales, decreased to 26.4%, compared with 29.3% for 2018, and reflected the impact of cost control efforts, lower severance and facility consolidation costs and lower research and development and bid and proposal expense.

2018 compared with 2017

Our Instrumentation segment net sales for 2018 increased 7.1%, compared with 2017. Operating income increased 17.0%, compared with 2017.

The 2018 net sales increase primarily resulted from higher sales of test and measurement instrumentation, environmental instrumentation and marine instrumentation, as well as the contribution from the SSI acquisition. Sales of test and measurement instrumentation increased $39.7 million. Sales of environmental instrumentation increased $25.3 million and included $12.1 million in incremental sales from the SSI acquisition. Sales of marine instrumentation increased by $2.3 million. The increase in operating income was primarily due to higher sales and improved margins for test and measurement instrumentation. Operating income in 2017 included a $2.6 million reversal of a previously reserved receivable that was collected during 2017. The incremental operating income included in the results for 2018 from recent acquisitions was $3.5 million.

Cost of sales increased by $28.0 million in 2018, compared with 2017, and primarily reflected the impact of higher net sales. The cost of sales percentage decreased to 56.3% in 2018 from 57.4% in 2017. Selling, general and administrative expenses, including research and development and bid and proposal expense, in 2018, increased by $17.9 million, compared with 2017, and primarily reflected the impact of higher net sales. Selling, general and administrative expenses for 2018, as a percentage of net sales, decreased slightly to 29.3%, compared with 29.4% for 2017.

Digital Imaging

(Dollars in millions)						2019						2018 (a)						2017 (a)
Net sales						$	992.9					$	875.3					$	710.4
Cost of sales						$	580.6					$	529.4					$	442.8
Selling, general and administrative expenses						$	235.8					$	190.4					$	157.4
Operating income						$	176.5					$	155.5					$	110.2
Cost of sales % of net sales						58.5		%				60.5		%				62.3		%
Selling, general and administrative expenses % of net sales						23.7		%				21.7		%				22.2		%
Operating income % of net sales						17.8		%				17.8		%				15.5		%
International sales % of net sales						59.7		%				66.0		%				61.2		%
U.S. Government sales % of net sales						10.8		%				10.3		%				12.1		%

(a) Previously reported segment data for 2018 and 2017 has been adjusted to reflect the third quarter 2019 segment realignment.

Our Digital Imaging segment includes high-performance sensors, cameras and systems, within the visible, infrared and X-ray spectra for use in industrial, government and medical applications, as well as MEMS and high-performance, high-reliability semiconductors including analog-to-digital and digital-to-analog converters. It also includes our sponsored and centralized research laboratories which benefit government programs and commercial businesses.

2019 compared with 2018

Our Digital Imaging segment net sales for 2019 increased 13.4%, compared with 2018. Operating income for 2019 increased 13.5%, compared with 2018.

Total year 2019 net sales primarily reflected higher sales of X-ray detectors for life sciences applications and aerospace, defense and MEMS products, as well as $87.8 million in sales from recent acquisitions, partially offset by lower sales of industrial machine vision products. The increase in operating income for 2019 reflected the impact of higher sales and incremental operating profit from recent acquisitions. The incremental operating income reflected in the results for 2019 from recent acquisitions was $12.1 million which included $4.7 million in additional intangible asset amortization expense.

Table of Contents

Cost of sales for 2019 increased by $51.2 million, compared with 2018, and reflected the impact of higher net sales. The cost of sales percentage in 2019 decreased to 58.5% compared with 60.5% in 2018 and reflected product mix differences. Selling, general and administrative expenses for 2019 increased to $235.8 million, compared with $190.4 million in 2018 and reflected the impact of higher net sales, higher research and development and bid and proposal expense and intangible amortization expense from recent acquisitions. The selling, general and administrative expense percentage increased to 23.7% in 2019 from 21.7% in 2018 and reflected the impact of higher research and development and bid and proposal expense and intangible amortization expense from recent acquisitions.

2018 compared with 2017

Our Digital Imaging segment net sales for 2018 increased 23.2%, compared with 2017. Operating income for 2018 increased 41.1%, compared with 2017.

The 2018 net sales included organic growth of $77.4 million and $87.5 million in incremental net sales from the e2v acquisition. Total year 2018 also reflected higher sales of X-ray detectors for life sciences applications, machine vision cameras for industrial applications, infrared detectors, geospatial hardware and software and MEMS products. The increase in operating income for 2018 reflected the impact of higher sales, favorable product mix and incremental operating profit from e2v. Operating income in 2017 reflected $8.0 million in acquisition-related costs related to the e2v acquisition. The incremental operating income reflected in the results for 2018 from the e2v acquisition was $31.3 million which included $1.1 million in additional intangible asset amortization expense.

Cost of sales for 2018 increased by $86.6 million, compared with 2017, and reflected the impact of higher net sales. The cost of sales percentage in 2018 decreased to 60.5% compared with 62.3% in 2017 and reflected product mix differences, as well as the inclusion in 2017 of $5.4 million of inventory fair value step-up amortization expense related to the e2v acquisition. Selling, general and administrative expenses for 2018 increased to $190.4 million, compared with $157.4 million in 2017 and reflected the impact of higher net sales. The selling, general and administrative expense percentage decreased slightly to 21.7% in 2018 from 22.2% in 2017.

Aerospace and Defense Electronics

(Dollars in millions)						2019						2018 (a)						2017 (a)
Net sales						$	690.1					$	640.2					$	591.2
Cost of sales						$	414.7					$	385.9					$	348.9
Selling, general and administrative expenses						$	132.0					$	122.5					$	129.3
Operating income						$	143.4					$	131.8					$	113.0
Cost of sales % of net sales						60.1		%				60.3		%				59.0		%
Selling, general and administrative expenses % of net sales						19.1		%				19.1		%				21.9		%
Operating income % of net sales						20.8		%				20.6		%				19.1		%
International sales % of net sales						27.4		%				34.1		%				40.8		%
U.S. Government sales % of net sales						32.6		%				27.7		%				26.6		%

(a) Previously reported segment data for 2018 and 2017 has been adjusted to reflect the third quarter 2019 segment realignment.

