UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2018~~2019



¨☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-15295

TELEDYNE TECHNOLOGIES ~~INCORPORATED~~INCORPORATED

(Exact name of registrant as specified in its charter)



Delaware		25-1843385
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
1049 Camino Dos Rios
~~1049 Camino Dos Rios~~ Thousand Oaks	California	91360-2362
(Address of principal executive offices)		(Zip Code)

~~(805)~~ 805373-4545

(Registrant’s telephone number, including area code)

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	TDY	New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý☒ No ¨☐

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



Large accelerated filer	ý☒	Accelerated filer	¨☐

Non-accelerated filer	☐	Smaller reporting company	¨☐

Emerging growth company	¨☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐

No ý☒

There were ~~36,079,107~~36,379,266 shares of common stock, $.01 par value per share, outstanding as of ~~October~~July 24, ~~2018.~~

2019.

TELEDYNE TECHNOLOGIES INCORPORATED

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

TELEDYNE TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE ~~THIRD~~SECOND QUARTER AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2018~~2019 AND ~~OCTOBER~~JULY 1, ~~2017~~2018

(Unaudited - Amounts in millions, except per-share amounts)


	Third Quarter						Nine Months						Second Quarter						Six Months
	2018			2017			2018			2017			2019			2018			2019			2018
Net sales	$	725.3		$	662.2		$	2,153.4		$	1,899.4		$	782.0		$	732.5		$	1,527.2		$	1,428.1
Costs and expenses
Cost of sales	446.2			408.6			1,331.4			1,186.8			463.6			447.0			927.5			885.2
Selling, general and administrative expenses	173.6			164.1			516.6			485.5			186.5			174.0			370.5			343.0
Total costs and expenses	619.8			572.7			1,848.0			1,672.3			650.1			621.0			1,298.0			1,228.2
Operating income	105.5			89.5			305.4			227.1			131.9			111.5			229.2			199.9
Interest and debt expense, net	(6.0		)	(8.2		)	(19.8		)	(25.5		)	(5.4		)	(6.7		)	(10.8		)	(13.8		)
Non-service retirement benefit income	3.4			3.4			10.1			10.1			2.0			3.3			4.2			6.7
Other expense, net	(2.7		)	(3.0		)	(8.9		)	(13.0		)	(0.6		)	(3.7		)	(1.8		)	(6.2		)
Income before income taxes	100.2			81.7			286.8			198.7			127.9			104.4			220.8			186.6
Provision for income taxes	9.9			12.7			44.1			39.1			23.3			18.5			40.9			34.2
Net income	$	90.3		$	69.0		$	242.7		$	159.6		$	104.6		$	85.9		$	179.9		$	152.4

Basic earnings per common share	$	2.52		$	1.95		$	6.80		$	4.53		$	2.89		$	2.40		$	4.97		$	4.27
Weighted average common shares outstanding	35.9			35.3			35.7			35.2			36.2			35.8			36.2			35.7

Diluted earnings per common share	$	2.43		$	1.90		$	6.56		$	4.41		$	2.80		$	2.32		$	4.82		$	4.13
Weighted average diluted common shares outstanding	37.2			36.4			37.0			36.2			37.4			37.0			37.3			36.9

The accompanying notes are an integral part of these condensed consolidated financial statements.

TELEDYNE TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE ~~THIRD~~SECOND QUARTER AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2018~~2019 AND ~~OCTOBER~~JULY 1, ~~2017~~2018

(Unaudited - Amounts in millions)


	Third Quarter					Nine Months					Second Quarter						Six Months
	2018			2017		2018			2017		2019			2018			2019		2018
Net income	$	90.3		$	69.0	$	242.7		$	159.6	$	104.6		$	85.9		$	179.9	$	152.4
Other comprehensive income (loss):
Foreign exchange translation adjustment	(0.8		)	36.8		(42.9		)	91.6		(4.6		)	(59.3		)	12.4		(42.1		)
Hedge activity, net of tax	2.5			1.9		(2.0		)	4.8		1.3			(2.9		)	3.1		(4.5		)
Pension and postretirement benefit adjustments, net of tax	4.8			3.2		14.2			10.0		4.9			5.1			9.5		9.4
Other comprehensive income (loss)	6.5			41.9		(30.7		)	106.4		1.6			(57.1		)	25.0		(37.2		)
Comprehensive income, net of tax	$	96.8		$	110.9	$	212.0		$	266.0
Comprehensive income											$	106.2		$	28.8		$	204.9	$	115.2

The accompanying notes are an integral part of these condensed consolidated financial statements.

TELEDYNE TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited - Amounts in millions, except share amounts)


	September 30, 2018			December 31, 2017			June 30, 2019			December 30, 2018
Assets
Current Assets
Cash	$	126.1		$	70.9		$	108.1		$	142.5
Accounts receivable, net	387.4			388.3			432.3			416.5
Unbilled receivables, net	164.4			89.8			176.5			145.3
Inventories, net	377.6			400.2			390.4			364.3
Prepaid expenses and other current assets	54.1			62.7			53.7			45.8
Total current assets	1,109.6			1,011.9			1,161.0			1,114.4
Property, plant and equipment, net of accumulated depreciation and amortization of $555.6 at September 30, 2018 and $531.6 at December 31, 2017	446.1			442.8
Property, plant and equipment, net of accumulated depreciation and amortization of $595.4 at June 30, 2019 and $566.0 at December 30, 2018							450.9			442.6
Goodwill	1,755.5			1,776.7			1,888.0			1,735.2
Acquired intangibles, net	357.8			398.9			379.9			344.3
Prepaid pension assets	158.0			127.2			101.4			88.2
Operating lease right-of-use assets							129.6			—
Other assets, net	86.2			88.9			89.4			84.6
Total Assets	$	3,913.2		$	3,846.4		$	4,200.2		$	3,809.3
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	205.4		$	191.7		$	221.7		$	227.8
Accrued liabilities	368.3			345.3			353.8			355.6
Current portion of long-term debt, capital leases and other debt	14.3			3.6
Current portion of long-term debt and other debt							135.5			137.4
Total current liabilities	588.0			540.6			711.0			720.8
Long-term debt and capital lease obligations	823.0			1,069.3
Long-term debt							656.2			610.1
Long-term operating lease liabilities							121.9			—
Other long-term liabilities	285.4			289.2			238.1			248.7
Total Liabilities	1,696.4			1,899.1			1,727.2			1,579.6
Commitments and contingencies
Stockholders’ Equity
Preferred stock, $0.01 par value; outstanding shares - none	—			—			—			—
Common stock, $0.01 par value; authorized 125,000,000 shares; issued shares: 37,697,865 at September 30, 2018 and December 31, 2017; outstanding shares: 36,072,347 at September 30, 2018 and 35,540,233 at December 31, 2017	0.4			0.4
Common stock, $0.01 par value; authorized 125,000,000 shares; issued shares: 37,697,865 at June 30, 2019 and December 30, 2018; outstanding shares: 36,376,376 at June 30, 2019 and 36,087,297 at December 30, 2018							0.4			0.4
Additional paid-in capital	337.9			337.3			352.4			343.7
Retained earnings	2,432.5			2,139.6			2,703.6			2,523.7
Treasury stock, 1,625,518 at September 30, 2018 and 2,157,632 at December 31, 2017	(146.4		)	(200.7		)
Treasury stock, 1,321,489 shares at June 30, 2019 and 1,610,568 shares at December 30, 2018							(115.2		)	(144.9		)
Accumulated other comprehensive loss	(407.6		)	(329.3		)	(468.2		)	(493.2		)
Total Stockholders’ Equity	2,216.8			1,947.3			2,473.0			2,229.7
Total Liabilities and Stockholders’ Equity	$	3,913.2		$	3,846.4		$	4,200.2		$	3,809.3

The accompanying notes are an integral part of these condensed consolidated financial statements.

TELEDYNE TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In millions)



	Common Stock		Additional Paid-in Capital			Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 30, 2018	$	0.4	$	343.7		$	(144.9	)	$	2,523.7	$	(493.2	)	$	2,229.7
Net income	—		—			—			75.3		—			75.3
Other comprehensive income, net of tax	—		—			—			—		23.4			23.4
Treasury stock issued	—		(15.0		)	15.0			—		—			—
Stock-based compensation	—		10.9			—			—		—			10.9
Exercise of stock options and other	—		10.2			—			—		—			10.2
Balance, March 31, 2019	0.4		349.8			(129.9		)	2,599.0		(469.8		)	2,349.5
Net income	—		—			—			104.6		—			104.6
Other comprehensive income, net of tax	—		—			—			—		1.6			1.6
Treasury stock issued	—		(14.7		)	14.7			—		—			—
Stock-based compensation	—		6.8			—			—		—			6.8
Exercise of stock options and other	—		10.5			—			—		—			10.5
Balance, June 30, 2019	$	0.4	$	352.4		$	(115.2	)	$	2,703.6	$	(468.2	)	$	2,473.0



	Common Stock		Additional Paid-in Capital			Treasury Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2017	$	0.4	$	337.3		$	(200.7	)	$	2,139.6	$	(329.3	)	$	1,947.3
Net income	—		—			—			66.5		—			66.5
Other comprehensive income, net of tax	—		—			—			—		19.9			19.9
Treasury stock issued	—		(20.4		)	20.4			—		—			—
Stock-based compensation	—		6.6			—			—		—			6.6
Exercise of stock options and other	—		12.3			—			—		—			12.3
Cumulative effect of new accounting standards	—		—			—			50.9		(47.6		)	3.3
Balance, April 1, 2018	0.4		335.8			(180.3		)	2,257.0		(357.0		)	2,055.9
Net income	—		—			—			85.9		—			85.9
Other comprehensive loss, net of tax	—		—			—			—		(57.1		)	(57.1		)
Treasury stock issued	—		(17.2		)	17.2			—		—			—
Stock-based compensation	—		6.5			—			—		—			6.5
Exercise of stock options and other	—		11.6			—			—		—			11.6
Balance, July 1, 2018	$	0.4	$	336.7		$	(163.1	)	$	2,342.9	$	(414.1	)	$	2,102.8

The accompanying notes are an integral part of these condensed consolidated financial statements.

TELEDYNE TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2018~~2019 AND ~~OCTOBER~~JULY 1, ~~2017~~2018

(Unaudited - Amounts in millions)


	Nine Months						Six Months
	2018			2017			2019			2018
Operating Activities
Net income	$	242.7		$	159.6		$	179.9		$	152.4
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	83.7			87.4			54.7			56.4
Deferred income taxes	4.3			(1.3		)
Stock-based compensation	18.8			14.3			17.7			13.1
Changes in operating assets and liabilities:
Changes in operating assets and liabilities excluding the effect of business acquired:
Accounts receivable	(52.4		)	(7.7		)	(36.6		)	(38.5		)
Inventories	(10.1		)	(36.9		)	(10.1		)	(12.2		)
Prepaid expenses and other assets	3.7			(1.2		)	(4.3		)	(1.3		)
Accounts payable	18.3			12.6			(7.8		)	25.9
Accrued liabilities	26.1			11.4			(22.8		)	(15.7		)
Income taxes receivable/payable, net	(6.1		)	11.9
Deferred and income taxes receivable/payable, net							(4.5		)	(1.0		)
Long-term assets	(0.4		)	(12.5		)	(11.7		)	(8.3		)
Other long-term liabilities	2.6			16.1			8.1			(1.6		)
Pension and postretirement benefits	(13.3		)	(13.9		)
Other operating, net	3.5			8.5			0.7			10.3
Net cash provided by operating activities	321.4			248.3			163.3			179.5
Investing Activities
Purchases of property, plant and equipment	(68.1		)	(40.5		)	(39.4		)	(47.2		)
Purchase of businesses and other investments, net of cash acquired	—			(773.8		)
Proceeds from the sale of assets	1.2			1.1
Purchase of businesses, net of cash acquired							(222.5		)	—
Other investing, net							0.3			0.7
Net cash used in investing activities	(66.9		)	(813.2		)	(261.6		)	(46.5		)
Financing Activities
Net proceeds from (payments on) credit facility	(165.0		)	285.0			47.5			(115.0		)
Proceeds from senior notes	—			268.0
Proceeds from term loan	—			100.0
Proceeds from (payments on) other debt, net	(59.6		)	(131.7		)
Net proceeds from (payments on) other debt							(2.2		)	2.3
Proceeds from exercise of stock options	36.1			18.7			20.7			23.8
Other financing, net	(2.0		)	(4.4		)	(1.4		)	(2.0		)
Net cash provided by (used in) financing activities	(190.5		)	535.6			64.6			(90.9		)
Effect of exchange rate changes on cash	(8.8		)	13.2			(0.7		)	(11.6		)
Change in cash	55.2			(16.1		)	(34.4		)	30.5
Cash—beginning of period	70.9			98.6			142.5			70.9
Cash—end of period	$	126.1		$	82.5		$	108.1		$	101.4

The accompanying notes are an integral part of these condensed consolidated financial statements.

TELEDYNE TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~September~~June 30, ~~2018~~2019

Note 1. General

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by Teledyne Technologies Incorporated (“Teledyne” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in notes to consolidated financial statements have been condensed or omitted pursuant to such rules and regulations, but resultant disclosures are in accordance with accounting principles generally accepted in the United States (“GAAP”) as they apply to interim reporting. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes in Teledyne’s Annual Report on Form 10-K for the fiscal year ended December ~~31, 2017~~30, 2018 (“~~2017~~2018 Form 10-K”).

In the opinion of Teledyne’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly, in all material respects, Teledyne’s consolidated financial position as of ~~September~~June 30, ~~2018~~2019 and the consolidated results of operations, ~~and~~ consolidated comprehensive income for the three and ~~nine~~six months then ended and consolidated cash flows for the ~~nine~~six months then ended. The results of operations and cash flows for the ~~three and nine months~~periods ended ~~September~~June 30, ~~2018 and cash flows for the nine months ended September 30, 2018~~2019 are not necessarily indicative of the results of operations or cash flows to be expected for any subsequent quarter or the full fiscal year. Certain prior year amounts have been reclassified to conform to the current period presentation.

In the second quarter of 2018, we realigned the reporting structure for certain of our microwave product groupings. These products, acquired with the acquisition of e2v technologies plc (“e2v”) were formerly reported as part of the Aerospace and Defense Electronics segment and are now reported as part of the Digital Imaging segment. Previously reported segment data has been adjusted to reflect this change. Total sales for these products were $24.2 million for fiscal year 2017.

Recent Accounting Pronouncements

In February ~~2016,~~2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The new guidance will require lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability, other than leases that meet the definition of a short-term lease. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. The new guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The new guidance can be adopted using either a modified retrospective transition, requiring application at the beginning of the earliest comparative period presented or a transition method whereby companies could continue to apply existing lease guidance during the comparative periods and apply the new lease requirements through a cumulative-effect adjustment in the period of adoption rather than in the earliest period presented without adjusting historical financial statements. We plan to adopt the new standard on December 31, 2018, the beginning of our 2019 fiscal year, and are currently evaluating the impact this guidance will have on the consolidated financial statements, including the selection of a transition method, and footnote disclosures. Please refer to Note 13 of the Notes to Consolidated Financial Statements included in our 2017 Form 10-K for additional information about the Company’s leases, including the future minimum lease payments of the Company’s operating leases at December 31, 2017.

~~In February 2018, the FASB issued ASU~~ No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, to address a specific consequence of the Tax Cuts and Jobs Act (“Tax Act”) by allowing a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the Tax Act reduction of the U.S. federal corporate income tax rate. The guidance is effective for all entities for annual periods beginning after December 15, 2018, with early adoption permitted, and is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized.permitted. In the ~~third~~second quarter of 2018, ~~Teledyne~~we elected to early adopt this ASU and elected to reclassify, in the period of enactment, stranded tax effects totaling $47.6 million from AOCI to retained earnings in our condensed consolidated balance sheet. The reclassification amount primarily included income tax effects related to our pension and postretirement benefit plans. Income tax effects remaining in AOCI will be released into earnings as the related pretax amounts are reclassified to earnings.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities.” This ~~ASU~~guidance better aligns an entity’s risk management activities and financial reporting for hedging ~~relationships. This ASU~~relationships and expands and refines hedge accounting for both nonfinancial and financial risk ~~components, and this ASU~~components. This guidance also simplifies and aligns the recognition and presentation of the effects of the hedging instrument and the hedged

item in the financial statements. This ~~ASU~~guidance is effective for fiscal years beginning after December 15, 2018 and for interim periods therein, with early adoption permitted. ~~Teledyne is currently evaluating~~We adopted the ~~impact~~guidance as of December 31, 2018 using the modified retrospective approach, there was no cumulative adjustment to retained earnings related to hedge ineffectiveness for the year ended December 31, 2018. Additionally, as a result of the adoption, we no longer disclose the ineffective portion of the change in fair value of our derivative financial instruments. The entire change in the fair value of the cash flow hedging instruments aside from components excluded from the assessment of hedge effectiveness will now be recorded in other comprehensive income and subsequently reclassified to earnings in the period the hedged item impacts earnings. The adoption of this guidance ~~will~~did not have a material impact on ~~the~~our condensed consolidated financial ~~statements and footnote disclosures.~~statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates the computation of the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record a goodwill impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The ~~new standard~~guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We expect the adoption of this ~~standard~~guidance will reduce the complexity surrounding the evaluation of goodwill for impairment. The impact of this ~~new standard~~guidance for the Company will depend on the outcomes of future goodwill impairment tests.