Our Aerospace and Defense Electronics segment provides sophisticated electronic components and subsystems and communications products, including defense electronics, harsh environment interconnects, data acquisition and communications equipment for aircraft, and components and subsystems for wireless and satellite communications, as well as general aviation batteries.

2019 compared with 2018

Our Aerospace and Defense Electronics segment net sales for 2019 increased 7.8%, compared with 2018. Operating income for 2019 increased 8.8%, compared with 2018.

The 2019 net sales increase reflected $57.9 million of higher sales of defense electronics, partially offset by $8.0 million of lower sales of aerospace electronics. The higher sales of defense electronics reflected greater sales in most product categories. Operating income in 2019 reflected the impact of higher net sales.

Cost of sales for 2019 increased by $28.8 million, compared with 2018, and reflected the impact of higher net sales. Cost of sales as a percentage of net sales for 2019 decreased slightly to 60.1% from 60.3% in 2018. Selling, general and administrative expenses, including research and development and bid and proposal expense, increased to $132.0 million in 2019, from $122.5 million in 2018 and reflected higher research and development and bid and proposal expense of $10.5 million. The selling, general and administrative expense percentage was 19.1% for both 2019 and 2018.

Table of Contents

2018 compared with 2017

Our Aerospace and Defense Electronics segment net sales for 2018 increased 8.3%, compared with 2017. Operating income for 2018 increased 16.6%, compared with 2017.

The 2018 net sales increase reflected $59.5 million of higher sales of defense electronics, partially offset by $10.5 million of lower sales of aerospace electronics. The higher sales of defense electronics reflected higher sales in most product categories and included $14.9 million in incremental sales from the e2v acquisition. Operating income in 2018 reflected the impact of higher net sales, overall improved margins and favorable product mix. The incremental operating income included in the results for 2018 from the e2v acquisition was $8.5 million.

Cost of sales for 2018 increased by $37.0 million, compared with 2017, and reflected the impact of higher net sales. Cost of sales as a percentage of net sales for 2018 increased to 60.3% from 59.0% in 2017. Selling, general and administrative expenses, including research and development and bid and proposal expense, decreased to $122.5 million in 2018, from $129.3 million in 2017 and reflected lower research and development and bid and proposal expense of $9.8 million. The selling, general and administrative expense percentage in 2018 decreased to 19.1% from 21.9% for 2017 and reflected the impact of lower research and development and bid and proposal expense.

Engineered Systems

(Dollars in millions)						2019						2018 (a)						2017 (a)
Net sales						$	375.5					$	365.1					$	348.3
Cost of sales						$	312.2					$	300.5					$	285.1
Selling, general and administrative expenses						$	26.8					$	26.7					$	27.7
Operating income						$	36.5					$	37.9					$	35.5
Cost of sales % of net sales						83.1		%				82.3		%				81.9		%
Selling, general and administrative expenses % of net sales						7.2		%				7.3		%				7.9		%
Operating income % of net sales						9.7		%				10.4		%				10.2		%
International sales % of net sales						1.1		%				2.9		%				2.8		%
U.S. Government sales % of net sales						92.3		%				87.5		%				89.5		%

(a) Previously reported segment data for 2018 and 2017 has been adjusted to reflect the third quarter 2019 segment realignment.

Our Engineered Systems segment provides innovative systems engineering and integration, advanced technology development, and manufacturing solutions for defense, space, environmental and energy applications. This segment also designs and manufactures electrochemical energy systems and small turbine engines.

2019 compared with 2018

Our Engineered Systems segment net sales for 2019 increased 2.8%, compared with 2018. Operating income for 2019 decreased 3.7%, compared with 2018.

The 2019 sales increase of $10.4 million reflected higher sales of $14.3 million of engineered products and services, partially offset by lower sales of $2.6 million of energy systems products and $1.3 million of turbine engines. The higher sales of engineered products and services primarily reflected increased sales for nuclear manufacturing and space programs. Operating income in 2019 decreased due to product mix differences.

Cost of sales for 2019 increased by $11.7 million, compared with 2018, and primarily reflected the impact of higher net sales. Cost of sales as a percentage of net sales for 2019 increased slightly 83.1%, compared with 82.3% in 2018. Selling, general and administrative expenses, including research and development and bid and proposal expense, increased slightly to $26.8 million in 2019, compared with $26.7 million in 2018. The selling, general and administrative expense percentage decreased slightly to 7.2% for 2019, compared with 7.3% in 2018.

2018 compared with 2017

Our Engineered Systems segment net sales for 2018 increased 4.8%, compared with 2017. Operating income for 2018 increased 6.8%, compared with 2017.

The 2018 sales increase of $16.8 million reflected higher sales of $28.8 million of engineered products and services, partially offset by lower sales of $12.0 million of turbine engines. The higher sales of engineered products and services, primarily reflected increased nuclear and aviation manufacturing programs and increased sales related to missile defense. Sales of turbine engines reflected lower sales of cruise missile engines. Operating income in 2018 increased due to higher sales of engineered products and services, partially offset by lower sales of turbine engines.

Table of Contents

Cost of sales for 2018 increased by $15.4 million, compared with 2017, and reflected the impact of higher net sales. Cost of sales as a percentage of net sales for 2018 increased slightly to 82.3%, compared with 81.9% in 2017. Selling, general and administrative expenses, including research and development and bid and proposal expense, decreased to $26.7 million in 2018, compared with $27.7 million in 2017, and reflected the impact of lower research and development and bid and proposal expense of $1.8 million. The selling, general and administrative expense percentage decreased to 7.3% for 2018, compared with 7.9% in 2017, and reflected the impact of lower research and development and bid and proposal expense.

Financial Condition, Liquidity and Capital Resources

Principal Cash and Capital Requirements

Our principal cash and capital requirements are to fund working capital needs, capital expenditures, income tax payments and debt service requirements, as well as acquisitions. We may deploy cash for stock repurchases. It is anticipated that operating cash flow, together with available borrowings under the credit facility described below, will be sufficient to meet these requirements and could be used to fund acquisitions in 2020. To support acquisitions, we may need to raise additional capital. Our liquidity is not dependent upon the use of off-balance sheet financial arrangements. We have no off-balance sheet financing arrangements that incorporate the use of special purpose or unconsolidated entities.

Credit Facility, Senior Notes and Term Loans

Long-term debt (in millions):						December 29, 2019						December 30, 2018
$750.0 million credit facility, due March 2024, weighted average rate of 2.80% at December 29, 2019 and 5.50% at December 30, 2018						$	125.0					$	29.0
Term loan repaid October 2019, variable rate of 3.63% at December 30, 2018, swapped to a Euro fixed rate of 0.7055%						—						100.0
Term loan due October 2024, variable rate of 2.702% at December 29, 2019, swapped to a Euro fixed rate of 0.612%						150.0						—
2.61% Fixed Rate Senior Notes repaid December 2019						—						30.0
5.30% Fixed Rate Senior Notes due September 2020						75.0						75.0
2.81% Fixed Rate Senior Notes due November 2020						25.0						25.0
3.09% Fixed Rate Senior Notes due December 2021						95.0						95.0
3.28% Fixed Rate Senior Notes due November 2022						100.0						100.0
0.70% €50 Million Fixed Rate Senior Notes due April 2022						56.0						57.2
0.92% €100 Million Fixed Rate Senior Notes due April 2023						111.9						114.4
1.09% €100 Million Fixed Rate Senior Notes due April 2024						111.9						114.4
Other debt						2.0						8.8
Debt issuance costs						(1.2)						(1.3)
Total long-term debt						850.6						747.5
Current portion of long-term debt						(100.6)						(137.4)
Total long-term debt, net of current portion						$	750.0					$	610.1

At December 29, 2019, we had $29.2 million in outstanding letters of credit.

On March 15, 2019, Teledyne amended its $750.0 million credit agreement to extend the maturity date from December 2020 to March 2024. While the borrowing capacity remains at $750.0 million, the amendment permits Teledyne to increase the aggregate amount of the borrowing capacity by up to $250.0 million subject to certain conditions. Excluding interest and fees, no payments are due under the $750.0 million unsecured credit facility (“credit facility”) until it matures. Borrowings under our credit facility and term loans are at variable rates which are, at our option, tied to a Eurocurrency rate equal to LIBOR (London Interbank Offered Rate) plus an applicable rate or a base rate as defined in our credit agreements. Eurocurrency rate loans may be denominated in U.S. dollars or an alternative currency as defined in the agreement. Eurocurrency or LIBOR based loans under the facility typically have terms of one, two, three or six months and the interest rate for each such loan is subject to change if the loan is continued or converted following the applicable maturity date. The Company has not drawn any loans with a term longer than three months under the credit facility. Base rate loans have interest rates that primarily fluctuate with changes in the prime rate. Interest rates are also subject to change based on our consolidated leverage ratio as defined in the credit agreement. The credit facility also provides for facility fees that vary between 0.12% and 0.25% of the credit line, depending on our consolidated leverage ratio.

In October 2019, Teledyne and its subsidiary, Teledyne Netherlands B.V., as borrowers, entered into an Amended and Restated Term Loan Credit Agreement (the “Amended Term Loan Credit Agreement”) that amends and restates the Term Loan Credit Agreement dated as of March 17, 2017. Pursuant to the Amended Term Loan Credit Agreement, the lenders thereunder made unsecured term loans in an aggregate principal amount of $150.0 million, denominated in US dollars, $100.0 million of which was used to repay outstanding loans, which had a maturity date of October 30, 2019. Also, on October 30, 2019,

Table of Contents

Teledyne entered into a cross currency swap to effectively convert the $150.0 million term loan to a €135.2 million denominated instrument with a fixed euro interest rate of 0.612%.

Our credit facility, senior notes and term loans agreements require the Company to comply with various financial and operating covenants, including maintaining certain consolidated leverage and interest coverage ratios, as well as minimum net worth levels and limits on acquired debt. At December 29, 2019, the Company was in compliance with these covenants and we had a significant amount of margin between required financial covenant ratios and our actual ratios. Currently, we do not believe our ability to undertake additional debt financing, if needed, is reasonably likely to be materially impacted by debt restrictions under our credit agreements subject to our complying with required financial covenants listed in the table below.

Financial covenant ratios and the actual ratios at December 29, 2019:

$750.0 million Credit Facility expires March 2024 and $150.0 million term loan due October 2024 (issued October 2019)
Financial Covenant			Requirement						Actual Measure
Consolidated Leverage Ratio (Net Debt/EBITDA) (a)			No more than 3.25 to 1						1.4 to 1
Consolidated Interest Coverage Ratio (EBITDA/Interest) (b)			No less than 3.0 to 1						22.6 to 1
$574.8 million Private Placement Senior Notes due from 2020 to 2024
Financial Covenant			Requirement						Actual Measure
Consolidated Leverage Ratio (Net Debt/EBITDA) (a)			No more than 3.25 to 1						1.4 to 1
Consolidated Interest Coverage Ratio (EBITDA/Interest) (b)			No less than 3.0 to 1						22.6 to 1

(a) The Consolidated Leverage Ratio is equal to Net Debt/EBITDA as defined in our private placement note purchase agreement and our $750.0 million credit agreement.

(b) The Consolidated Interest Coverage Ratio is equal to EBITDA/Interest as defined in our private placement note purchase agreement and our $750.0 million credit agreement.