In ~~March 2017,~~February 2016, the FASB issued ASU No. ~~2017-07, “Improving~~2016-02, Leases (Topic 842). The guidance requires lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability, other than leases that meet the ~~Presentation~~definition of ~~Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This ASU requires~~a short-term lease. For income statement purposes, the ~~service cost component of net benefit costs~~FASB retained a dual model, requiring leases to be ~~disaggregated from all other components and be reported in the same line item~~classified as either operating or items as other compensation costs and allow only the service cost component to be eligible for capitalization when applicable. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and before income from operations. The Companyfinance. We adopted the ~~requirements~~guidance on December 31, 2018, the beginning of this ASU as of January 1, 2018 on a retrospective basis. As such, the Company reclassified $2.8 million and $0.6 million from cost of sales and selling, general and administrative expenses, respectively to non-service retirement benefit income for the three months ended October 1, 2017 and reclassified $8.5 million and $1.6 million from cost of sales and selling, general and administrative expenses, respectively to non-service retirement benefit income for the nine months ended October 1, 2017 to conform to current period presentation.

In May 2014, the FASB issued ASU No. 2014-09 (Topic 606), Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseded most current revenue recognition guidance under Topic 605, Revenue Recognition. Under the new standard, an entity recognizes revenue when or as it satisfies a performance obligation by transferring control of a good or service to the customer, either at a point in time or over time. The new standard requires expanded disclosures, including how and when we satisfy performance obligations as well as additional disaggregated revenue information to be provided more frequently in the reporting process.

~~The Company adopted the requirements of Topic 606 as of January 1, 2018,~~our 2019 fiscal year using the modified retrospective transition ~~method~~method. Prior period comparative information was not adjusted. In addition, we elected the package of practical expedients permitted under the transition guidance, which ~~required~~among other things, allowed us to carry forward the historical lease classification. The adoption of this guidance did not have a material impact related to existing leases and as a result, a cumulative-effect adjustment aswas not recorded. Also, the adoption of the guidance did not have a material impact on our results of operations or cash flows. Upon adoption, on December 31, 2018, we recognized right-of-use assets of $128.4 million and a total lease liability of $139.8 million for operating leases.

Lease Commitments

We determine if an arrangement is a lease at inception. Effective December 31, 2018, operating leases are recorded as right-of-use assets, other long-term lease liabilities and current accrued liabilities in our condensed consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our condensed consolidated balance sheets.

Operating lease right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and lease liabilities are recognized at commencement date based on the present value of ~~adoption. Adoption~~lease payments over the lease term. Since most of ~~Topic 606 primarily impacted contracts~~our leases do not provide an implicit rate, we use our incremental borrowing rate to determine the present value of lease payments at the commencement date. We use the implicit rate when readily determinable. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for ~~which revenue prior~~lease payments is recognized on a straight-line basis over the lease term.

Many lease agreements contain renewal options at either a fixed cost, fixed increase or market value adjustment. For those leases with renewal options, we will include the renewal options that are reasonably certain to ~~fiscal year 2018 was recognized using~~be exercised, for purposes of calculating the ~~percentage~~lease liability and corresponding right-of-use asset. Teledyne will evaluate the likelihood of ~~completion (“POC”), units-of-delivery or milestone methods, as these contracts are now recognized primarily using~~exercising each renewal option based on many factors, including the ~~POC cost-to-cost method to depict the transfer of control~~length of the ~~good~~renewal option and the future new lease cost, if known, or ~~service~~the estimated future new lease cost if it is not a fixed amount.

Operating Leases

Teledyne has approximately 120 operating lease agreements, which are primarily for manufacturing facilities and office space. These agreements frequently include one or more renewal options and may require the Company to ~~the customer as the work~~pay for utilities, taxes, insurance and maintenance expense. No lease agreement imposes a restriction on the ~~contract~~Company’s ability to engage in financing transactions or enter into further lease agreements. At June 30, 2019, Teledyne has right-of-use assets of $129.6 million and a total lease liability for operating leases of $139.8 million of which $121.9 million is ~~performed. Also, to a much lesser extent, certain contracts~~included in long-term lease liabilities and $17.9 million is included in current accrued liabilities.

At June 30, 2019, future minimum lease payments for ~~customized goods and services, certain products sold to the U.S. Government, and product repair contracts are now recognized over time, as control~~operating leases with non-cancelable terms of the good or service produced transfers to the customer over time in accordance with the guidance in Topic 606. For impacted contracts that were in process at December 31, 2017, we calculated the difference in the life to date revenue (and related costs and expenses) between legacy accounting standards and Topic 606, with the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of retained earnings, as shown below. The priormore than one year comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. While Topic 606 includes additional disclosures, as discussed within these Notes to the Condensed Consolidated Financial Statements, comparative disclosures with prior periods are not required in the year of adoption due to our use of the modified retrospective transition method.

~~The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption ofTopic 606~~ were as follows (in millions):

Balance at December 31, 2017 Topic ASC 606 Adjustments Balance at January 1, 2018
Assets
Accounts receivable, net $ 388.3
1.0
$ 389.3
Unbilled receivables, net $ 89.8
29.0
$ 118.8
Inventories, net $ 400.2
(24.8 ) $ 375.4
Liabilities
Accrued liabilities $ 345.3
1.9
$ 347.2
Stockholders’ Equity

Retained earnings $ 2,139.6
3.3
$ 2,142.9



Remainder of 2019	$	11.5
2020	22.3
2021	20.5
2022	18.2
2023	16.7
Thereafter	84.7
Total minimum lease payments	173.9
Less:
Imputed interest	(34.1		)
Current portion	(17.9		)
Present value of minimum lease payments, net of current portion	$	121.9

The weighted average remaining lease term for operating leases is approximately 10 years and the weighted average discount rate is 4.08%. Operating lease expense was $5.8 million and $11.6 million for the second quarter and first six months of 2019, respectively.

~~In accordance with the requirements of Topic 606, the disclosure~~As previously disclosed in Note 13 of the ~~impact~~Notes to Consolidated Financial Statements included in our 2018 Form 10-K and under the previous lease accounting, future minimum lease payments for operating leases having initial or remaining non-cancelable lease terms in excess of ~~adoption on our condensed consolidated income statement and balance sheet for the third quarter and nine months ended September 30, 2018 was~~one year were as follows (in millions):



	As of December 30, 2018
2019	$	23.2
2020	20.6
2021	18.4
2022	18.4
2023	11.8
Thereafter	48.2
Total minimum lease payments	$	140.6

For the third quarter ended September 30, 2018
Balance as Reported Topic ASC 606 Adjustments Balance Without ASC 606 Adoption
Assets
Accounts receivable, net $ 387.4
(1.2 ) $ 386.2
Unbilled receivables, net $ 164.4
(66.2 ) $ 98.2
Inventories, net $ 377.6
46.4
$ 424.0
Liabilities
Accrued liabilities $ 368.3
(6.3 ) $ 362.0
Stockholders' Equity
Retained earnings $ 2,432.5
(14.7 ) $ 2,417.8

For the third quarter ended September 30, 2018 For the nine months ended September 30, 2018
As Reported Topic ASC 606 Adjustments Without ASC 606 Adoption As Reported Topic ASC 606 Adjustments Without ASC 606 Adoption
Net sales $ 725.3
(1.1 ) $ 724.2
$ 2,153.4
(44.6 ) $ 2,108.8
Cost of sales $ 446.2
0.2
$ 446.4
$ 1,331.4
(29.5 ) $ 1,301.9
Provision for income taxes $ 9.9
(0.4 ) $ 9.5
$ 44.1
(3.7 ) $ 40.4
Net income $ 90.3
(0.9 ) $ 89.4
$ 242.7
(11.4 ) $ 231.3

~~Significant Accounting Policies Update~~Other

Our ~~significant accounting policies~~finance leases and subleases are detailed in “Note 2: Summary of Significant Accounting Policies” of our 2017 Form 10-K for the year ended December 31, 2017. Significant changes to our accounting policies as a result of adopting Topic 606 are discussed below.

~~Revenue Recognition~~

We determine the appropriate method by which we recognize revenue by analyzing the nature of the products or services being provided as well as the terms and conditions of contracts or arrangements entered into with our customers. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. A contract’s transaction price is allocated to each distinct good or service (i.e., performance obligation) identified in the contract, and each performance obligation is valued based on its estimated relative standalone selling price. For standard products or services, list prices generally represent the standalone selling price. For performance obligations where list price is not available, we typically use the expected cost plus a margin approach to estimate the standalone selling price for that performance obligation. Approximately 60% of our revenue is recognized at a point in time, with the remaining 40% recognized over time.

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. This type of revenue arrangement is typical for our commercial contracts within the Instrumentation, Digital Imaging, and Aerospace and Defense Electronics segments, and to a lesser extent for certain commercial contracts within the Engineered Systems segment relating to the sale of standard hydrogen/oxygen gas generators. In limited circumstances, customer specified acceptance criteria exist. If we cannot objectively demonstrate that the product meets those specifications prior to the shipment, the revenue is deferred until customer acceptance is obtained. Performance obligations recognized at a point in time can include variable consideration, such as product returns and sales allowances. The estimation of this variable consideration and determination of whether to include estimated amounts as a reduction in the transaction price is based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.

Revenue recognized over time relates primarily to contracts to design, develop and/or manufacture highly engineered products used in both defense and commercial applications. This type of revenue arrangement is typical of our U.S. government contracts and to a lesser extent for certain commercial contracts, with both contract types occurring across all segments. The customer typically controls the work in process as evidenced either by contractual termination clauses or by our right to

payment for costs incurred to date plus a reasonable profit for products or services that do not have an alternative use. 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. 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.

The majority of our over time contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. Over time contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of our contract modifications on over time contracts are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.

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 and cost, and making assumptions for schedule and technical issues. This EAC process requires management’s judgment to make reasonably dependable cost estimates. 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. The majority of revenue recognized over time uses an EAC process. The net aggregate effects of these changes in estimates on contracts accounted for under the cost-to-cost method in the first nine months of 2018 was approximately $2.0 million of favorable operating income, primarily related to changes in estimates that favorably impacted revenue. None of the effects of changes in estimates on any individual contract were material to the condensed consolidated statements of income for any period presented.

While extended or non-customary warranties do not represent a significant portion of our revenue, we recognize warranty services as a separate performance obligations when it is material to the contract. When extended or non-customary warranties represents a separate performance obligation, the revenue is deferred and recognized ratably over the extended warranty period.

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities, which are included in accrued liabilities and other long-term liabilities) on the Condensed Consolidated Balance Sheet. Under the typical payment terms of our over time contracts, the customer pays us either performance-based payments or progress payments. Amounts billed and due from our customers are classified as receivables on the Condensed Consolidated Balance Sheet. We may receive interim payments as work progresses, although for some contracts, we may be entitled to receive an advance payment. We recognize a liability for these interim and advance payments in excess of revenue recognized and present it as a contract liability which is included within accrued liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheet, which represented $112.4 million and $15.8 million as of September 30, 2018, and $110.3 million and $15.5 million as of January 1, 2018, respectively. Contract liabilities typically are not considered a significant financing component because these cash advances are used to meet working capital demands that can be higher in the early stages of a contract, and these cash advances protect us from the other party failing to adequately complete some or all of its obligations under the contract. When revenue recognized exceeds the amount billed to the customer, we record an unbilled receivable (contract asset) for the amount we are entitled to receive based on our enforceable right to payment. The unbilled receivable balance increased from the beginning of the year by $45.6 million, or 38.4%, primarily due to work performed ahead of billings on certain over time revenue contracts primarily in our Aerospace and Defense Electronics and Instrumentation operating segments. Contract liabilities increased slightly from the beginning of the year by $2.4 million, or 1.9%. The Company recognized revenue of $58.1 million during the year ended September 30, 2018 from contract liabilities that existed at the beginning of year. The Company recognizes the incremental

costs of obtaining or fulfilling a contract as expense when incurred if the amortization period of the asset is one year or less. Incremental costs to obtain or fulfill contracts with an amortization period greater than one year were not material.

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed as of the period end date and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity). As of September 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,706.6 million. The Company expects approximately 83% of remaining performance obligations to be recognized into revenue within the next twelve months, with the remaining 17% recognized thereafter.

Note 2. Accumulated Other Comprehensive Loss

The changes in AOCI by component, net of tax, for the ~~third~~second quarter ~~ended~~ and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~October~~July 1, ~~2017~~2018 are as follows (in millions):

Foreign Currency Translation Cash Flow Hedges and Other Pension and Postretirement Benefits Total
Balance as of July 1, 2018 $ (144.1 ) $ (4.0 ) $ (218.4 ) $ (366.5 )
   Other comprehensive income/(loss) before reclassifications (0.8 ) 2.5
—
1.7
   Amounts reclassified from AOCI —
—
4.8
4.8
Net other comprehensive income (loss) (0.8 ) 2.5
4.8
6.5
  Reclassification of income tax effects for ASU 2018-02 —
—
(47.6 ) (47.6 )
Balance as of September 30, 2018 $ (144.9 ) $ (1.5 ) $ (261.2 ) $ (407.6 )

Foreign Currency Translation Cash Flow Hedges and Other Pension and Postretirement Benefits Total
Balance as of July 2, 2017 $ (144.0 ) $ 0.1
$ (242.8 ) $ (386.7 )
   Other comprehensive income/(loss) before reclassifications 36.8
0.6
—
37.4
   Amounts reclassified from AOCI —
1.3
3.2
4.5
Net other comprehensive income 36.8
1.9
3.2
41.9
Balance as of October 1, 2017 $ (107.2 ) $ 2.0
$ (239.6 ) $ (344.8 )



	Foreign Currency Translation			Cash Flow Hedges and Other			Pension and Postretirement Benefits			Total
Balance as of March 31, 2019	$	(164.5	)	$	(3.1	)	$	(302.2	)	$	(469.8	)
Other comprehensive income/(loss) before reclassifications	(4.6		)	0.5			—			(4.1		)
Amounts reclassified from AOCI	—			0.8			4.9			5.7
Net other comprehensive income/(loss)	(4.6		)	1.3			4.9			1.6
Balance as of June 30, 2019	$	(169.1	)	$	(1.8	)	$	(297.3	)	$	(468.2	)

	Foreign Currency Translation			Cash Flow Hedges and Other			Pension and Postretirement Benefits			Total
Balance as of April 1, 2018	$	(84.8	)	$	(1.1	)	$	(271.1	)	$	(357.0	)
Other comprehensive income/(loss) before reclassifications	(59.3		)	2.6			—			(56.7		)
Amounts reclassified from AOCI	—			(5.5		)	5.1			(0.4		)
Net other comprehensive income/(loss)	(59.3		)	(2.9		)	5.1			(57.1		)
Balance as of July 1, 2018	$	(144.1	)	$	(4.0	)	$	(266.0	)	$	(414.1	)

Foreign Currency Translation Cash Flow Hedges and Other Pension and Postretirement Benefits Total
Balance at January 1, 2018 $ (102.0 ) $ 0.5
$ (227.8 ) $ (329.3 )
   Other comprehensive income/(loss) before reclassifications (42.9 ) 2.4
—
(40.5 )
   Amounts reclassified from AOCI —
(4.4 ) 14.2
9.8
Net other comprehensive income (loss) (42.9 ) (2.0 ) 14.2
(30.7 )
  Reclassification of income tax effects for ASU 2018-02 —
—
(47.6 ) (47.6 )
Balance at September 30, 2018 $ (144.9 ) $ (1.5 ) $ (261.2 ) $ (407.6 )