In the event of an acquisition, our credit agreements permit us, at our option, to exceed the Consolidated Leverage Ratio of 3.25 to 1 for up to four quarters following the fiscal quarter in which the acquisition event occurs, provided that the Consolidated Leverage Ratio does not exceed 3.5 to 1.

Available borrowing capacity under the $750.0 million credit facility, which is reduced by borrowings and outstanding letters of credit, was $598.3 million at December 29, 2019.

Contractual Obligations

The following table summarizes our expected cash outflows resulting from financial contracts and commitments at December 29, 2019:

Contractual obligations (in millions):						2020						2021						2022						2023						2024						After 2024						Total
Debt obligations						$	100.6					$	95.4					$	156.0					$	111.9					$	386.9					$	1.0					$	851.8
Interest expense(a)						20.1						17.0						13.6						10.0						4.7						—						65.4
Operating lease obligations (b)						24.5						23.0						19.7						16.9						15.1						70.1						169.3
Purchase obligations (c)						184.5						22.6						18.4						8.3						0.6						0.7						235.1
Total						$	329.7					$	158.0					$	207.7					$	147.1					$	407.3					$	71.8					$	1,321.6

(a) Interest expense related to the credit facility, including facility fees, is assumed to accrue at the rates in effect at year-end 2019 and is assumed to be paid at the end of each quarter with the final payment in March 2024 when the credit facility expires.

(b) Includes imputed interest and the short-term portion of lease obligations.

(c) Purchase obligations generally include contractual obligations for the purchase of goods and services and capital commitments that are enforceable and legally binding on us and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction.

Unrecognized tax benefits of $24.5 million are not included in the table above because $10.6 million is offset by deferred tax assets, and the remainder cannot be reasonably estimated to be settled in cash due to a lack of prior settlement history and offsetting credits.

At December 29, 2019, we were not required, and accordingly are not planning, to make any cash contributions to the domestic qualified pension plan for 2020. Our minimum funding requirements after 2020 as set forth by ERISA, are dependent on several factors as discussed under “Accounting for Pension Plans” in the Critical Accounting Policies section of this Management’s Discussion and Analysis of Financial Condition and Results of Operation. Estimates beyond 2020 have not been provided due to the significant uncertainty of these amounts, which are subject to change until the Company’s pension assumptions can be updated at the appropriate times. In addition, certain pension contributions are eligible for future recovery

Table of Contents

through the pricing of products and services to the U.S. government under certain government contracts, therefore, future cash contributions are not necessarily indicative of the impact these contributions may have on our liquidity. We also have payments due under our other postretirement benefit plans. These plans are not required to be funded in advance, but are pay as you go. See further discussion in Note 11 of the Notes to Consolidated Financial Statements. Teledyne intends to continue to monitor and manage its defined benefit pension plans obligation and may take additional actions to manage risk in the future.

Operating Activities

In 2019, net cash provided by operating activities was $482.1 million, compared with $446.9 million in 2018 and $374.7 million in 2017. The higher cash provided by operating activities in 2019, compared with 2018, was driven by higher operating income, cash flow from recent acquisitions, partially offset by $45.4 million of higher income tax payments. The higher cash provided by operating activities in 2018, compared with 2017, was driven by higher operating income, partially offset by $28.0 million of higher income tax payments.

Free cash flow (cash provided by operating activities less capital expenditures) was $393.7 million in 2019, compared with $360.1 million in 2018 and $316.2 million in 2017.

Free Cash Flow(a) (in millions, brackets indicate use of funds)												2019						2018						2017
Cash provided by operating activities												$	482.1					$	446.9					$	374.7
Capital expenditures for property, plant and equipment												(88.4)						(86.8)						(58.5)
Free cash flow												$	393.7					$	360.1					$	316.2

a) We define free cash flow as cash provided by operating activities (a measure prescribed by generally accepted accounting principles) less capital expenditures for property, plant and equipment. The company believes that this supplemental non-GAAP information is useful to assist management and the investment community in analyzing the company’s ability to generate cash flow.

Investing Activities

Net cash used in investing activities was $571.9 million, $88.6 million and $831.2 million for 2019, 2018 and 2017, respectively. Cash flows relating to investing activities consists primarily of cash used for acquisitions and other investments and capital expenditures.

Capital expenditures (in millions):						2019						2018						2017
Instrumentation						$	18.9					$	14.8					$	13.7
Digital Imaging						45.2						35.8						23.4
Aerospace and Defense Electronics						19.0						18.7						9.3
Engineered Systems						3.6						13.6						7.4
Corporate						1.7						3.9						4.7
						$	88.4					$	86.8					$	58.5

During 2020, we plan to invest approximately $100.0 million in capital expenditures, principally to upgrade facilities and manufacturing equipment to reduce costs and introduce new products. The increase in capital spending in 2018 compared with 2017, primarily reflects facility upgrades and expansions.

Acquisitions

Investing activities used cash for acquisitions and other investments of $484.0 million, $3.1 million and $774.1 million, in 2019, 2018 and 2017, respectively (see “Recent Acquisitions”). Teledyne funded the acquisitions primarily from borrowings under its credit facilities, issuance of senior notes and term loans and cash on hand. On January 3, 2020, we acquired OakGate Technology, Inc. for $28.0 million in cash.

For all acquisitions, the results of operations and cash flows are included in our consolidated financial statements from the date of each respective acquisition.

The following table shows the purchase price (net of cash acquired), goodwill acquired and intangible assets acquired for the acquisitions and other investments made in 2019 and 2017 (in millions):

						2019
Acquisition						Acquisition date						Cash Paid (a)						Goodwill Acquired						Acquired Intangible Assets
Scientific imaging businesses						February 5, 2019						$	224.8					$	149.9					$	52.4
Gas and flame detection business						August 1, 2019						233.5						147.7						69.0
Micralyne Inc.						August 30, 2019						25.7						7.3						0.9
Total												$	484.0					$	304.9					$	122.3
(a) Net of any cash acquired and any purchase price adjustments.