Foreign Currency Translation Cash Flow Hedges and Other Pension and Postretirement Benefits Total
Balance as of January 2, 2017 $ (198.8 ) $ (2.8 ) $ (249.6 ) $ (451.2 )
   Other comprehensive income/(loss) before reclassifications 91.6
(1.5 ) —
90.1
   Amounts reclassified from AOCI —
6.3
10.0
16.3
Net other comprehensive income 91.6
4.8
10.0
106.4
Balance as of October 1, 2017 $ (107.2 ) $ 2.0
$ (239.6 ) $ (344.8 )



	Foreign Currency Translation			Cash Flow Hedges and Other			Pension and Postretirement Benefits			Total
Balance as of December 30, 2018	$	(181.5	)	$	(4.9	)	$	(306.8	)	$	(493.2	)
Other comprehensive income before reclassifications	12.4			3.7			—			16.1
Amounts reclassified from AOCI	—			(0.6		)	9.5			8.9
Net other comprehensive income	12.4			3.1			9.5			25.0
Balance as of June 30, 2019	$	(169.1	)	$	(1.8	)	$	(297.3	)	$	(468.2	)

	Foreign Currency Translation			Cash Flow Hedges and Other			Pension and Postretirement Benefits			Total
Balance as of December 31, 2017	(102.0		)	0.5			(227.8		)	(329.3		)
Other comprehensive loss before reclassifications	(42.1		)	—			—			(42.1		)
Amounts reclassified from AOCI	—			(4.5		)	9.4			4.9
Net other comprehensive income/(loss)	(42.1		)	(4.5		)	9.4			(37.2		)
Reclassification of income tax effects for ASU 2018-02	—			—			(47.6		)	(47.6		)
Balance as of July 1, 2018	(144.1		)	(4.0		)	(266.0		)	(414.1		)

The reclassifications out of AOCI to net income for the ~~third~~second quarter and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~October~~July 1, ~~2017~~2018 are as follows (in millions):



	Amount Reclassified from AOCI for the Three Months Ended			Amount Reclassified from AOCI for the Three Months Ended			Statement of Income
	June 30, 2019			July 1, 2018			Presentation
(Gain) loss on cash flow hedges:
(Gain) loss recognized in income on derivatives	$	1.1		$	(7.4	)	See Note 4
Income tax impact	(0.3		)	1.9			Provision for income taxes
Total	$	0.8		$	(5.5	)

Amortization of defined benefit pension and postretirement plan items:
Amortization of prior service cost	$	(1.5	)	$	(1.5	)	Costs and expenses
Amortization of net actuarial loss	7.9			8.1			Costs and expenses
Total before tax	6.4			6.6
Income tax impact	(1.5		)	(1.5		)	Provision for income taxes
Total	$	4.9		$	5.1

Amount Reclassified from AOCI Three Months Ended Amount Reclassified from AOCI Three Months Ended Statement of Income
September 30, 2018 October 1, 2017 Presentation
(Gain) loss on cash flow hedges:
(Gain) loss recognized in income on derivatives $ —
$ 1.8
See note 2
Income tax impact —
(0.5 ) Provision for income taxes
Total $ —
$ 1.3

Amortization of defined benefit pension and postretirement plan items:
Amortization of prior service cost $ (1.5 ) $ (1.5 ) Costs and expenses
Amortization of net actuarial loss 7.8
6.7
Costs and expenses
Total before tax 6.3
5.2

Income tax impact (1.5 ) (2.0 ) Provision for income taxes
Total $ 4.8
$ 3.2

Amount Reclassified from AOCI Nine Months Ended Amount Reclassified from AOCI Nine Months Ended Statement of Income
September 30, 2018 October 1, 2017 Presentation
(Gain) loss on cash flow hedges:
(Gain) loss recognized in income on derivatives $ (6.2 ) $ 8.5
See note 2
Income tax impact 1.8
(2.2 ) Provision for income taxes
Total $ (4.4 ) $ 6.3

Amortization of defined benefit pension and postretirement plan items:
Amortization of prior service cost $ (4.5 ) $ (4.5 ) Costs and expenses
Amortization of net actuarial loss 23.2
20.8
Costs and expenses
Total before tax 18.7
16.3

Income tax impact $ (4.5 ) $ (6.3 ) Provision for income taxes
Total $ 14.2
$ 10.0



	Amount Reclassified from AOCI Six Months Ended			Amount Reclassified from AOCI Six Months Ended			Statement of Income
	June 30, 2019			July 1, 2018			Presentation
Gain on cash flow hedges:
Gain recognized in income on derivatives	$	(0.9	)	$	(6.1	)	See Note 4
Income tax impact	0.3			1.6			Provision for income taxes
Total	$	(0.6	)	$	(4.5	)

Amortization of defined benefit pension and postretirement plan items:
Amortization of prior service cost	(3.0		)	(3.0		)	Costs and expenses
Amortization of net actuarial loss	15.5			15.4			Costs and expenses
Total before tax	12.5			12.4
Income tax impact	$	(3.0	)	$	(3.0	)	Provision for income taxes
Total	$	9.5		$	9.4

Note 3. Business Combinations, Goodwill and Acquired Intangible Assets

Acquisition of ~~e2v~~the scientific imaging businesses of Roper Technologies, Inc.

On ~~March 28, 2017, Teledyne completed~~February 5, 2019, we acquired the ~~acquisition~~scientific imaging businesses of ~~all of the outstanding common stock of e2v~~Roper Technologies, Inc. for ~~$770.7~~$225.0 million ~~including stock options and assumed debt, net of $24.4 million of cash acquired.~~in cash. Principally located in ~~Chelmsford,~~the United ~~Kingdom~~States and ~~Grenoble, France, most~~Canada, the acquired businesses are part of ~~e2v’s operations are included in~~ the Digital Imaging segment. The acquired businesses include Princeton Instruments, Photometrics and ~~Aerospace~~Lumenera. The acquired businesses provide a range of imaging solutions, primarily for life sciences, academic research and ~~Defense Electronics segments. The Instrumentation segment includes a small portion of e2v’s operations.~~

~~The first nine months of 2017 includes pretax charges of $28.1 million related to~~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. Teledyne funded the acquisition ~~of e2v, which included $13.0 million in transaction costs, including stamp duty, advisory, legal~~with borrowings under its credit facility and other consulting fees and other costs recorded to selling, general and administrative expenses, $6.8 million in inventory fair value step-up amortization expense recorded to cost of sales, $2.3 million in bank bridge facility commitment expense recorded to interest expense and $6.0 million related to a foreign currency option contract expense recorded as other expense. Of these amounts, $9.4 million impacted segment operating income.

cash on hand. The ~~unaudited proforma information below, as required by GAAP, assumes that e2v had been acquired at the beginning~~results of the ~~2017 fiscal year and includes~~acquisition have been included in Teledyne’s results since the effect of increased interest expense on net acquisition debt and the amortization of acquired intangible assets. The 2017 proforma amount also include $12.3 million in transaction costs, including legal and other consulting fees, $11.5 million in expense related to a foreign currency option contract to hedge the e2v purchase price, $2.8 million in bridge financing costs and $1.4 million in inventory fair value step-up amortization expense. These amounts totaling $28.0 million should be considered non-recurring costs that were necessary to complete the acquisition and are not indicativedate of the ~~ongoing operations of the combined company.~~

This unaudited proforma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have resulted had the acquisition been in effect at the beginning of the periods presented. In addition, the unaudited proforma results are not intended to be a projection of future results and do not reflect any operating efficiencies or cost savings that might be achievable.

~~The following table presents proforma net sales, net income and earnings per share data assuming e2v was acquired at the beginning of the 2017 fiscal year:~~

Third Quarter (a) Nine Months (a)
(unaudited - in millions, except per share amounts) 2017 2017
Net sales $ 662.2
$ 1,992.4
Net income $ 69.0
$ 142.2
Basic earnings per common share $ 1.95
$ 4.04
Diluted earnings per common share $ 1.90
$ 3.93

~~a) The above unaudited proforma information is presented for the e2v acquisition as it is considered a material~~ acquisition.

~~SSI Acquisition~~

On July 20, 2017, a subsidiary of Teledyne acquired assets of Scientific Systems, Inc. (“SSI”) for $31.0 million in cash. Headquartered in State College, PA, SSI is part of the Instrumentation segment.

~~For a further description of the Company’s acquisition activity for fiscal year 2017, please refer to Note 3 of the Notes to Consolidated Financial Statements included in our 2017 Form 10-K.~~

Goodwill and Acquired Intangible Assets

Teledyne’s goodwill was ~~$1,755.5~~$1,888.0 million at ~~September~~June 30, ~~2018~~2019 and ~~$1,776.7~~$1,735.2 million at December ~~31, 2017.~~30, 2018. The ~~decrease~~increase in the balance of goodwill in ~~2018 included~~2019 resulted from $145.5 million in goodwill from the ~~impact~~acquisition of ~~exchange rate changes, partially offset by adjustments for~~ the ~~purchase accounting allocation for the e2v and SSI acquisitions.~~scientific imaging businesses of Roper Technologies, Inc. Teledyne’s net acquired intangible assets were ~~$357.8~~$379.9 million at ~~September~~June 30, ~~2018~~2019 and ~~$398.9~~$344.3 million at December ~~31, 2017.~~30, 2018. The ~~decrease~~increase in the balance of net acquired intangible assets ~~reflected amortization and~~resulted from $52.4 million in acquired intangible assets from the ~~impact~~acquisition of ~~exchange rate changes,~~the scientific imaging businesses of Roper Technologies, Inc., partially offset by ~~adjustments for the purchase accounting allocation for the SSI acquisition.~~amortization of acquired intangible assets. The Company ~~completed~~is in the process of specifically identifying the amount to be assigned to certain assets, including acquired intangible assets, and liabilities and the related impact on taxes and goodwill for the ~~e2v~~acquisition of the scientific imaging businesses of Roper Technologies, Inc. since there was insufficient time between the acquisition date and ~~SSI acquisitions, including~~ the ~~allocation by segment, resulting in an increase~~end of the period to ~~goodwill of $3.9 million~~finalize the analysis.

Pending Acquisition

See Note 14 to these condensed consolidated financial statements for ~~e2v and $4.8 million for SSI in 2018.~~information about a pending acquisition.

Note 4. Derivative Instruments

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 foreign currency risk management objective is to protect the USU.S. dollar value of future cash flows and minimize the volatility of reported 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. The Company utilizes foreign currency forward contracts to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in Canadian dollars for our Canadian companies, including Teledyne DALSA and in British pounds for our UK companies, including Teledyne e2v. These contracts are designated and qualify as cash flow hedges. The Company has converted a USU.S. dollar denominated, variable rate debt obligation into a euro fixed rate obligation using a ~~receive-float,~~receive float, pay fixed cross currency swap. This cross currency swap is designated as a cash flow hedge.

Cash Flow Hedging Activities

The effectiveness of the forward contract cash flow hedge, ~~which exclude time value,~~ and the cross currency swap cash flow hedge is assessed prospectively and retrospectively on a monthly basis using ~~regression~~quantitative and qualitative 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 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 ~~cost of sales~~revenue in our consolidated statements of income. For the cross currency swap cash flow hedge, effective amounts are recorded in AOCI, and reclassified into interest expense in the consolidated statements of income. In addition, for the cross currency swap 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 liability. Net deferred gains recorded in AOCI, net of tax, for the forward contracts that will mature in the next twelve months total $0.2 million. These ~~gains~~losses are expected to be offset by anticipated ~~losses~~gains in the value of the forecasted underlying hedged item. Amounts related to the cross currency swap expected to be reclassified from AOCI into income in the ~~coming~~next twelve months total ~~$2.1~~$0.1 million.

In the event that the gains or losses in AOCI are deemed to be ineffective, the ineffective portion of gains or losses resulting from changes in fair value, if any, is reclassified to other income and expense. 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. As of ~~September~~June 30, ~~2018,~~2019, Teledyne ~~DALSA~~ had foreign currency forward contracts designated as cash flow hedges to buy Canadian dollars and to sell U.S. dollars totaling ~~$102.0~~$80.1 million. These foreign currency forward contracts have maturities ranging from ~~December 2018~~September 2019 to ~~February~~August 2020. ~~e2v Limited UK~~Teledyne had foreign currency forward contracts designated as cash flow hedges to buy British pounds and to sell U.S. dollars totaling ~~$18.3~~$21.2 million. These foreign currency forward contracts have maturities ranging from ~~December 2018~~September 2019 to ~~February~~November 2020. ~~Together the contracts had a negative fair value of $0.1 million.~~ The cross currency swap has notional amounts of €93.0 million equivalent to $100.0 million, and matures in October 2019.

The effect of derivative instruments designated as cash flow hedges in the condensed consolidated financial statements for the ~~third~~second quarter and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~October~~July 1, ~~2017~~2018 was as follows (in millions):


	Third Quarter						Nine Months						Second Quarter						Six Months
	2018			2017			2018			2017			2019			2018			2019			2018
Net gain (loss) recognized in AOCI (a)	$	3.2		$	1.0		$	3.1		$	(1.9	)	$	0.7		$	3.6		$	5.0		$	(0.1	)
Net gain (loss) reclassified from AOCI into cost of sales (a)	$	—		$	(0.8	)	$	2.0		$	—
Net gain (loss) reclassified from AOCI into revenue (a)													$	(0.6	)	$	0.8		$	(1.2	)	$	2.0
Net gain reclassified from AOCI into interest expense (a)	$	0.6		$	0.4		$	1.7		$	0.9		$	0.7		$	0.6		$	1.5		$	1.1
Net gain (loss) reclassified from AOCI into other income and expense, net (b)	$	(0.6	)	$	(3.0	)	$	2.4		$	(9.3	)	$	(1.2	)	$	6.0		$	0.6		$	3.0
Net foreign exchange gain (loss) recognized in other income and expense, net (c)	$	(0.2	)	$	0.8		$	(0.4	)	$	(0.8	)
Net foreign exchange gain (loss) recognized in other income, net (c)													$	(0.2	)	$	(0.2	)	$	(0.4	)	$	(0.2	)

a) Effective portion, pre-tax

b) Amount reclassified to offset earnings impact of liability hedged by cross currency swap

c) Amount excluded from effectiveness testing

Non-Designated Hedging Activities

In addition, the Company utilizes foreign currency forward contracts to mitigate foreign exchange rate risk associated with ~~foreign-currency-denominated~~foreign currency denominated monetary assets and liabilities, including intercompany receivables and payables. As of ~~September~~June 30, ~~2018,~~2019, Teledyne had non-designated foreign currency contracts of this type in the following pairs (in millions):



Contracts to Buy			Contracts to Sell
Currency	Amount		Currency	Amount
Canadian Dollars	C$	23.2	U.S. Dollars	US$	18.0
Canadian Dollars	C$	15.4	Euros	€	10.3
Great Britain Pounds	£	1.2	Australian Dollars	A$	2.1
Great Britain Pounds	£	33.3	U.S. Dollars	US$	42.4
Singapore Dollars	S$	2.3	U.S. Dollars	US$	1.7
Euros	€	35.4	U.S. Dollars	US$	40.4
U.S. Dollars	US$	1.9	Japanese Yen	¥	200.0
Danish Krone	DKR	60.2	U.S. Dollars	US$	9.2
Great Britain Pounds	£	4.9	Euros	€	5.5
Great Britain Pounds	£	2.5	Hong Kong Dollars	HK$	24.8

Contracts to Buy Contracts to Sell
Currency Amount Currency Amount
Canadian Dollars C$ 59.2
U.S. Dollars US$ 45.5
Canadian Dollars C$ 15.8
Euros € 10.4
Euros € 55.0
Great Britain Pounds £ 49.1
Great Britain Pounds £ 1.2
Australian Dollars A$ 2.2
Great Britain Pounds £ 97.7
U.S. Dollars US$ 128.1
Singapore Dollars S$ 2.1
U.S. Dollars US$ 1.5
Euros € 26.9
U.S. Dollars US$ 31.3
U.S. Dollars US$ 0.9
Japanese Yen ¥ 100.0
Danish Krone DKR 62.6
U.S. Dollars US$ 9.8

The above table includes non-designated hedges derived from terms contained in triggered or previously designated cash flow hedges. 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. Teledyne does not use foreign currency forward contracts for speculative or trading purposes.

The effect of derivative instruments not designated as cash flow hedges recognized in other income and expense for the ~~third~~second quarter and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 was ~~income~~expense of ~~$3.1~~$0.7 million and ~~expense of $14.7~~income $0.9 million, respectively. The effect of derivative instruments not designated as cash flow hedges in other income and expense for the ~~third~~second quarter and ~~nine~~six months ended ~~October~~July 1, ~~2017~~2018 was ~~income~~expense of ~~$4.8~~$17.0 million and ~~expense of $1.7~~$17.8 million, respectively. ~~These losses were~~The income/expense was largely offset by losses/gains in the value of the underlying hedged item excluding the impact of forward points.

Fair Value of Derivative Financial Instruments

The Company has elected to use the income approach to value the derivatives, using observable Level 2 market expectations at measurement date and standard valuation techniques to convert future amounts to a single present amount. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR and EURIBOR) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR and EURIBOR cash and swap rates, foreign currency forward rates and cross currency basis spreads). Mid-market pricing is used as a practical expedient for fair value measurements. The fair value measurement of an asset or liability must reflect the nonperformance risk of the entity and the counterparty. Therefore, the impact of the counterparty’s creditworthiness when in an asset position and the Company’s creditworthiness when in a liability position has also been factored into the fair value measurement of the derivative instruments and did not have a material impact on the fair value of these derivative instruments. Both the counterparty and the Company are expected to continue to perform under the contractual terms of the instruments.

The fair values of the Company’s derivative financial instruments are presented below. All fair values for these derivatives were measured using Level 2 information as defined by the accounting standard hierarchy (in millions):



Asset/(Liability) Derivatives	Balance sheet location	June 30, 2019			December 30, 2018
Derivatives designated as hedging instruments:
Cash flow forward contracts	Other assets	$	0.8		$	—
Cash flow cross currency swap	Accrued liabilities	(5.8		)	(6.3		)
Cash flow forward contracts	Accrued liabilities	(0.9		)	(4.2		)
Total derivatives designated as hedging instruments		(5.9		)	(10.5		)
Derivatives not designated as hedging instruments:
Non-designated forward contracts	Other current assets	0.1			—
Non-designated forward contracts	Accrued liabilities	(0.4		)	(0.6		)
Total derivatives not designated as hedging instruments		(0.3		)	(0.6		)
Total liability derivatives, net		$	(6.2	)	$	(11.1	)

Asset/(Liability) Derivatives Balance sheet location September 30, 2018 December 31, 2017
Derivatives designated as hedging instruments:
Cash flow forward contracts Other assets $ 0.8
$ 3.8
Cash flow cross currency swap Other assets —
2.2
Cash flow cross currency swap Accrued liabilities (8.0 ) (13.9 )
Cash flow forward contracts Accrued liabilities (0.9 ) —
Total derivatives designated as hedging instruments (8.1 ) (7.9 )
Derivatives not designated as hedging instruments:
Non-designated forward contracts Other current assets 0.1
4.9
Non-designated forward contracts Accrued liabilities (0.4 ) (1.2 )
Total derivatives not designated as hedging instruments (0.3 ) 3.7
Total liability derivatives, net $ (8.4 ) $ (4.2 )

Note 5. Earnings Per Share

For the ~~third~~second quarter of ~~2018,~~2019, no stock options were excluded in the computation of ~~diluted~~ earnings per share. For the first ~~nine~~six months of ~~2018, 2,580~~2019, 3,240 stock options were excluded in the computation of diluted earnings per share because they had exercise prices that were greater than the weighted average market price of the Company’s common stock during the period. For the ~~third~~second quarter of ~~2017,~~2018, no stock options were excluded in the computation of ~~diluted~~ earnings per share. For the first ~~nine~~six months of ~~2017, 600~~2018, 185,292 stock options were excluded in the computation of diluted earnings per share because they had exercise prices that were greater than the weighted average market price of the Company’s common stock during the period.

The weighted average number of common shares used in the calculation of basic and diluted earnings per share consisted of the following (in millions):



	Second Quarter		Six Months
	2019	2018	2019	2018
Weighted average basic common shares outstanding	36.2	35.8	36.2	35.7
Effect of dilutive securities (primarily stock options)	1.2	1.2	1.1	1.2
Weighted average diluted common shares outstanding	37.4	37.0	37.3	36.9

Third Quarter Nine Months
2018 2017 2018 2017
Weighted average basic common shares outstanding 35.9
35.3
35.7
35.2
Effect of dilutive securities (primarily stock options) 1.3
1.1
1.3
1.0
Weighted average diluted common shares outstanding 37.2
36.4
37.0
36.2

Note 6. Stock-Based Compensation Plans

Teledyne has long-term incentive plans pursuant to which it has granted non-qualified stock options, restricted stock and performance shares to certain employees. The Company also has non-employee Board of Director stock compensation plans, pursuant to which ~~non-qualified~~common stock, stock options ~~(prior to 2015), common stock~~ and restricted stock units have been issued to its directors.

Stock Incentive Plan

~~The following disclosures are based on stock options granted to Teledyne’s employees and directors.~~ Stock option compensation expense was ~~$4.6~~$5.8 million for the ~~third~~second quarter of ~~2018~~2019 and was ~~$3.2~~$5.4 million for the ~~third~~second quarter of ~~2017.~~2018. Stock option compensation expense was ~~$14.9~~$14.7 million for the first ~~nine~~six months of ~~2018~~2019 and was ~~$11.0~~$10.3 million for the first ~~nine~~six months of ~~2017.~~2018. Employee stock option grants are charged to expense evenly over the three year vesting ~~period.~~period except for stock options that were granted in January 2019 to Teledyne’s President and Chief Executive Officer and Teledyne’s Executive Chairman which were expensed immediately. For ~~2018,~~2019, the Company currently expects approximately ~~$20.0~~$26.5 million in stock option compensation expense based on stock options currently outstanding. This amount can be impacted by employee retirements and terminations or stock options granted during the remainder of the year. The Company issues shares of common stock upon the exercise of stock options.

The following assumptions were used in the valuation of stock options granted in ~~2018:~~2019:



	~~2018~~2019
Expected volatility	~~31.0%~~26.7%
Risk-free interest rate range	~~1.99%~~2.47% to ~~2.58%~~2.70%
Expected life in years	~~6.8~~6.6
Expected dividend yield	—

Based on the assumptions used in the valuation of stock options, the grant date weighted average fair value of stock options granted in ~~2018~~2019 was ~~$71.89~~$72.00 per share.

Stock option transactions for the ~~third~~second quarter and ~~nine~~first six months ~~ended September 30, 2018~~of 2019 are summarized as follows:



	2019
	Second Quarter				Six Months
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Beginning balance	2,317,523		$	124.24	2,064,740		$	104.66
Granted	—		$	—	390,789		$	217.58
Exercised	(139,978	)	$	77.04	(260,761	)	$	80.62
Canceled	(6,702	)	$	187.44	(23,925	)	$	175.95
Ending balance	2,170,843		$	127.09	2,170,843		$	127.09
Options exercisable at end of period	1,410,369		$	79.43	1,410,369		$	79.43

2018
Third Quarter Nine Months
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Beginning balance 2,290,893
$ 103.11
2,285,703
$ 83.73
Granted 2,580
$ 231.98
377,472
$ 192.28
Exercised (163,702 ) $ 75.13
(504,674 ) $ 71.63
Canceled (51,467 ) $ 139.87
(80,197 ) $ 130.87
Ending balance 2,078,304
$ 104.57
2,078,304
$ 104.57
Options exercisable at end of period 1,270,019
$ 78.32
1,270,019
$ 78.32

Performance Share Plan and Restricted Stock Award Program

InUnder the 2015 to 2017 Performance Share Plan, in the first quarter of 2019 the Company issued 8,586 shares of Teledyne common stock and in the first quarter of 2018, the Company issued 6,481 shares of Teledyne common ~~stock for the first of three annual payouts under the 2015 to 2017 Performance Share Plan.~~stock. A total of ~~31,117~~15,578 shares remain to be issued in ~~equal installments in 2019 and 2020.~~ 2020, subject to the terms of the plan.

In the first quarter of 2018, the performance cycle for the three-year period ending December 31, 2020, was set. Under the plan, the ~~target~~maximum number of shares that could be issued in three equal installments in 2021, 2022 and 2023, is ~~25,989 (with a maximum of 51,978).~~59,922.

The following table shows the restricted stock activity for the first ~~nine~~six months of ~~2018:~~2019:



	Shares		Weighted average fair value per share
Balance, December 30, 2018	74,220		$	108.05
Granted	17,522		$	200.00
Vested	(35,330	)	$	72.91
Balance, June 30, 2019	56,412		$	158.62

Shares Weighted average fair value per share
Balance, December 31, 2017 88,436
$ 90.63
Granted 16,733
$ 171.80
Vested (28,855 ) $ 92.74
Forfeited/Canceled (2,994 ) $ 118.55
Balance, September 30, 2018 73,320
$ 107.19

Note 7. Inventories

Inventories are stated at current cost net of reserves for excess, slow moving and obsolete ~~inventory, less progress payments.~~inventory. Inventories are valued under the FIFO method, LIFO method ~~and~~or average cost method. Inventories at cost determined on the average cost or the FIFO methods were ~~$342.5~~$358.3 million at ~~September~~June 30, ~~2018~~2019 and ~~$348.6~~$331.3 million at December ~~31, 2017.~~30, 2018. The remainder of the inventories using the LIFO method ~~were $44.4~~is $41.1 million at ~~September~~June 30, ~~2018~~2019 and ~~$63.6~~$42.3 million at December ~~31, 2017.~~30, 2018. Interim LIFO calculations are based on the Company’s estimates of expected year-end inventory levels and costs since an actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Because these estimates are subject to many factors beyond the Company’s control, interim results are subject to the final year-end LIFO inventory valuation.



	Balance at
Inventories (in millions):	June 30, 2019			December 30, 2018
Raw materials and supplies	$	221.5		$	205.6
Work in process	124.6			117.5
Finished goods	53.3			50.5
	399.4			373.6
Reduction to LIFO cost basis	(9.0		)	(9.3		)
Total inventories, net	$	390.4		$	364.3

Balance at
Inventories (in millions): September 30, 2018 December 31, 2017
Raw materials and supplies $ 204.4
$ 200.2
Work in process 128.4
157.9
Finished goods 54.1
54.1
386.9
412.2
Progress payments —
(1.4 )
Reduction to LIFO cost basis (9.3 ) (10.6 )
Total inventories, net $ 377.6
$ 400.2

Note 8. Customer Contracts

Estimate at Completion Process

For over time contracts using the cost-to-cost method, 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 and cost, 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 reviewed and reassessed quarterly. The majority of revenue recognized over time uses an EAC process. The net aggregate effects of these changes in estimates on contracts accounted for under the cost-to-cost method in the first six month of 2019 was approximately $12.6 million of favorable operating income, primarily related to favorable changes in estimates that impacted revenue, and, to a lesser degree, cost of sales, within the Digital Imaging operating segment. The net aggregate effects of these changes in estimates on contracts accounted for under the cost-to-cost method in the first six months of 2018 was less than $0.1 million of unfavorable operating income, respectively, primarily related to unfavorable changes in estimates that impacted revenue. None of the effects of changes in estimates on any individual contract were material to the condensed consolidated statements of income for any period presented.

Contract Liabilities

We recognize a liability for interim and advance payments in excess of revenue recognized and present it as a contract liability which is included within accrued liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheet, which represented $114.5 million and $19.9 million as of June 30, 2019, and $111.5 million and $15.3 million as of December 30, 2018, respectively.

The Company recognized revenue of $65.1 million during the six months ended June 30, 2019 from contract liabilities that existed at the beginning of year. The Company recognizes the incremental costs of obtaining or fulfilling a contract as expense when incurred if the amortization period of the asset is one year or less. Incremental costs to obtain or fulfill contracts with an amortization period greater than one year were not material.

Remaining Performance Obligations

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed as of the period end date and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity). As of June 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,697.3 million. The Company expects approximately 79% of remaining performance obligations to be recognized into revenue within the next twelve months, with the remaining 21% recognized thereafter.

Product Warranty ~~Reserve~~Costs

Some of the Company’s products are subject to specified warranties, and the Company provides for the estimated cost of product warranties. The adequacy of the warranty reserve is assessed regularly, and the reserve is adjusted as necessary based on a review of historic warranty experience with respect to the applicable business or products, as well as the length and actual terms of the warranties. The warranty reserve is included in current and long-term accrued liabilities on the ~~balance sheet.~~Condensed Consolidated Balance Sheet.



	Six Months
Warranty Reserve (in millions):	2019			2018
Balance at beginning of year	$	21.0		$	21.1
Accruals for product warranties charged to expense	5.1			4.4
Cost of product warranty claims	(4.6		)	(3.9		)
Acquisition	0.3			—
Balance at end of period	$	21.8		$	21.6

Nine Months
Warranty Reserve (in millions): 2018 2017
Balance at beginning of year $ 21.1
$ 18.4
Accruals for product warranties charged to expense 7.6
4.8
Cost of product warranty claims (6.8 ) (5.3 )
Acquisitions —
3.1
Balance at end of period $ 21.9
$ 21.0

Note 9. Income Taxes

The income tax provision is calculated using an estimated annual effective tax rate, based upon expected annual income, permanent items, statutory rates and planned tax strategies in the various jurisdictions in which the Company operates. However, losses in certain jurisdictions and discrete items, such as the resolution of uncertain tax positions, are treated separately.

On December 22, 2017, the Tax Act was enacted. The Tax Act 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 repatriation tax on deemed repatriated earnings of foreign subsidiaries. As a result of the Tax Act, Teledyne incurred provisional charges of $4.7 million in the fourth quarter of 2017 primarily due to the repatriation tax and the remeasurement of U.S. deferred tax assets and liabilities. The impacts of the Tax Act may differ from this estimate, possibly materially (and the amount of the provisional charge may accordingly be adjusted over the course of 2018), due to changes in interpretations and assumptions Teledyne has made, guidance that may be issued, and actions Teledyne may take as a result of the Tax Act. In the first quarter of 2018, the provisional charge was adjusted by an additional $0.6 million. In the third quarter of 2018, this additional provisional charge was reversed, following guidance issued by the Internal Revenue Service in the third quarter of 2018. The Company will evaluate new guidance as it is issued and will finalize the computation of the charge in the fourth quarter of 2018.

The Company’s effective income tax rate for the ~~third~~second quarter and first ~~nine~~six months of ~~2018~~2019 was ~~9.9%~~18.2% and ~~15.4%~~18.5%, respectively. The Company’s effective income tax rate for the ~~third~~second quarter and first ~~nine~~six months of ~~2017~~2018 was ~~15.6%~~17.7% and ~~19.7%~~18.3%, respectively. The ~~third~~second quarter and first ~~nine~~six months of ~~2018~~2019 include net discrete income tax benefits of ~~$11.4~~$4.3 million and ~~$16.9~~$7.4 million, respectively. The ~~2018 third~~2019 second quarter and first ~~nine~~six months of net discrete tax benefits includes ~~$5.0~~$4.8 million and ~~$12.7~~$7.7 million, respectively, related to share-based accounting. The ~~third~~second quarter and first ~~nine~~six months of ~~2017 included~~2018 includes net discrete income tax benefits of ~~$9.9~~$3.4 million and ~~$15.9~~$5.5 million, respectively. The ~~2017~~2018 second quarter and first ~~nine~~six months net discrete tax benefits includes a $7.7 million income tax benefit as a result of the remeasurement of uncertain tax positions due to expiration of statute of limitation, of which $7.4 million was recorded in the third quarter of 2017. The first nine months of 2017 also includes an $8.5 million income tax benefit related to the release of valuation allowance for which the deferred tax assets were determined more-likely-than-not to be realizable, of which $0.4 million was recorded in the third quarter. The first nine months of 2017 includes a $4.6 million income tax expense related to adjustments for uncertain tax positions. The 2017 third quarter and first nine months net discrete tax benefits includes $2.3$4.7 million and ~~$5.1~~$7.7 million, respectively, related to share-based accounting. The first six months of 2018 also includes an increase a provisional charge recorded as part of the Tax Cuts and Jobs Act of 2017 of $0.6 million recorded in the first quarter.