Table of Contents

The majority of the goodwill resulting from the acquisition of the scientific imaging businesses will be deductible for tax purposes. Goodwill resulting from the acquisition of the gas and flame detection business and Micralyne will not be deductible for tax purposes.

						2017
Acquisition						Acquisition date						Cash Paid (a)						Goodwill Acquired						Acquired Intangible Assets
e2v						March 28, 2017						$	740.6					$	494.3					$	172.3
SSI						July 20, 2017						31.3						18.6						4.8
Other investments						Various						2.2						0.6						0.4
Total												$	774.1					$	513.5					$	177.5
(a) Net of any cash acquired and any purchase price adjustments.

Goodwill resulting from the e2v acquisition is not deductible for tax purposes. Goodwill resulting from the SSI acquisition is deductible for tax purposes.

Financing Activities

Financing activities for 2019 reflected net proceeds from debt of $108.8 million, compared with net payments on debt of $306.5 million in 2018 and net proceeds from debt of $393.7 million for 2017. Fiscal years 2019, 2018 and 2017 reflect proceeds from the exercise of stock options of $34.6 million, $37.2 million and $24.9 million, respectively.

Other Matters

Pension Plans

Teledyne has a domestic qualified defined benefit pension plan covering substantially all U.S. employees hired before January 1, 2004, or approximately 10% of Teledyne’s active employees as of December 29, 2019. As of January 1, 2004, new U.S. hires participate in a domestic defined contribution plan. In 2019, 2018 and 2017, Teledyne’s domestic pension plan was over 100% funded, thus no cash contributions were made. For the Company’s qualified defined benefit pension plans, the discount rate for 2020 will decrease to an average of 3.41% from 4.59% in 2019. The company also has several small non-qualified domestic and foreign-based defined benefit pension plans.

Income Taxes

Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.

We intend to reinvest indefinitely the earnings of our material foreign subsidiaries in our operations outside of the United States. The cash that the Company’s foreign subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including foreign acquisitions. We estimate that future domestic cash generation will be sufficient to meet future domestic cash requirements. Due to the Tax Act, U.S. federal and applicable state income taxes have been accrued for the deemed repatriation. At December 29, 2019, the amount of undistributed foreign earnings was $309.5 million, for which we have not recorded a deferred tax liability of approximately $1.4 million for corporate income taxes which would be due if reinvested foreign earnings were repatriated. Should we decide to repatriate the foreign earnings, we would need to adjust our income tax provision in the period we determined that we would no longer indefinitely reinvest the earnings outside the United States.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amount in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state, federal and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income. Based on the Company’s history of operating earnings, expectations of future operating earnings and potential tax planning strategies, management believes that it is possible that some portion of deferred taxes will not be realized as a future tax benefit and therefore has recorded a valuation allowance.

Table of Contents

We file income tax returns in the United States federal jurisdiction and in various states and foreign jurisdictions. The Company has substantially concluded on all U.S. federal income tax matters for all years through 2015, United Kingdom income tax matters for all years through 2017, France income tax matters for all years through 2016 and Canadian income tax matters for all years through 2011.

Costs and Pricing

Inflationary trends in recent years have been moderate. Current inventory costs, the increasing costs of equipment and other costs are considered in establishing sales pricing policies. The Company emphasizes cost containment and cost reductions in all aspects of its business.

Hedging Activities and Market Risk Disclosures

Teledyne transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company’s primary objective is to protect the United States dollar value of future cash flows and minimize the volatility of reported earnings. The Company utilizes foreign currency forward contracts to reduce the volatility of cash flows primarily related to forecasted revenue and expenses denominated in Canadian dollars for our Canadian companies, and in British pounds for our U.K. companies. These contracts are designated and qualify as cash flow hedges. The Company has converted U.S. dollar denominated, variable rate and fixed rate debt obligations of a European subsidiary, into euro fixed rate obligations using a receive float, pay fixed cross currency swap, and a received fixed pay, fixed cross currency swap. These cross currency swaps are designated as cash flow hedges. In addition, the Company has converted domestic U.S. variable rate debt to fixed rate debt using a receive variable, pay fixed interest rate swap. The interest rate swap is also designated as a cash flow hedge.

The effectiveness of the cash flow hedge forward contracts, the cross currency swap hedges, and the interest rate swap cash flow hedge is assessed prospectively and retrospectively on a monthly basis using regression analysis, as well as using other timing and probability criteria. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedges and must be highly effective in offsetting changes to future cash flows on hedged transactions. The effective portion of the cash flow hedge forward contracts’ gains or losses resulting from changes in the fair value of these hedges is initially reported, net of tax, as a component of accumulated other comprehensive income/(loss) (“AOCI”) in stockholders’ equity until the underlying hedged item is reflected in our consolidated statements of income, at which time the effective amount in AOCI is reclassified to revenue in our consolidated statements of income. For the cross currency swap and interest rate cash flow hedges, effective amounts are recorded in AOCI, and reclassified into interest expense in the consolidated statements of income. In addition, for the cross currency swaps an amount is reclassified from AOCI to other income and expense each reporting period, to offset the earnings impact of the remeasurement of the hedged liabilities. Net deferred gains recorded in AOCI, net of tax, for forward contracts that will mature in the next 12 months total $0.8 million. These gains are expected to be offset by anticipated losses in the value of the forecasted underlying hedged item. Amounts related to the cross currency swaps and interest rate swap expected to be reclassified from AOCI into income in the coming 12 months total $5.9 million.

In the event that the underlying forecasted transactions do not occur, or it becomes remote that they will occur, within the defined hedge period, the gains or losses on the related cash flow hedges will be reclassified from AOCI to other income and expense. During the current reporting period, all forecasted transactions occurred and, therefore, there were no such gains or losses reclassified to other income and expense, due to missed forecasts.