Excluding the net discrete income tax benefits in both ~~2018~~ periods, the effective tax rates would have been ~~21.3%~~21.6% for ~~both~~ the ~~third~~second quarter of 2019 and 21.9% for the first ~~nine~~six months of ~~2018.~~2019. Excluding the net discrete income tax benefits in both ~~2017~~ periods and the increase in the provisional charge, the effective tax rates would have been ~~27.7%~~21.0% for ~~both~~ the ~~third~~second quarter of 2018 and 21.3% for the first ~~nine~~six months of ~~2017. The decrease in the effective tax rate in both 2018 periods, primarily reflects the lower corporate income tax rates as part of the Tax Act.~~2018.

Note 10. Long-Term Debt ~~Capital Leases~~ and Letters of Credit



	Balance at
Long-Term Debt (in millions):	June 30, 2019			December 30, 2018
$750.0 million credit facility due March 2024, weighted average rate of 4.15% at June 30, 2019 and 5.50% at December 30, 2018	$	76.5		$	29.0
Term loan due October 2019, variable rate of 3.53% at June 30, 2019 and 3.63% at December 30, 2018, swapped to a Euro fixed rate of 0.7055%	100.0			100.0
2.61% Fixed Rate Senior Notes due December 2019	30.0			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	56.9			57.2
0.92% €100 Million Fixed Rate Senior Notes due April 2023	113.7			114.4
1.09% €100 Million Fixed Rate Senior Notes due April 2024	113.7			114.4
Other debt	6.9			8.8
Total debt	792.7			748.8
Less: current portion of long-term debt and debt issuance costs	(136.5		)	(138.7		)
Total long-term debt	$	656.2		$	610.1

Balance at
Long-Term Debt (in millions): September 30, 2018 December 31, 2017
$750.0 million credit facility due December 2020, weighted average rate of 2.72% at December 31, 2017 $ —
$ 165.0
Term loans due through January 2022, weighted average rate of 3.37% at September 30, 2018 and 2.94% at December 31, 2017 114.0
175.5
Term loan due October 2019, variable rate of 3.36% swapped to a Euro fixed rate of 0.7055% 100.0
100.0
2.61% Fixed Rate Senior Notes due December 2019 30.0
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
58.0
60.0
0.92% €100 Million Fixed Rate Senior Notes due April 2023
116.1
120.0
1.09% €100 Million Fixed Rate Senior Notes due April 2024
116.1
120.0
Other debt at various rates due through 2018 5.3
2.7
Total debt 834.5
1,068.2
Less: current portion of long-term debt and debt issuance costs (14.7 ) (4.3 )
Total long-term debt $ 819.8
$ 1,063.9
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.

Available borrowing capacity under the $750.0 million credit facility, which is reduced by borrowings and certain outstanding letters of credit, was ~~$714.8~~$644.8 million at ~~September~~June 30, ~~2018.~~2019. The credit agreements require the Company to comply with various financial and operating covenants and at ~~September~~June 30, ~~2018,~~2019, the Company was in compliance with these covenants. At June 30, 2019, Teledyne had $33.1 million in outstanding letters of credit.

Teledyne estimates the fair value of its long-term debt based on debt of similar type, rating and maturity and at comparable interest rates. The Company’s long-term debt is considered a level 2 fair value hierarchy and is valued based on observable market data. The estimated fair value of Teledyne’s long-term debt at ~~September~~June 30, ~~2018~~2019 and December ~~31, 2017,~~30, 2018, approximated the carrying value.

At September 30, 2018, the Company had $4.3 million in capital leases, of which $1.1 million is current. At December 31, 2017, the Company had $6.7 million in capital leases, of which $1.3 million was current. At September 30, 2018, Teledyne had $38.4 million in outstanding letters of credit.

Note 11. Lawsuits, Claims, Commitments, Contingencies and Related Matters

For a further description of the Company’s commitments and contingencies, reference is made to Note 14 of the Company’s financial statements as of and for the fiscal year ended December ~~31, 2017,~~30, 2018, included in the ~~2017~~2018 Form 10-K.

At ~~September~~June 30, 2019, the Company’s reserves for environmental remediation obligations totaled $6.2 million, of which $1.5 million is included in current accrued liabilities. At December 30, 2018, the Company’s reserves for environmental remediation obligations totaled ~~$5.1 million, of which $1.3 million is included in current accrued liabilities. At December 31, 2017, the Company’s reserves for environmental remediation obligations totaled $5.1~~$6.0 million. The Company evaluates whether it may be able to recover a portion of future costs for environmental liabilities from its insurance carriers and from third parties. The timing of expenditures depends on a number of factors that vary by site, including the nature and extent of contamination, the number of potentially responsible parties, the timing of regulatory approvals, the complexity of the investigation and remediation, and the standards for remediation. The Company expects that it will expend present accruals over many years and will complete remediation of all sites with which it has been identified in up to 30 years.

A number of other lawsuits, claims and proceedings have been or may be asserted against the Company, including those pertaining to product liability, acquisitions, patent infringement, contracts, environmental, employment and employee benefits matters. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to the Company, management does not believe that the disposition of any such pending matters is likely to have a material adverse effect on the Company’s financial statements.

Note 12. Pension Plans and Postretirement Benefits

For the domestic pension plans, the discount rate ~~decreased~~increased to ~~4.02%~~4.59% in ~~2018~~2019 compared with a ~~4.54%~~4.02% discount rate used in 2017. Pension expense associated with contracts pursuant to U.S. Government Cost Accounting Standards (“CAS”) was $3.2 million for the third quarter of 2018 and $3.5 million for the third quarter of 2017. Pension expense associated with contracts pursuant to CAS was $9.7 million for the first nine months of 2018 and $10.4 million for the first nine months of 2017. Pension expense determined under CAS can generally be recovered through the pricing of products and services sold to the U.S. Government.2018. Teledyne has not made any cash pension contributions to its domestic qualified pension plan since 2013. No cash pension contributions are planned for ~~2018~~2019 for the domestic qualified pension plan.


	Third Quarter						Nine Months						Second Quarter						Six Months
	2018			2017			2018			2017			2019			2018			2019			2018
Service cost — benefits earned during the period (in millions)	$	2.7		$	2.7		$	8.1		$	8.1		$	2.3		$	2.7		$	4.7		$	5.4

Pension non-service income (in millions):
Interest cost on benefit obligation	$	8.2		$	9.1		$	24.5		$	27.4		$	8.4		$	8.2		$	16.8		$	16.3
Expected return on plan assets	(17.9		)	(18.3		)	(53.7		)	(54.9		)	(16.6		)	(17.9		)	(33.1		)	(35.8		)
Amortization of prior service cost	(1.5		)	(1.5		)	(4.5		)	(4.5		)	(1.5		)	(1.5		)	(3.0		)	(3.0		)
Amortization of net actuarial loss	7.8			7.3			23.6			21.9			7.8			7.9			15.5			15.8
Curtailment/settlements													(0.1		)	—			(0.4		)	—
Pension non-service income	$	(3.4	)	$	(3.4	)	$	(10.1	)	$	(10.1	)	$	(2.0	)	$	(3.3	)	$	(4.2	)	$	(6.7	)

Teledyne sponsors several postretirement defined benefit plans that provide health care and life insurance benefits for certain eligible retirees.



	Second Quarter						Six Months
Postretirement benefits non-service (income)/expense (in millions):	2019			2018			2019			2018
Interest cost on benefit obligation	$	0.1		$	0.1		$	0.2		$	0.2
Amortization of net actuarial gain	(0.1		)	(0.1		)	(0.1		)	(0.2		)
Postretirement benefits non-service (income)/expense	$	—		$	—		$	0.1		$	—

Third Quarter Nine Months
Postretirement benefits non-service (income)/expense (in millions): 2018 2017 2018 2017
Interest cost on benefit obligation $ 0.1
$ 0.1
$ 0.3
$ 0.3
Amortization of net actuarial gain (0.1 ) (0.1 ) (0.3 ) (0.3 )
Postretirement benefits non-service (income)/expense $ —
$ —
$ —
$ —

Note 13. Segment Information

Teledyne is a leading provider of sophisticated instrumentation, digital imaging products and software, aerospace and defense electronics, and engineered systems. Our customers include government agencies, aerospace prime contractors, energy exploration and production companies, major industrial companies and airlines. The Company has four reportable segments: Instrumentation; Digital Imaging; Aerospace and Defense Electronics; and Engineered Systems.

Segment results includes net sales and operating income by segment but excludes non-service retirement benefit income, equity income or loss, unusual non-recurring legal matter settlements, interest income and expense, gains and losses on the disposition of assets, sublease rental income and non-revenue licensing and royalty income, domestic and foreign income taxes and corporate office expenses. Corporate expense includes various administrative expenses relating to the corporate office and certain non-operating expenses, including certain acquisition-related transaction costs, not allocated to our segments.

In the second quarter of 2018, we realigned the reporting structure for certain of our microwave product groupings. These products, acquired with the acquisition of e2v were formerly reported as part of the Aerospace and Defense Electronics segment and are now reported as part of the Digital Imaging segment. Previously reported segment data has been adjusted to reflect this change. Total sales for these products were $24.2 million for fiscal year 2017.

The following table presents Teledyne’s segment disclosures (dollars in millions):


	Third Quarter						%		Nine Months						%		Second Quarter						%		Six Months						%
	2018			2017			Change		2018			2017			Change		2019			2018			Change		2019			2018			Change
Net sales(a):
Instrumentation	$	256.2		$	232.5		10.2	%	$	757.8		$	699.1		8.4	%	$	264.1		$	262.6		0.6	%	$	520.6		$	501.6		3.8	%
Digital Imaging	223.0			197.0			13.2	%	659.3			511.0			29.0	%	251.3			225.3			11.5	%	486.6			436.3			11.5	%
Aerospace and Defense Electronics	171.1			159.6			7.2	%	518.2			472.6			9.6	%	191.0			173.5			10.1	%	371.4			347.1			7.0	%
Engineered Systems	75.0			73.1			2.6	%	218.1			216.7			0.6	%	75.6			71.1			6.3	%	148.6			143.1			3.8	%
Total net sales	$	725.3		$	662.2		9.5	%	$	2,153.4		$	1,899.4		13.4	%	$	782.0		$	732.5		6.8	%	$	1,527.2		$	1,428.1		6.9	%
Operating income:
Instrumentation	$	35.7		$	34.6		3.2	%	$	104.4		$	95.3		9.5	%	$	49.0		$	40.9		19.8	%	$	88.9		$	68.7		29.4	%
Digital Imaging (b)	42.3			31.4			34.7	%	120.2			74.5			61.3	%
Digital Imaging																	52.5			43.3			21.2	%	89.5			77.9			14.9	%
Aerospace and Defense Electronics	33.3			28.2			18.1	%	98.7			82.2			20.1	%	39.4			33.7			16.9	%	73.2			65.4			11.9	%
Engineered Systems	9.3			8.6			8.1	%	23.9			23.7			0.8	%	7.3			7.4			(1.4	)%	12.0			14.6			(17.8	)%
Corporate expense ~~(b)~~	(15.1		)	(13.3		)	13.5	%	(41.8		)	(48.6		)	(14.0	)%	(16.3		)	(13.8		)	18.1	%	(34.4		)	(26.7		)	28.8	%
Operating income	$	105.5		$	89.5		17.9	%	$	305.4		$	227.1		34.5	%	$	131.9		$	111.5		18.3	%	$	229.2		$	199.9		14.7	%



(a)	Net sales excludes inter-segment sales of ~~$6.2~~$4.0 million and ~~$16.9~~$10.4 million for the ~~third~~second quarter and first ~~nine~~six months of ~~2018,~~2019, respectively, and ~~$6.4~~$5.5 million and ~~$17.8~~$10.7 million for the ~~third~~second quarter and ~~nine~~first six months of ~~2017, respectively.~~
~~(b)~~	The third quarter of 2017 included pretax charges of $2.9 million related to the acquisition of e2v which was recorded in the Digital Imaging segment. The first nine months of 2017 included pretax charges of $19.8 million related to the acquisition of e2v, of which $9.1 million was recorded in the Digital Imaging segment, $0.3 million was recorded in the Aerospace and Defense Electronics segment and $10.4 million was recorded in Corporate expense.2018.

Identifiable assets are those assets used in the operations of the segments. Corporate assets primarily consist of cash, deferred taxes, net pension assets/liabilities and other assets (in millions):



Identifiable assets:	June 30, 2019		December 30, 2018
Instrumentation	$	1,410.2	$	1,392.7
Digital Imaging	1,843.6		1,600.9
Aerospace and Defense Electronics	616.0		521.4
Engineered Systems	123.3		116.6
Corporate	207.1		177.7
Total identifiable assets	$	4,200.2	$	3,809.3

Identifiable assets: September 30, 2018 December 31, 2017
Instrumentation $ 1,378.0
$ 1,413.6
Digital Imaging 1,613.8
1,606.5
Aerospace and Defense Electronics 527.9
495.4
Engineered Systems 118.2
107.0
Corporate 275.3
223.9
Total identifiable assets $ 3,913.2
$ 3,846.4

Product Lines

The Instrumentation segment includes three product lines: Environmental Instrumentation, Marine Instrumentation and Test and Measurement Instrumentation. Teledyne’s other three segments each contain one product line.

The following tables provide a summary of the net sales by product line for the Instrumentation segment (in millions):



	Second Quarter				Six Months
Instrumentation	2019		2018		2019		2018
Marine Instrumentation	$	111.4	$	118.7	$	216.6	$	222.9
Environmental Instrumentation	87.4		85.7		173.8		166.9
Test and Measurement Instrumentation	65.3		58.2		130.2		111.8
Total	$	264.1	$	262.6	$	520.6	$	501.6

Third Quarter Nine Months
Instrumentation 2018 2017 2018 2017
Marine Instrumentation $ 106.2
$ 101.8
$ 329.1
$ 318.3
Environmental Instrumentation 85.5
77.7
252.4
230.2
Test and Measurement Instrumentation 64.5
53.0
176.3
150.6
Total $ 256.2
$ 232.5
$ 757.8
$ 699.1

We also disaggregate our revenue from contracts with customers by customer type, contract-type and geographic region for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. As we adopted Topic 606 using the modified retrospective transition method, prior period information was not adjusted for Topic 606 and comparative disclosures for disaggregated revenue are not required in the year of adoption.


	Third Quarter Ended September 30, 2018						Nine Months Ended September 30, 2018						Second Quarter Ended June 30, 2019						Six Months Ended June 30, 2019
	Customer Type						Customer Type						Customer Type						Customer Type
(in millions)	United States Government (a)		Other, Primarily Commercial		Total		United States Government (a)		Other, Primarily Commercial		Total		United States Government (a)		Other, Primarily Commercial		Total		United States Government (a)		Other, Primarily Commercial		Total
Net Sales:
Instrumentation	$	15.4	$	240.8	$	256.2	$	44.0	$	713.8	$	757.8	$	18.6	$	245.5	$	264.1	$	32.8	$	487.8	$	520.6
Digital Imaging	23.9		199.1		223.0		68.9		590.4		659.3		26.2		225.1		251.3		52.4		434.2		486.6
Aerospace and Defense Electronics	57.9		113.2		171.1		189.6		328.6		518.2		78.5		112.5		191.0		146.5		224.9		371.4
Engineered Systems	61.9		13.1		75.0		178.1		40.0		218.1		63.7		11.9		75.6		125.2		23.4		148.6
	$	159.1	$	566.2	$	725.3	$	480.6	$	1,672.8	$	2,153.4	$	187.0	$	595.0	$	782.0	$	356.9	$	1,170.3	$	1,527.2

a) Includes sales as a prime contractor or subcontractor.


	Third Quarter Ended September 30, 2018						Nine Months Ended September 30, 2018						Second Quarter Ended June 30, 2019						Six Months Ended June 30, 2019
	Contract Type						Contract Type						Contract Type						Contract Type
(in millions)	Fixed Price		Cost Type		Total		Fixed Price		Cost Type		Total		Fixed Price		Cost Type		Total		Fixed Price		Cost Type		Total
Net Sales:
Instrumentation	$	252.6	$	3.6	$	256.2	$	745.2	$	12.6	$	757.8	$	253.7	$	10.4	$	264.1	$	504.7	$	15.9	$	520.6
Digital Imaging	206.0		17.0		223.0		600.7		58.6		659.3		229.8		21.5		251.3		443.1		43.5		486.6
Aerospace and Defense Electronics	170.0		1.1		171.1		516.4		1.8		518.2		190.5		0.5		191.0		370.6		0.8		371.4
Engineered Systems	24.3		50.7		75.0		70.9		147.2		218.1		21.8		53.8		75.6		40.0		108.6		148.6
	$	652.9	$	72.4	$	725.3	$	1,933.2	$	220.2	$	2,153.4	$	695.8	$	86.2	$	782.0	$	1,358.4	$	168.8	$	1,527.2


	Third Quarter Ended September 30, 2018								Nine Months Ended September 30, 2018								Second Quarter Ended June 30, 2019								Six Months Ended June 30, 2019
	Geographic Region (a)								Geographic Region (a)								Geographic Region (a)								Geographic Region (a)
(in millions)	United States		Europe		All other		Total		United States		Europe		All other		Total		United States		Europe		All other		Total		United States		Europe		All other		Total
Net sales:
Instrumentation	$	215.4	$	31.3	$	9.5	$	256.2	$	612.9	$	116.1	$	28.8	$	757.8	$	225.1	$	30.8	$	8.2	$	264.1	$	436.2	$	64.4	$	20.0	$	520.6
Digital Imaging	62.6		78.1		82.3		223.0		178.8		221.1		259.4		659.3		80.3		77.3		93.7		251.3		152.7		147.6		186.3		486.6
Aerospace and Defense Electronics	154.6		15.4		1.1		171.1		465.7		50.1		2.4		518.2		171.7		18.9		0.4		191.0		336.8		34.0		0.6		371.4
Engineered Systems	71.8		3.2		—		75.0		210.9		7.2		—		218.1		73.4		2.2		—		75.6		144.6		4.0		—		148.6
	$	504.4	$	128.0	$	92.9	$	725.3	$	1,468.3	$	394.5	$	290.6	$	2,153.4	$	550.5	$	129.2	$	102.3	$	782.0	$	1,070.3	$	250.0	$	206.9	$	1,527.2

a) Net sales by geographic region of origin.



	Second Quarter Ended July 1, 2018						Six Months Ended July 1, 2018
	Customer Type						Customer Type
(in millions)	United States Government (a)		Other, Primarily Commercial		Total		United States Government (a)		Other, Primarily Commercial		Total
Net Sales:
Instrumentation	$	15.8	$	246.8	$	262.6	$	28.6	$	473.0	$	501.6
Digital Imaging	22.5		202.8		225.3		44.9		391.4		436.3
Aerospace and Defense Electronics	66.5		107.0		173.5		131.8		215.3		347.1
Engineered Systems	57.2		13.9		71.1		116.2		26.9		143.1
	$	162.0	$	570.5	$	732.5	$	321.5	$	1,106.6	$	1,428.1

a) Includes sales as a prime contractor or subcontractor.



	Second Quarter Ended July 1, 2018						Six Months Ended July 1, 2018
	Contract Type						Contract Type
(in millions)	Fixed Price		Cost Type		Total		Fixed Price		Cost Type		Total
Net Sales:
Instrumentation	$	258.5	$	4.1	$	262.6	$	492.6	$	9.0	$	501.6
Digital Imaging	203.5		21.8		225.3		394.7		41.6		436.3
Aerospace and Defense Electronics	173.0		0.5		173.5		346.4		0.7		347.1
Engineered Systems	23.4		47.7		71.1		46.6		96.5		143.1
	$	658.4	$	74.1	$	732.5	$	1,280.3	$	147.8	$	1,428.1



	Second Quarter Ended July 1, 2018								Six Months Ended July 1, 2018
	Geographic Region (a)								Geographic Region (a)
(in millions)	United States		Europe		All other		Total		United States		Europe		All other		Total
Net sales:
Instrumentation	$	206.5	$	45.4	$	10.7	$	262.6	$	397.5	$	84.8	$	19.3	$	501.6
Digital Imaging	59.4		76.0		89.9		225.3		116.2		143.0		177.1		436.3
Aerospace and Defense Electronics	157.0		15.9		0.6		173.5		311.1		34.7		1.3		347.1
Engineered Systems	68.9		2.2		—		71.1		139.1		4.0		—		143.1
	$	491.8	$	139.5	$	101.2	$	732.5	$	963.9	$	266.5	$	197.7	$	1,428.1

a) Net sales by geographic region of origin.

Note 14. Subsequent Events

Effective June 4, 2019, Teledyne and 3M Company entered into a purchase agreement whereby Teledyne agreed to acquire the gas and flame detection business of 3M Company for $230.0 million in cash. The gas and flame detection business includes Oldham, Simtronics, Gas Measurement Instruments (GMI), Detcon and select Scott Safety products. The gas and flame detection business 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, Scotland and the United States, the acquired businesses will become part of the Instrumentation segment.

The transaction is anticipated to close in the third quarter of 2019, and is subject to customary closing conditions, including French regulatory approval.

Item 2. 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, electronics design and development, 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 and control 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.

Effective in ~~the third quarter of~~ 2018, Teledyne early adopted Financial Accounting Standards Board (“FASB”) ~~issued~~ Accounting Standards Update (“ASU”) No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” See Note 1 to these condensed consolidated financial statements for additional information.

Effective ~~January 1,~~December 31, 2018, Teledyne adopted FASB ASU No. ~~2014-09~~2016-02, Leases (Topic ~~606), “Revenue from Contracts with Customers”,~~842) using the modified retrospective transition ~~method.~~option of applying the guidance at the adoption date. Prior period comparative information iswas not adjusted and is reported under the accounting standards in effect for that period. The cumulative effect of adopting the new standard resulted in an immaterial increase to retained earnings as of January 1, 2018.adjusted. See Note 1 to these condensed consolidated financial statements for additional information.

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, product development, acquisitions and share repurchases. We aggressively pursue operational excellence to continually improve our margins and ~~earnings.~~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.

Recent Acquisitions

Acquisition of ~~e2v~~the scientific imaging businesses of Roper Technologies

On ~~March 28, 2017,~~February 5, 2019, we ~~purchased all~~acquired the scientific imaging businesses of Roper Technologies, Inc. for $225.0 million in cash. Principally located in the ~~common stock~~United States and Canada, the acquired businesses are part 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 segment. The acquired businesses include Princeton Instruments, Photometrics and ~~Aerospace~~Lumenera. The acquired businesses provide a range of imaging solutions, primarily for life sciences, academic research and ~~Defense Electronics segments.~~

~~e2v, with principal locations~~customized OEM industrial imaging solutions. Princeton Instruments and Photometrics manufacture state-of-the-art cameras, spectrographs and optics for advanced research in ~~Chelmsford, United Kingdom~~physical sciences, life sciences research and ~~Grenoble, France, had sales of approximately £236 million~~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 ~~its fiscal year ended March 31, 2016.~~markets such as traffic management, as well as life sciences applications. Teledyne funded the acquisition ~~of e2v~~ with ~~borrowings under its credit facility and cash on hand as well as $100.0 million in term loans.~~

e2v provides high performance image sensors and custom camera solutions and application specific standard products for the machine vision market. In addition, e2v provides high performance space qualified imaging sensors and arrays for space science and astronomy. e2v also produces components and subsystems that deliver high reliability radio frequency power generation for healthcare, industrial and defense applications. Finally, e2v provides high reliability semiconductors and board-level solutions for use in aerospace, space and communications applications.

~~SSI Acquisition~~

On July 20, 2017, Teledyne Instruments, Inc. completed the acquisition of assets of Scientific Systems, Inc. (“SSI”) for $31.0 million in cash. A subsequent cash payment of $0.3 million related to a purchase price adjustment was made in the fourth quarter of 2017. Headquartered in State College, Pa., SSI manufactures 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 Instrumentation segment.

~~Teledyne funded the SSI acquisition from~~ borrowings under its credit facility and cash on hand. The results of the ~~acquisitions~~acquisition have been included in Teledyne’s results since the ~~dates of each respective acquisition.~~

~~For a further description~~date of the ~~Company’s acquisition activity~~acquisition.

Pending Acquisition

Effective June 4, 2019, Teledyne and 3M Company entered into a purchase agreement whereby Teledyne agreed to acquire the gas and flame detection business of 3M Company for $230.0 million in cash. The gas and flame detection business includes Oldham, Simtronics, Gas Measurement Instruments (GMI), Detcon and select Scott Safety products. The gas and flame detection business 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, Scotland and the ~~fiscal year 2017, please refer to Note 3~~United States, the acquired businesses will become part of the ~~Notes~~Instrumentation segment.

The transaction is anticipated to ~~Consolidated Financial Statements included~~close in ~~our 2017 Annual Report on Form 10-K (“2017 Form 10-K”).~~the second half of 2019, and is subject to customary closing conditions, including French regulatory approval.

Results of Operations


	Third Quarter						Nine Months						Second Quarter						Six Months
(in millions)	2018			2017			2018			2017			2019			2018			2019			2018
Net sales	$	725.3		$	662.2		$	2,153.4		$	1,899.4		$	782.0		$	732.5		$	1,527.2		$	1,428.1
Costs and expenses
Cost of sales	446.2			408.6			1,331.4			1,186.8			463.6			447.0			927.5			885.2
Selling, general and administrative expenses	173.6			164.1			516.6			485.5			186.5			174.0			370.5			343.0
Total costs and expenses	619.8			572.7			1,848.0			1,672.3			650.1			621.0			1,298.0			1,228.2
Operating income	105.5			89.5			305.4			227.1			131.9			111.5			229.2			199.9
Interest expense, net	(6.0		)	(8.2		)	(19.8		)	(25.5		)	(5.4		)	(6.7		)	(10.8		)	(13.8		)
Non-service retirement benefit income	3.4			3.4			10.1			10.1			2.0			3.3			4.2			6.7
Other expense, net	(2.7		)	(3.0		)	(8.9		)	(13.0		)	(0.6		)	(3.7		)	(1.8		)	(6.2		)
Income before income taxes	100.2			81.7			286.8			198.7			127.9			104.4			220.8			186.6
Provision for income taxes	9.9			12.7			44.1			39.1			23.3			18.5			40.9			34.2
Net income	$	90.3		$	69.0		$	242.7		$	159.6		$	104.6		$	85.9		$	179.9		$	152.4


	Third Quarter						%		Nine Months						%		Second Quarter						%		Six Months						%
(dollars in millions)	2018			2017			Change		2018			2017			Change		2019			2018			Change		2019			2018			Change
Net sales(a):
Instrumentation	$	256.2		$	232.5		10.2	%	$	757.8		$	699.1		8.4	%	$	264.1		$	262.6		0.6	%	$	520.6		$	501.6		3.8	%
Digital Imaging	223.0			197.0			13.2	%	659.3			511.0			29.0	%	251.3			225.3			11.5	%	486.6			436.3			11.5	%
Aerospace and Defense Electronics	171.1			159.6			7.2	%	518.2			472.6			9.6	%	191.0			173.5			10.1	%	371.4			347.1			7.0	%
Engineered Systems	75.0			73.1			2.6	%	218.1			216.7			0.6	%	75.6			71.1			6.3	%	148.6			143.1			3.8	%
Total net sales	$	725.3		$	662.2		9.5	%	$	2,153.4		$	1,899.4		13.4	%	$	782.0		$	732.5		6.8	%	$	1,527.2		$	1,428.1		6.9	%
Operating income:
Instrumentation	$	35.7		$	34.6		3.2	%	$	104.4		$	95.3		9.5	%	$	49.0		$	40.9		19.8	%	$	88.9		$	68.7		29.4	%
Digital Imaging(b)	42.3			31.4			34.7	%	120.2			74.5			61.3	%
Digital Imaging																	52.5			43.3			21.2	%	89.5			77.9			14.9	%
Aerospace and Defense Electronics	33.3			28.2			18.1	%	98.7			82.2			20.1	%	39.4			33.7			16.9	%	73.2			65.4			11.9	%
Engineered Systems	9.3			8.6			8.1	%	23.9			23.7			0.8	%	7.3			7.4			(1.4	)%	12.0			14.6			(17.8	)%
Corporate expense~~(b)~~	(15.1		)	(13.3		)	13.5	%	(41.8		)	(48.6		)	(14.0	)%	(16.3		)	(13.8		)	18.1	%	(34.4		)	(26.7		)	28.8	%
Total operating income	$	105.5		$	89.5		17.9	%	$	305.4		$	227.1		34.5	%	$	131.9		$	111.5		18.3	%	$	229.2		$	199.9		14.7	%


(a)	Net sales excludes inter-segment sales of ~~$6.2~~$4.0 million and ~~$16.9~~$10.4 million for the ~~third~~second quarter and first ~~nine~~six months of ~~2018,~~2019, respectively, and ~~$6.4~~$5.5 million and ~~$17.8~~$10.7 million for the ~~third~~second quarter and ~~nine~~first six months of ~~2017, respectively.~~

~~(b)~~

The third quarter of 2017 included pretax charges of $2.9 million related to the acquisition of e2v which was recorded in the Digital Imaging segment. The first nine months of 2017 includes pretax charges of $19.8 million related to the acquisition of e2v, of which $9.1 million was recorded in the Digital Imaging segment, $0.3 million was recorded in the Aerospace and Defense Electronics segment and $10.4 million was recorded in Corporate expense.2018.

The table below presents net sales and cost of sales by segment and total company:


	Third Quarter						Nine Months						Second Quarter						Six Months
(dollars in millions)	2018			2017			2018			2017			2019			2018			2019			2018
Instrumentation
Net sales	$	256.2		$	232.5		$	757.8		$	699.1		$	264.1		$	262.6		$	520.6		$	501.6
Cost of sales	$	146.0		$	129.4		$	430.7		$	398.7		$	146.6		$	145.4		$	293.6		$	284.7
Cost of sales as a % of net sales	57.0		%	55.7		%	56.8		%	57.1		%	55.5		%	55.3		%	56.4		%	56.8		%
Digital Imaging
Net sales	$	223.0		$	197.0		$	659.3		$	511.0		$	251.3		$	225.3		$	486.6		$	436.3
Cost of sales	$	134.1		$	121.3		$	395.9		$	321.6		$	138.3		$	133.7		$	280.1		$	261.8
Cost of sales as a % of net sales	60.1		%	61.6		%	60.0		%	62.9		%	55.0		%	59.4		%	57.6		%	60.0		%
Aerospace and Defense Electronics
Net sales	$	171.1		$	159.6		$	518.2		$	472.6		$	191.0		$	173.5		$	371.4		$	347.1
Cost of sales	$	106.1		$	99.9		$	328.2		$	290.8		$	117.1		$	110.0		$	230.0		$	222.1
Cost of sales as a % of net sales	62.0		%	62.6		%	63.3		%	61.5		%	61.3		%	63.4		%	61.9		%	64.0		%
Engineered Systems
Net sales	$	75.0		$	73.1		$	218.1		$	216.7		$	75.6		$	71.1		$	148.6		$	143.1
Costs of sales	$	60.0		$	58.0		$	176.6		$	175.7		$	61.6		$	57.9		$	123.8		$	116.6
Cost of sales as a % of net sales	80.0		%	79.3		%	80.9		%	81.1		%	81.5		%	81.4		%	83.3		%	81.5		%
Total Company
Net sales	$	725.3		$	662.2		$	2,153.4		$	1,899.4		$	782.0		$	732.5		$	1,527.2		$	1,428.1
Costs of sales	$	446.2		$	408.6		$	1,331.4		$	1,186.8		$	463.6		$	447.0		$	927.5		$	885.2
Cost of sales as a % of net sales	61.5		%	61.7		%	61.8		%	62.5		%	59.3		%	61.0		%	60.7		%	62.0		%

~~Third~~Second Quarter and First ~~Nine~~Six Months Results

The following is a discussion of our ~~2018 third~~2019 second quarter and first ~~nine~~six months results compared with the ~~2017 third~~2018 second quarter and first ~~nine~~six months results. Comparisons are with the corresponding reporting period of ~~2017,~~2018, unless noted otherwise.

~~Third~~Second quarter of ~~2018~~2019 compared with the ~~third~~second quarter of ~~2017~~2018

Our ~~third~~second quarter of ~~2018~~2019 net sales increased ~~9.5%~~6.8%. Net income for the second quarter of 2019 increased ~~30.9%~~21.8%. Net income per diluted share was ~~$2.43~~$2.80 for the ~~third~~second quarter of ~~2018,~~2019, compared with net income per diluted share of ~~$1.90.~~$2.32. The ~~third~~second quarter of ~~2018 included $4.1 million in severance and facility consolidation costs. The third quarter of 2018 also~~2019 included net discrete income tax benefits of ~~$11.4 million. The third quarter of 2017 included $2.9~~$4.3 million ~~in acquisition costs related to the e2v acquisition and $2.4 million in severance and facility consolidation costs. The third quarter of 2017 also included net discrete income tax benefits of $9.9~~compared with $3.4 million.