As of December 29, 2019, Teledyne had foreign currency forward contracts designated as cash flow hedges to buy Canadian dollars and to sell U.S. dollars totaling $75.7 million. These foreign currency forward contracts have maturities ranging from March 2020 to February 2021. Teledyne had foreign currency forward contracts designated as cash flow hedges to buy British pounds and to sell U.S. dollars totaling $17.1 million. These foreign currency forward contracts have maturities ranging from March 2020 to February 2021. Together these contracts had a negative fair value of $1.1 million.

The cross currency swaps have notional amounts of €113.0 million and $125.0 million, and €135.0 million and $150.0 million, and mature in March 2023 and October 2024, respectively. The interest rate swap has a notional amount of $125.0 million and matures in March 2023.

Table of Contents

In addition, the Company utilizes foreign currency forward contracts to mitigate foreign exchange rate risk associated with foreign currency denominated monetary assets and liabilities, including intercompany receivables and payables. As of December 29, 2019, Teledyne primarily had foreign currency contracts of this type in the following currency pairs (in millions):

Contracts to Buy												Contracts to Sell
Currency			Amount						Currency			Amount
Canadian Dollars			$	7.9					U.S. Dollars			US$	6.2
Euros			€	35.8					U.S. Dollars			US$	39.2
Great Britain Pounds			£	44.9					U.S. Dollars			US$	55.5
Canadian Dollars			$	11.9					Euros			€	8.2
Danish Krone			Kr.	66.2					U.S. Dollars			US$	9.7
Great Britain Pounds			£	9.1					Euros			€	10.3

These contracts had a negative fair value of $0.3 million at December 29, 2019. The gains and losses on these derivatives which are not designated as hedging instruments, are intended to, at a minimum, partially offset the transaction gains and losses recognized in earnings.

All derivatives are recorded on the balance sheet at fair value. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting. Teledyne does not use foreign currency forward contracts for speculative or trading purposes.

Notwithstanding our efforts to mitigate portions of our foreign currency exchange rate risks, there can be no assurance that our hedging activities will adequately protect us against the risks associated with foreign currency fluctuations. A hypothetical 10 percent price change of the U.S. dollar from its value at December 29, 2019, would result in a decrease or increase in the fair value of our foreign currency forward contracts designated as cash flow hedges to buy Canadian dollars and to sell U.S. dollars by approximately $7.6 million. A hypothetical 10 percent price change in the U.S. dollar from its value at December 29, 2019 would result in a decrease or increase in the fair value of our foreign currency forward contracts designated as cash flow hedges to buy British Pounds and to sell U.S. dollars by approximately $1.7 million. A hypothetical 10 percent price change in the U.S. dollar from its value at December 29, 2019 would result in a decrease or increase in the fair value of our Euro/U.S. Dollar cross currency swaps designated as cash flow hedges by approximately $28.7 million. A hypothetical 100 basis point increase in U.S. interest rates at December 29, 2019 would result in an increase in the fair value of our U.S. Dollar interest rate swap designated as a cash flow hedge by approximately $3.7 million, while a 100 basis point decrease would result in a decrease in its fair value of $3.5 million.

Borrowings under our credit facility are at fixed rates that vary with the term and timing of each loan under the facility. Loans under the facility typically have terms of one, two, three or six months and the interest rate for each such loan is subject to change if the loan is continued or converted following the applicable maturity date. Interest rates are also subject to change based on our debt to earnings before interest, taxes, depreciation and amortization ratio. As of December 29, 2019, we had $125.0 million outstanding under our $750.0 million credit facility. Any borrowings under the Company’s credit facility are based on a fluctuating market interest rate and, consequently, the fair value of any outstanding debt should not be affected materially by changes in market interest rates.

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.

Environmental

We are 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. These include sites at which Teledyne has been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, and comparable state laws. We are currently involved in the investigation and remediation of a number of sites. Reserves for environmental investigation and remediation totaled $6.0 million at both December 29, 2019 and December 30, 2018. As investigation and remediation of these sites proceed and new information is received, the Company will adjust accruals 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. See also our environmental risk factor disclosure beginning on page 24 and Notes 2 and 14 of the Notes to Consolidated Financial Statements.

Table of Contents

Government Contracts

We perform work on a number of contracts with the U.S. Department of Defense and other agencies and departments of the U.S. Government including sub-contracts with government prime contractors. Sales under these contracts with the U.S. Government, which included contracts with the U.S. Department of Defense, were approximately 24% of total net sales in 2019, 23% of total net sales in 2018 and 24% of total sales in 2017. For a summary of sales to the U.S. Government by segment, see Note 12 of the Notes to Consolidated Financial Statements. Sales to the U.S. Department of Defense represented approximately 17%, 17% and 18% of total net sales for 2019, 2018 and 2017, respectively.

Performance under government contracts has certain inherent risks that could have a 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. See also our government contracts risks factor disclosure beginning on page 18.

For information on accounts receivable from the U.S. Government, see Note 5 of the Notes to Consolidated Financial Statements.

Estimates and Reserves

Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates, including those related to product returns and replacements, allowance for doubtful accounts, inventories, intangible assets, income taxes, warranty obligations, pension and other postretirement benefits, long-term contracts, environmental, workers’ compensation and general liability, employee benefits and other contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances at the time, the results of which form the basis for making our judgments. Actual results may differ materially from these estimates under different assumptions or conditions. In some cases, such differences may be material. See also Critical Accounting Policies.

The following table reflects significant reserves and valuation accounts, which are estimates and based on judgments as described above, at December 29, 2019, and December 30, 2018:

Reserves and Valuation Accounts (in millions): (a)						2019						2018
Allowance for doubtful accounts						$	10.2					$	6.8
Reduction to LIFO cost basis						$	7.8					$	9.4
Workers’ compensation and general liability reserves (b)						$	6.5					$	8.9
Environmental reserves (b)						$	6.0					$	6.0
Other accrued liability reserves (b)						$	16.0					$	26.5

(a) This table should be read in conjunction with the Notes to Consolidated Financial Statements.

(b) Includes both long-term and short-term reserves.

Some of the Company’s products are subject to standard warranties and the Company provides for the estimated cost of product warranties. We regularly assess the adequacy of our pre-existing warranty liabilities and adjust amounts as necessary based on a review of historic warranty experience with respect to the applicable business or products, as well as the length and actual terms of the warranties, which are typically one year. The product warranty reserve is included in current accrued liabilities and other long-term liabilities on the balance sheet.

Warranty Reserve (in millions):						2019						2018						2017
Balance at beginning of year						$	21.0					$	21.1					$	18.4
Product warranty expense						13.1						10.0						6.0
Deductions						(14.2)						(10.1)						(6.4)
Acquisitions						4.9						—						3.1
Balance at year-end						$	24.8					$	21.0					$	21.1

Table of Contents

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to the financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. Our critical accounting policies are those that are reflective of significant judgment, complexity and uncertainty, and may potentially result in materially different results under different assumptions and conditions. We have identified the following as critical accounting policies: revenue recognition; accounting for pension plans; accounting for business combinations, goodwill and acquired intangible assets; and accounting for income taxes. For additional discussion of the application of these and other accounting policies, see Note 2 of the Notes to Consolidated Financial Statements.

Revenue Recognition

Approximately 40% of our revenue is recognized over time with the remaining 60% of our revenue recognized at a point in time.

Revenue recognized over time relates primarily to contracts to design, develop and/or manufacture highly engineered products used in both defense and commercial applications. The transaction price in these arrangements may include estimated amounts of variable consideration, including award fees, incentive fees, contract amounts not yet funded, or other provisions that can either increase or decrease the transaction price. We estimate variable consideration at the amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the estimation uncertainty is resolved. The estimation of this variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. As control transfers continuously over time on these contracts, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We generally use the cost-to-cost measure of progress as this measure best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation.

For over time contracts using cost-to-cost, we have an Estimate at Completion (“EAC”) process in which management reviews the progress and execution of our performance obligations. This EAC process requires management judgment relative to assessing risks, estimating contract revenue, determining reasonably dependable cost estimates, and making assumptions for schedule and technical issues. Since certain contracts extend over a longer period of time, the impact of revisions in cost and revenue estimates during the progress of work may adjust the current period earnings through a cumulative catch-up basis. This method recognizes, in the current period, the cumulative effect of the changes on current and prior quarters. Additionally, if the current contract estimate indicates a loss, a provision is made for the total anticipated loss in the period that it becomes evident. Contract cost and revenue estimates for significant contracts are generally reviewed and reassessed quarterly.

We do not believe that any discrete event or adjustment to an individual contract within the aggregate changes in contract estimates for 2019, 2018 or 2017 was material to the consolidated statements of income for such annual periods.

Revenue recognized at a point in time relates primarily to the sale of standard or minimally customized products, with control transferring to the customer generally upon the transfer of title. See Note 2 of the Notes to Consolidated Financial Statements for additional revenue recognition disclosures.

Pension Plans

The Company’s accounting for its defined benefit pension plans requires that amounts recognized in financial statements be determined on an actuarial basis, rather than as contributions are made to the plan. In consultation with our actuaries, we determine the appropriate assumptions for use in determining the liability for future pension benefits. Net actuarial gains or losses are amortized to expense on a plan-by-plan basis when they exceed the accounting corridor. The accounting corridor is a defined range within which amortization of net gains and losses is not required and is equal to 10 percent of the greater of the market related value of assets or benefit obligations. Gains or losses outside of the corridor are subject to amortization over our average employee future service period of approximately nine years. Significant assumptions used in determining the Company’s pension income or expense is the expected long-term rate of return on plan assets, participant mortality estimates, expected rates of increase in future compensation levels, employee turnover, as well as the assumed discount rate on pension obligations.

Table of Contents

Differences in the discount rate and expected long-term rate of return on assets within the indicated range would have had the following impact on 2019 pension expense (in millions):

						0.25 Percentage Point Increase						0.25 Percentage Point Decrease
Increase (decrease) to pension expense resulting from:
Change in discount rate						$	(1.2)					$	1.3
Change in long-term rate of return on plan assets						$	(2.1)					$	2.1

See Note 11 of the Notes to Consolidated Financial Statements for additional pension disclosures.

Business Combinations, Goodwill and Acquired Intangible Assets

The results for all acquisitions are included in the Company’s consolidated financial statements from the date of each respective acquisition. Business acquisitions are accounted for under the acquisition method by assigning the purchase price to tangible and intangible assets acquired and liabilities assumed. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. We determine the fair value of such assets and liabilities, often in consultation with third-party valuation advisors. Acquired intangible assets with finite lives are amortized over their estimated useful lives. Adjustments to fair value assessments are recorded to goodwill over the purchase price allocation period.

Goodwill and acquired intangible assets with indefinite lives are not amortized. We review goodwill and acquired indefinite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company also performs an annual impairment test in the fourth quarter of each year. We test goodwill and acquired indefinite-lived intangible assets for impairment between annual tests if events occur or circumstances change that would more likely than not reduce our enterprise fair value below its book value. These events or circumstances could include a significant change in the business climate, including a significant sustained decline in an entity’s market value, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business, or other factors.

We may use either a qualitative or quantitative approach when testing a reporting unit’s goodwill for impairment. For selected reporting units where we use the qualitative approach, we perform a qualitative evaluation of events and circumstances impacting the reporting unit to determine the likelihood of goodwill impairment. Based on that qualitative evaluation, if we determine it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, no further evaluation is necessary. Otherwise we perform a quantitative impairment test. We perform a quantitative test for each reporting unit at least once every three years.