Net Sales

The ~~third~~second quarter of ~~2018~~2019 net sales, compared with the ~~third~~second quarter of ~~2017~~2018 net sales, reflected higher net sales in each segment. The second quarter of 2019 included organic growth of $26.2 million and $23.3 million in incremental net sales from a recent acquisition.

Cost of Sales

Cost of sales increased ~~$37.6~~$16.6 million in the ~~third~~second quarter of ~~2018~~2019 and reflected the impact of higher sales. Cost of sales as a percentage of net sales decreased ~~slightly~~ for the ~~third~~second quarter of ~~2018~~2019 to ~~61.5%~~59.3%, from ~~61.7%~~61.0%.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, including research and development and bid and proposal expense, increased ~~$9.5~~$12.5 million in the ~~third~~second quarter of ~~2018~~2019 and primarily reflected the impact of higher ~~sales.~~sales and higher research and development spending. Selling, general and administrative expenses for the ~~third~~second quarter of ~~2018,~~2019, as a percentage of net sales ~~decreased to 23.9% from 24.8%~~remained at 23.8%. Corporate expense, which is included in selling, general and administrative expenses, was ~~$15.1~~$16.3 million for the ~~third~~second quarter of ~~2018,~~2019, compared with ~~$13.3 million.~~$13.8 million and primarily reflected higher professional fees expense. In the ~~third~~second quarter of ~~2018~~2019 and ~~2017,~~2018, we recorded a total of ~~$4.6~~$5.8 million and ~~$3.2~~$5.4 million, respectively, in stock option compensation expense.

Pension Service Expense

Pension service expense is included in both cost of sales and selling general and administrative expense. For ~~both~~ the ~~third~~second quarter of ~~2018 and 2017~~2019 pension service expense was $2.3 million compared with $2.7 million. For ~~2018,~~2019, the discount rate used to determine the benefit obligation for the domestic plan was ~~4.02 percent~~4.59% compared with ~~4.54 percent~~4.02% in 2017. Pension expense associated with contracts pursuant to U.S. Government Cost Accounting Standards (“CAS”) was $3.2 million for the third quarter of 2018, compared with $3.5 million for the third quarter of 2017. Pension expense determined allowable under CAS can generally be recovered through the pricing of products and services sold to the U.S. Government.2018.

Operating Income

Operating income for the ~~third~~second quarter of ~~2018~~2019 increased ~~17.9%~~18.3%. The ~~third~~second quarter of ~~2018,~~2019, compared with the ~~third~~second quarter of ~~2017,~~2018, reflected higher operating income in each ~~segment. Operating income in~~segment except the third quarter of 2018 included $4.1 million in severance and facility consolidation costs. Operating income in the third quarter of 2017 included pretax acquisition costs of $2.9 million related to the e2v acquisition which was recorded to the Digital ImagingEngineered Systems segment. ~~The third quarter of 2017 also included $2.4 million in severance and facility consolidation costs.~~

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

Interest expense, net of interest income, was ~~$6.0~~$5.4 million for the ~~third~~second quarter of ~~2018,~~2019, compared with ~~$8.2~~$6.7 million and primarily reflected lower average debt ~~levels.~~levels in 2019. Non-service retirement benefit income was ~~$3.4~~$2.0 million for ~~both~~ the ~~third~~second quarter of ~~2018 and 2017.~~2019 compared with $3.3 million. Other income and expense was expense of ~~$2.7~~$0.6 million for the ~~third~~second quarter of ~~2018,~~2019, compared with expense of ~~$3.0~~$3.7 million.

The higher amount in 2018 primarily reflected higher foreign currency expense.

Income Taxes

The income tax provision is calculated using an estimated annual effective tax rate, based upon estimates of annual income, permanent items, statutory tax rates and planned tax strategies in the various jurisdictions in which we operate except that certain loss jurisdictions and discrete items, such as the resolution of uncertain tax positions and share-based accounting income tax benefits, are treated separately.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was enacted. The Tax Act 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 repatriation tax on deemed repatriated earnings of foreign subsidiaries. As a result of the Tax Act, Teledyne incurred provisional charges of $4.7 million in the fourth quarter of 2017 primarily due to the repatriation tax and the remeasurement of U.S. deferred tax assets and liabilities. The impacts of the Tax Act may differ from this estimate, possibly materially (and the amount of the provisional charge may accordingly be adjusted over the course of 2018), due to changes in interpretations and assumptions Teledyne has made, guidance that may be issued, and actions Teledyne may take as a result of the Tax Act. In the first quarter of 2018, the provisional charge was adjusted by an additional $0.6 million. In the third quarter of 2018, this additional provisional charge was reversed, following guidance issued by the Internal Revenue Service in the third quarter of 2018. The Company will evaluate new guidance as it is issued and will finalize the computation of the charge in the fourth quarter of 2018.

The Company’s effective income tax rate for the ~~third~~second quarter of ~~2018~~2019 was ~~9.9%~~18.2%, compared with ~~15.6%~~17.7%. The ~~third~~second quarter of ~~2018~~2019 reflected net discrete income tax benefits of ~~$11.4 million. This amount~~$4.3 million, which included ~~$4.4 million in income tax benefit as~~ a ~~result of the remeasurement of uncertain tax positions due to expiration of statute of limitations and a $5.0~~$4.8 million income tax benefit related to share-based accounting. The ~~third~~second quarter of ~~2017~~2018 included net discrete tax benefits of ~~$9.9 million. This amount~~$3.4 million, which included ~~$7.4 million in income tax benefit as~~ a ~~result of the remeasurement of uncertain tax positions due to expiration of statute of limitations and a $2.3~~$4.7 million income tax benefit related to share-based accounting. Excluding the net discrete income tax benefits in both periods, the effective tax rates would have been ~~21.3%~~21.6% for the ~~third~~second quarter of ~~2018~~2019 and ~~27.7%~~21.0% for the ~~third~~second quarter of ~~2017. The decrease in the effective tax rate in 2018, primarily reflects the lower corporate income tax rates as part of the Tax Act.~~2018. The Company’s annual effective tax rate for fiscal year ~~2018~~2019 is expected to be ~~21.3%~~21.9%, based on the projected mix of earnings before tax by jurisdiction, excluding the impact of any matters that would be treated as discrete.

First ~~nine~~six months of ~~2018~~2019 compared with the first ~~nine~~six months of ~~2017~~2018

~~The~~Our first ~~nine~~six months of ~~2018~~2019 net sales increased ~~13.4%~~6.9%. ~~The increase in net sales resulted from organic growth and the acquisition of e2v.~~ Net income for the first six months of 2019 increased ~~52.1%~~18.0%. Net income per diluted share was ~~$6.56~~$4.82 for the first ~~nine~~six months of ~~2018,~~2019, compared with net income per diluted share of ~~$4.41.~~$4.13. The first ~~nine~~six months of 2018 included $5.3 million in severance and facility consolidation costs compared with severance and facility consolidation costs of $3.5 million for the first nine months of 2017. The first nine months of 2018 also2019 included net discrete income tax benefits of ~~$16.9~~$7.4 million compared with net discrete income tax benefits of $15.9 million for the first nine months of 2017. The first nine months of 2017 included pretax charges of $28.1 million related to the acquisition of e2v, of which, $6.8 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.

$5.5 million.

Net Sales

The first ~~nine~~six months of 2019 net sales, compared with the first six months of 2018 net sales, reflected higher net sales in each segment. The first ~~nine~~six months of ~~2018~~2019 included organic growth of ~~$144.9~~$61.7 million and ~~$109.1~~$37.4 million in incremental net sales from a recent ~~acquisitions, primarily e2v.~~

acquisition.

Cost of Sales

Cost of sales increased ~~$144.6~~$42.3 million in the first ~~nine~~six months of ~~2018 which~~2019 and primarily reflected the impact of higher sales. Cost of sales as a percentage of net sales for the ~~nine~~six months of ~~2018~~2019 decreased to ~~61.8%~~60.7%, ~~from 62.5%~~compared with 62.0%.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, including research and development and bid and proposal expense, increased by

~~$31.1~~by$27.5 million in the first ~~nine~~six months of ~~2018,~~2019 and primarily reflected the impact of higher sales. The first ~~nine~~six months of ~~2017~~2019 reflected the impact of ~~$13.0~~$2.2 million in acquisition transaction expense related to the ~~e2v acquisition.~~acquisition of the scientific imaging businesses of Roper Technologies, Inc., as well as the pending acquisition of the gas and flame detection business of 3M Company. Selling, general and administrative expenses for the first ~~nine~~six months of ~~2018,~~2019, as a percentage of net sales, ~~decreased~~increased slightly to 24.0% from 25.5%. The higher percentage in 2017 reflected the impact of acquisition costs related to the acquisition of e2v. Corporate expense, which is included in selling, general and administrative expenses, was $41.8 million for the first nine months of 2018,24.3% compared with ~~$48.6 million. The 2017 amount included $10.4 million in expense related to the e2v acquisition.~~24.0%. In the first ~~nine~~six months of ~~2018~~2019 and ~~2017,~~2018, we recorded a total of ~~$14.9~~$14.7 million and ~~$11.0~~$10.3 million, respectively, in stock option compensation expense.

The higher amount in 2019 reflect the expense related to certain stock options that were granted in January 2019 to Teledyne’s Executive Chairman and Teledyne’s President and Chief Executive Officer which were required to be expensed immediately.

Pension Service Expense

~~For both the first nine months of 2018 and 2017, pension~~Pension service expense ~~was $8.1 million. Pension expense associated with contracts pursuant to CAS was $9.7 million~~ for the first ~~nine~~six months of ~~2018 and $10.4~~2019 was $4.7 million ~~for the first nine months of 2017.~~compared with $5.4 million.

Operating Income

Operating income for the first ~~nine~~six months of ~~2018~~2019 increased ~~34.5%~~14.7%. The first ~~nine~~six months of 2019, compared with the first six months of 2018, reflected higher operating income in each segment except the Engineered Systems segment. Corporate expense ~~was also lower by $6.8 million. Operating income~~$34.4 million in the first ~~nine~~six months of ~~2017 included pretax acquisition costs of $19.8~~2019 compared with $26.7 million ~~related to the e2v acquisition, of which $9.1 million was recorded to the Digital Imaging segment, $0.3 million was recorded to the Aerospace~~ and ~~Defense Electronics segment and $10.4 million was recorded as corporate~~reflected higher stock option expense. Operating income in the first ~~nine~~six months of ~~2018~~2019 included ~~$5.3~~pretax acquisition costs of $2.2 million ~~in severance~~related to the acquisition of the scientific imaging businesses of Roper Technologies, Inc as well as the pending acquisition of the gas and ~~facility consolidation costs. Operating income in the first nine months~~flame detection business of ~~2017 also included $6.1 million in severance and facility consolidation costs.~~3M Company. The incremental operating income included in the results for the first ~~nine~~six months of ~~2018~~2019 from ~~recent acquisitions~~the acquisition of the scientific imaging businesses of Roper Technologies, Inc. was ~~$40.6~~$5.0 million.

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

Interest expense, net of interest income, was ~~$19.8~~$10.8 million for the first ~~nine~~six months of ~~2018,~~2019, compared with ~~$25.5 million. The 2017 amount included $2.3~~$13.8 million and primarily reflected lower average debt levels in ~~fees related to the terminated bridge facility in connection with the acquisition of e2v. For both the first nine months of 2018 and 2017 non-service retirement benefit income was $10.1 million.~~2019. Other income and expense was expense of ~~$8.9~~$1.8 million for the first ~~nine~~six months of ~~2018,~~2019, compared with expense of ~~$13.0. Other expense~~$6.2 million. The higher amount in ~~the first nine months of 2017~~2018 primarily reflected ~~$6.0 million of expense for a~~higher foreign currency ~~option contract related to the e2v acquisition.~~

expense.

Income Taxes

The Company’s effective income tax rate for the first ~~nine~~six months of ~~2018~~2019 was ~~15.4%~~18.5% compared with ~~19.7%~~18.3%. The first ~~nine~~six months of ~~2018~~2019 reflected ~~$16.9~~$7.4 million in net discrete income tax benefits, which included a ~~$12.7~~$7.7 million income tax benefit related to share-based ~~accounting and $4.4 million in income tax benefit as a result of the remeasurement of uncertain tax positions due to expiration of statute of limitations.~~accounting. The first ~~nine~~six months of ~~2017~~2018 reflected ~~$15.9~~$5.5 million in net discrete income tax benefits, which included a ~~$5.1~~$7.7 million income tax benefit related to share-based accounting. The 2017 first nine months net discrete tax benefits, also includes 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 and $4.6 million in income tax expense related to adjustments for uncertain tax positions. Excluding the net discrete income tax items in both periods, the effective tax rates would have been 21.9% for the first six months of 2019 and 21.3% for the first ~~nine~~six months of ~~2018 and 27.7% for the first nine months of 2017.~~

2018.

Segment Results

Segment results includes net sales and operating income by segment but exclude non-service retirement benefit income, equity income or loss, unusual non-recurring legal matter settlements, interest income and expense, gains and losses on the disposition of assets, sublease rental income and non-revenue licensing and royalty income, domestic and foreign income taxes and corporate office expenses. Corporate expense includes various administrative expenses relating to the corporate office and certain nonoperating expenses, including certain acquisition related transaction costs, not allocated to our segments. ~~Comparisons are with the corresponding reporting period of 2017, unless noted otherwise.~~ See Note 13 to these condensed consolidated financial statements for additional segment information.

Instrumentation


	Third Quarter						Nine Months						Second Quarter						Six Months
(dollars in millions)	2018			2017			2018			2017			2019			2018			2019			2018
Net sales	$	256.2		$	232.5		$	757.8		$	699.1		$	264.1		$	262.6		$	520.6		$	501.6
Cost of sales	$	146.0		$	129.4		$	430.7		$	398.7		$	146.6		$	145.4		$	293.6		$	284.7
Selling, general and administrative expenses	$	74.5		$	68.5		$	222.7		$	205.1		$	68.5		$	76.3		$	138.1		$	148.2
Operating income	$	35.7		$	34.6		$	104.4		$	95.3		$	49.0		$	40.9		$	88.9		$	68.7
Cost of sales as a % of net sales	57.0		%	55.7		%	56.8		%	57.1		%	55.5		%	55.3		%	56.4		%	56.8		%
Selling, general and administrative expenses % of sales	29.1		%	29.4		%	29.4		%	29.3		%	25.9		%	29.1		%	26.5		%	29.5		%
Operating income as a % of net sales	13.9		%	14.9		%	13.8		%	13.6		%	18.6		%	15.6		%	17.1		%	13.7		%

~~Third~~Second quarter of 2019 compared with the second quarter of 2018 ~~compared with the third quarter of 2017~~

The Instrumentation segment’s ~~third~~second quarter of ~~2018~~2019 net sales increased ~~10.2%~~0.6%. Operating income for the ~~third~~second quarter of ~~2018~~2019 increased ~~3.2%~~19.8%.

The ~~third~~second quarter of ~~2018~~2019 net sales increase resulted from higher sales of test and measurement instrumentation, environmental instrumentation, partially offset by lower marine instrumentation ~~and environmental instrumentation.~~sales. Sales of test and measurement instrumentation increased ~~$11.5~~$7.1 million while sales of environmental instrumentation increased $1.7 million and sales of marine instrumentation decreased $7.3 million. The increase in operating income the second quarter of 2019 reflected the impact of higher ~~sales, partially offset higher severance and facility consolidation costs of $2.0 million in the third~~margins across most product lines.

The second quarter of ~~2018. Operating income in the third quarter of 2017 included a $2.6 million reversal of a previously reserved receivable that was collected during the quarter.~~

~~The third quarter of 2018~~2019 cost of sales increased ~~$16.6~~$1.2 million and reflected the impact of higher sales. Cost of sales as a percentage of net sales for the ~~third~~second quarter of ~~2018~~2019 increased slightly to ~~57.0%~~55.5% from ~~55.7% and reflected product mix differences. Third~~55.3%. Second quarter ~~2018~~2019 selling, general and administrative expenses, ~~including research and development expense, increased $6.0~~decreased $7.8 million and reflected the impact of ~~higher net sales.~~cost control efforts. The selling, general and administrative expense percentage decreased to ~~29.1%~~25.9% in the ~~third~~second quarter of ~~2018~~2019 from ~~29.4%.~~29.1% and reflected the impact of cost control efforts.