For goodwill impairment testing using the quantitative approach, the Company estimates the fair value of the selected reporting units primarily through the use of a discounted cash flow model based on our best estimate of amounts and timing of future revenues and cash flows and our most recent business and strategic plans, and compares the estimated fair value to the carrying value of the reporting unit, including goodwill. The discounted cash flow model requires judgmental assumptions about projected revenue growth, future operating margins, discount rates and terminal values over a multi-year period. There are inherent uncertainties related to these assumptions and management’s judgment in applying them to the analysis of goodwill impairment. While the Company believes it has made reasonable estimates and assumptions to calculate the fair value of its reporting units, it is possible a material change could occur. If actual results are not consistent with management’s estimates and assumptions, goodwill may be overstated and a charge would need to be taken against net earnings.

Changes in our projections used in the discounted cash flow model could affect the estimated fair value of certain of the Company’s reporting units and could result in a goodwill impairment charge in a future period. In order to evaluate the sensitivity of the fair value calculations used in the quantitative goodwill impairment test, the Company applied a hypothetical 10% decrease to the fair values of each reporting unit subject to a quantitative impairment test and compared those values to the reporting unit carrying values. Based on this sensitivity analysis, the Company did not identify any goodwill impairment. Due to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of our recorded goodwill, differences in assumptions may have a material effect on the results of our impairment analysis.

As of December 29, 2019, the Company had nine reporting units for goodwill impairment testing. The carrying value of goodwill included in the Company’s individual reporting units ranged from $1.2 million to $870.2 million. The Company’s analysis in 2019 indicated that in all instances, the fair value of the Company’s reporting units exceeded their carrying values and consequently did not result in an impairment charge. The excess of the estimated fair value over the carrying value (expressed as a percentage of carrying value of the respective reporting unit) for the Company’s reporting units subject to a quantitative test as of the fourth quarter of 2019, the annual testing date, exceeded at least 77%.

Table of Contents

Income Taxes

Income tax expense and deferred tax assets and liabilities reflect management’s assessment of actual future taxes to be paid on items reflected in the financial statements. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. Uncertainty exists regarding tax positions taken in previously filed tax returns still under examination and positions expected to be taken in the current year and future returns. Deferred tax assets and liabilities arise due to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax carryforwards. Although we believe our income tax expense and deferred tax assets and liabilities are reasonable, no assurance can be given that the final tax outcome will not be different from that which is reflected in our historical income tax provisions and accruals. To the extent that the final tax outcome is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of uncertain tax benefits that are considered appropriate, as well as the related net interest.

Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence including past operating results, estimates of future taxable income and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

An increase of 100 basis points in our nominal tax rate would have resulted in additional income tax provision for the fiscal year ended December 29, 2019, of $4.7 million. For a description of the Company’s tax accounting policies, refer to Note 2 and Note 10 of the Notes to Consolidated Financial Statements.

Recent Accounting Standards

For a discussion of recent accounting standards see Note 2 of the Notes to Consolidated Financial Statements.

Safe Harbor Cautionary Statement Regarding Forward-Looking Information

This Management’s Discussion and Analysis of Financial Condition and Results of Operation contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, directly and indirectly relating to earnings, growth opportunities, acquisitions and divestitures, product sales, capital expenditures, pension matters, stock option compensation expense, the credit facility, interest expense, severance and relocation costs, environmental remediation cost, stock repurchases, taxes, exchange rate fluctuations and strategic plans. All statements made in this Management’s Discussion and Analysis of Financial Condition and Results of Operation that are not historical in nature should be considered forward-looking. Actual results could differ materially from these forward-looking statements.

Many factors could change the anticipated results, including: disruptions in the global economy; changes in demand for products sold to the defense electronics, instrumentation, digital imaging, energy exploration and production, commercial aviation, semiconductor and communications markets; funding, continuation and award of government programs; cuts to defense spending resulting from existing and future deficit reduction measures; impacts from the United Kingdom’s pending exit from the European Union; uncertainties related to the policies of the U.S. Presidential administration; the imposition and expansion of, and responses to, trade sanctions and tariffs; and threats to the security of our confidential and proprietary information, including cyber security threats. Lower oil and natural gas prices, as well as instability in the Middle East or other oil producing regions, and new regulations or restrictions relating to energy production, including with respect to hydraulic fracturing could further negatively affect our businesses that supply the oil and gas industry. Disruptions from the production delay of Boeing’s 737 Max aircraft and increasing fuel costs will negatively affect the markets of our commercial aviation businesses. If the Coronavirus outbreak continues and results in a prolonged period of travel, commercial and other similar restrictions, we could experience lower demand for our products and global supply disruptions. In addition, financial market fluctuations affect the value of our pension assets.

Changes in the policies of U.S. and foreign governments, including economic sanctions, could result, over time, in reductions or realignment in defense or other government spending and further changes in programs in which the Company participates.

While Teledyne’s growth strategy includes possible acquisitions, we cannot provide any assurance as to when, if or on what terms any acquisitions will be made. Acquisitions involve various inherent risks, such as, among others, our ability to integrate acquired businesses, retain customers and achieve identified financial and operating synergies. There are additional risks associated with acquiring, owning and operating businesses outside of the United States, including those arising from U.S. and foreign government policy changes or actions and exchange rate fluctuations.

Table of Contents

We continue to take action to assure compliance with the internal controls, disclosure controls and other requirements of the Sarbanes-Oxley Act of 2002. While we believe our control systems are effective, there are inherent limitations in all control systems, and misstatements due to error or fraud may occur and may not be detected.

Additional information concerning factors that could cause actual results to differ materially from those projected in the forward-looking statements is contained beginning on page 14 of this Form 10-K under the caption “Risk Factors; Cautionary Statement as to Forward-Looking Statements.” Forward-looking statements are generally accompanied by words such as “estimate”, “project”, “predict”, “believes” or “expect”, that convey the uncertainty of future events or outcomes. We assume no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or otherwise.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is included in this Report on page 45 under the caption “Other Matters - Hedging Activities; Market Risk Disclosures” of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.”