First ~~nine~~six months of ~~2018~~2019 compared with the first ~~nine~~six months of ~~2017~~

2018

The Instrumentation segment’s first ~~nine~~six months ~~of 2018~~2019 net sales increased ~~8.4%~~3.8%. Operating income for the first ~~nine~~six months of ~~2018~~2019 increased ~~9.5%~~of 29.4%.

The first ~~nine~~six months of ~~2018~~2019 net sales increase resulted from higher sales of test and measurement instrumentation, environmental instrumentation, partially offset by lower marine instrumentation and environmental instrumentation, as well as the contribution from the SSI acquisition. Sales of environmental instrumentation increased $22.2 million and included $11.1 million in incremental sales from the SSI acquisition.sales. Sales of test and measurement instrumentation increased ~~$25.7~~$18.4 million while sales of environmental instrumentation increased $6.9 million and ~~included $1.3 million in incremental~~ sales ~~from the e2v acquisition. Sales~~ of marine instrumentation ~~increased $10.8 million and primarily reflected higher sales of sonar systems, partially offset by lower sales of sensors for energy exploration.~~decreased $6.3 million. The increase in operating income ~~primarily~~the first six months of 2019 reflected the impact of higher sales ~~partially offset by~~and higher severance and facility consolidation costs of $2.4 million in the first nine months of 2018. Operating income in the first nine months of 2017 included a $2.6 million reversal of a previously reserved receivable that was collected during the third quarter.margins across most product lines.

The first ~~nine~~six months of ~~2018~~2019 cost of sales increased ~~$32.0~~by $8.9 million and primarily reflected the impact of higher sales. ~~Cost~~The cost of sales ~~as a~~ percentage ~~of net sales~~ decreased slightly to ~~56.8%~~56.4% from ~~57.1%~~56.8%. The first ~~nine~~six months of ~~2018~~2019 selling, general and administrative expenses, including research and development expense, ~~increased~~decreased by ~~$17.6~~$10.1 million and reflected the impact of ~~higher sales.~~cost control efforts. The selling, general and administrative expense percentage ~~increased slightly~~decreased to ~~29.4%~~26.5% in the first ~~nine~~six months of ~~2018~~2019 from ~~29.3%.~~29.5% and reflected the impact of cost control efforts.

Digital Imaging


	Third Quarter						Nine Months						Second Quarter						Six Months
(dollars in millions)	2018			2017			2018			2017			2019			2018			2019			2018
Net sales	$	223.0		$	197.0		$	659.3		$	511.0		$	251.3		$	225.3		$	486.6		$	436.3
Cost of sales	$	134.1		$	121.3		$	395.9		$	321.6		$	138.3		$	133.7		$	280.1		$	261.8
Selling, general and administrative expenses	$	46.6		$	44.3		$	143.2		$	114.9		$	60.5		$	48.3		$	117.0		$	96.6
Operating income	$	42.3		$	31.4		$	120.2		$	74.5		$	52.5		$	43.3		$	89.5		$	77.9
Cost of sales as a % of net sales	60.1		%	61.6		%	60.0		%	62.9		%	55.0		%	59.4		%	57.6		%	60.0		%
Selling, general and administrative expenses % of sales	20.9		%	22.5		%	21.8		%	22.5		%	24.1		%	21.4		%	24.0		%	22.1		%
Operating income as a % of net sales	19.0		%	15.9		%	18.2		%	14.6		%	20.9		%	19.2		%	18.4		%	17.9		%

~~Third~~Second quarter of ~~2018~~2019 compared with the ~~third~~second quarter of ~~2017~~2018

The Digital Imaging segment’s ~~third~~second quarter of ~~2018~~2019 net sales increased ~~13.2%~~11.5%. Operating income for the ~~third~~second quarter of ~~2018~~2019 increased ~~34.7%~~21.2%.

The ~~third~~second quarter of ~~2018~~2019 net sales primarily reflected higher sales of X-ray detectors ~~and generators~~ for life sciences applications and ~~detectors for space-based imaging.~~aerospace, defense and MEMS products as well as $23.3 million in sales from the acquisition of the scientific imaging businesses of Roper Technologies, Inc. The increase in operating income in the ~~third~~second quarter of ~~2018~~2019 primarily reflected the impact of higher sales and favorable product ~~mix. Operating income~~mix, partially offset by higher research and development expense. The incremental operating profit included in the ~~third~~results for the second quarter of ~~2017 included $2.9 million in acquisition-related costs related to~~2019 from the ~~e2v acquisition.~~scientific imaging businesses of Roper Technologies, Inc. acquisition was $4.0 million.

The ~~third~~second quarter of ~~2018~~2019 cost of sales increased ~~$12.8~~$4.6 million and primarily reflected the impact of higher sales. Cost of sales as a percentage of net sales for the ~~third~~second quarter of ~~2018~~2019 decreased to ~~60.1%~~55.0% from ~~61.6%. Selling,~~59.4% primarily due to product mix. Second quarter 2019 selling, general and administrative expenses, including research and development and bid and proposal expense increased $2.3 million driven by the impact of higher net sales in the third quarter of 2018. The selling, general and administrative expense percentage decreased to 20.9% in the third quarter of 2018 from 22.5%.

~~First nine months of 2018 compared with the first nine months of 2017~~

~~The Digital Imaging segment’s first nine months of 2018 net sales increased 29.0%. Operating income increased 61.3%.~~

The first nine months of 2018 net sales included organic growth of $61.4 million and $86.9 million in incremental net sales from the e2v acquisition. The first nine months net sales 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 in the first nine months of 2018 reflected the impact of higher sales, favorable product mix and incremental operating profit from e2v. Operating income in the first nine months of 2017 included $9.1 million in acquisition-related costs related to the e2v acquisition. The incremental operating profit included in the results for the first nine months of 2018 from the e2v acquisition was $32.8 million.

The first nine months of 2018 cost of sales increased to $395.9 million from $321.6 million and reflected the impact of higher net sales. Cost of sales as a percentage of net sales in 2018 decreased to 60.0% from 62.9% and reflected product mix differences, as well as the inclusion in 2017 of $6.5 million of inventory fair value step-up amortization expense related to the e2v acquisition. Selling, general and administrative expenses, including research and development and bid and proposal expense, increased $28.3$12.2 million driven by the impact of higher net sales. The selling, general and administrative expense percentage ~~decreased~~increased to ~~21.8%~~24.1% in the second quarter of 2019 from 21.4% and reflected higher research and development expense and also reflected the impact of the acquisition of the scientific imaging businesses of Roper Technologies, Inc. which carries a higher selling, general and administrative expense percentage compared with the other digital imaging businesses.

First six months of 2019 compared with the first six months of 2018

The Digital Imaging segment’s first six months of 2019 net sales increased 11.5%. Operating income for the first six months of 2019 increased 14.9%.

The first six months of 2019 net sales primarily reflected higher sales of X-ray detectors for life sciences applications and aerospace, defense and MEMS products as well as $37.4 million in sales from the acquisition of the scientific imaging businesses of Roper Technologies, Inc. The increase in operating income in the first ~~nine~~six months of ~~2018~~2019 reflected the impact of higher sales and product mix, partially offset by higher research and development expense and acquisition-related costs. Operating income in the first six months of 2019 included $0.7 million in acquisition-related costs related to the scientific imaging businesses of Roper Technologies, Inc. The incremental operating profit included in the results for the first six months of 2019 from ~~22.5%.~~the scientific imaging businesses of Roper Technologies, Inc. acquisition was $5.0 million.

The first six months of 2019 cost of sales increased $18.3 million and reflected the impact of higher sales. The cost of sales percentage in 2019 decreased to 57.6% compared with 60.0% primarily due to product mix. Selling, general and administrative expenses, including research and development and bid and proposal expense, increased to $117.0 million in the first six months of 2019, from $96.6 million and reflected the impact of higher net sales. The selling, general and administrative expense percentage increased to 24.0% in the first six months of 2019 from 22.1% and reflected higher research and development expense and acquisition-related costs and also reflected the impact of the acquisition of the scientific imaging businesses of Roper Technologies, Inc. which carries a higher selling, general and administrative expense percentage compared with the other digital imaging businesses.

Aerospace and Defense Electronics


	Third Quarter						Nine Months						Second Quarter						Six Months
(dollars in millions)	2018			2017			2018			2017			2019			2018			2019			2018
Net sales	$	171.1		$	159.6		$	518.2		$	472.6		$	191.0		$	173.5		$	371.4		$	347.1
Cost of sales	$	106.1		$	99.9		$	328.2		$	290.8		$	117.1		$	110.0		$	230.0		$	222.1
Selling, general and administrative expenses	$	31.7		$	31.5		$	91.3		$	99.6		$	34.5		$	29.8		$	68.2		$	59.6
Operating income	$	33.3		$	28.2		$	98.7		$	82.2		$	39.4		$	33.7		$	73.2		$	65.4
Cost of sales as a % of net sales	62.0		%	62.6		%	63.3		%	61.5		%	61.3		%	63.4		%	61.9		%	64.0		%
Selling, general and administrative expenses % of sales	18.5		%	19.7		%	17.7		%	21.1		%	18.1		%	17.2		%	18.4		%	17.2		%
Operating income as a % of net sales	19.5		%	17.7		%	19.0		%	17.4		%	20.6		%	19.4		%	19.7		%	18.8		%

~~Third~~Second quarter of 2019 compared with the second quarter of 2018 ~~compared with the third quarter of 2017~~

The Aerospace and Defense Electronics segment’s ~~third~~second quarter of ~~2018~~2019 net sales increased ~~7.2%~~10.1%. Operating income for the second quarter of 2019 increased ~~18.1%~~16.9%.

The ~~third~~second quarter of ~~2018~~2019 net sales reflected ~~$11.0~~$17.8 million of higher sales of defense electronics and ~~$0.5~~$0.3 million of lower sales of aerospace electronics. The higher sales of defense electronics reflected greater sales in most product categories. The increase in operating income the second quarter of 2019 reflected the impact of higher sales and improved margins.

The second quarter of 2019 cost of sales increased $7.1 million and reflected the impact of higher net sales, partially offset by product mix differences. Cost of sales as a percentage of net sales for the second quarter of 2019 decreased to 61.3% from 63.4% and reflected product mix differences. Selling, general and administrative expenses, including research and development and bid and proposal expense increased to $34.5 million in the second quarter of 2019 from $29.8 million and reflected the impact of higher sales. The selling, general and administrative expense percentage increased to 18.1% in the second quarter of 2019 from 17.2%.

First six months of 2019 compared with the first six months of 2018

The Aerospace and Defense Electronics segment’s first six months of 2019 net sales increased 7.0%. Operating income for the first six months of 2019 increased 11.9%.

The first six months of 2019 net sales reflected $23.5 million of higher sales of defense electronics and $0.8 million of higher sales of aerospace electronics. The higher sales of defense electronics reflected greater sales in most product categories. The increase in operating income in the ~~third quarter~~first six months of ~~2018~~2019 primarily reflected the impact of higher sales and ~~favorable product mix.~~improved margins.

The ~~third quarter~~first six months of ~~2018~~2019 cost of sales increased ~~$6.2~~by $7.9 million and reflected the impact of higher ~~net~~ sales. Cost of sales as a percentage of ~~net~~ sales for the ~~third quarter~~first six months of 2019 decreased to 61.9% from 64.0% in the first six months of 2018 ~~decreased~~due to ~~62.0% from 62.6% and reflected~~ product mix differences. Selling, general and administrative expenses, including research and development and bid and proposal expense, increased to ~~$31.7~~$68.2 million in the ~~third quarter~~first six months of 2019, compared with $59.6 million for the first six months of 2018 ~~from $31.5 million~~ and reflected the impact of higher sales ~~mostly offset by lower~~and higher research and development and bid and proposal ~~expense of $2.2 million.~~expense. The selling, general and administrative expense percentage ~~decreased~~increased to ~~18.5%~~18.4% in the ~~third quarter~~first six months of ~~2018 from 19.7%~~2019, compared with 17.2% and reflected the impact of ~~lower~~higher research and development and bid and proposal expense.

~~First nine months~~

Engineered Systems



	Second Quarter						Six Months
(dollars in millions)	2019			2018			2019			2018
Net sales	$	75.6		$	71.1		$	148.6		$	143.1
Cost of sales	$	61.6		$	57.9		$	123.8		$	116.6
Selling, general and administrative expenses	$	6.7		$	5.8		$	12.8		$	11.9
Operating income	$	7.3		$	7.4		$	12.0		$	14.6
Cost of sales as a % of net sales	81.5		%	81.4		%	83.3		%	81.5		%
Selling, general and administrative expenses % of sales	8.8		%	8.2		%	8.6		%	8.3		%
Operating income as a % of net sales	9.7		%	10.4		%	8.1		%	10.2		%

Second quarter of ~~2018~~2019 compared with the ~~first nine months~~second quarter of ~~2017~~2018

The ~~Aerospace and Defense Electronics~~Engineered Systems segment’s ~~first nine months~~second quarter of ~~2018~~2019 net sales increased ~~9.6%~~6.3%. Operating income ~~for the first nine months of 2018 increased 20.1%~~decreased 1.4%.

The ~~first nine months~~second quarter of ~~2018~~2019 net sales reflected ~~$47.8 million of~~ higher sales of ~~defense electronics,~~$5.2 million of engineered products and services, partially offset by ~~$2.2 million of~~ lower sales of ~~aerospace electronics.~~$0.7 million of turbine engines. The higher sales of ~~defense electronics reflected greater sales in most product categories~~engineered products and ~~included $9.8 million in incremental sales from the e2v acquisition. The increase in operating income in the third quarter of 2018~~services, primarily reflected ~~the impact of higher sales.~~increased sales for nuclear manufacturing and space programs. Operating income in the ~~first nine months~~second quarter of ~~2018 reflected the impact of higher sales, overall improved margins and favorable~~2019 decreased primarily due to product mix.

The ~~first nine months~~second quarter of ~~2018~~2019 cost of sales increased ~~$37.4~~$3.7 million and reflected the impact of higher sales. Cost of sales as a percentage of net sales for the ~~first nine months~~second quarter of ~~2018~~2019 increased slightly to ~~63.3%~~81.5% from ~~61.5%~~81.4%. Selling, general and administrative expenses, including research and development and bid and proposal expense, ~~decreased to $91.3~~was $6.7 million infor the ~~first nine months~~second quarter of ~~2018 from $99.6 million and reflected the impact of lower research and development and bid and proposal expense of $8.6~~2019, compared with $5.8 million. The selling, general and administrative expense percentage ~~decreased to 17.7% in~~was 8.8% for the ~~first nine~~second quarter of 2019, compared with 8.2%.

First six months of ~~2018, compared with 21.1% and reflected the impact of lower research and development and bid and proposal expense.~~

~~Engineered Systems~~

Third Quarter Nine Months
(dollars in millions) 2018 2017 2018 2017
Net sales $ 75.0
$ 73.1
$ 218.1
$ 216.7
Cost of sales $ 60.0
$ 58.0
$ 176.6
$ 175.7
Selling, general and administrative expenses $ 5.7
$ 6.5
$ 17.6
$ 17.3
Operating income $ 9.3
$ 8.6
$ 23.9
$ 23.7
Cost of sales as a % of net sales 80.0 % 79.3 % 80.9 % 81.1 %
Selling, general and administrative expenses % of sales 7.6 % 8.9 % 8.1 % 8.0 %
Operating income as a % of net sales 12.4 % 11.8 % 11.0 % 10.9 %

~~Third quarter of 2018~~2019 compared with the ~~third quarter~~first six months of ~~2017~~2018

The Engineered Systems segment’s ~~third quarter~~first six months of ~~2018~~2019 net sales increased ~~2.6%~~3.8%. Operating income ~~increased 8.1%~~for the first six months of 2019 decreased 17.8%.

The ~~third quarter~~first six months of ~~2018~~2019 net sales reflected higher sales of ~~$6.6~~$11.7 million of engineered products and services, ~~and $1.1 million of energy systems products,~~ partially offset by lower sales of ~~$5.8~~$5.5 million of turbine ~~engines.~~engines, and lower sales of $0.7 million of energy systems products. The higher sales of engineered products and services, primarily reflected increased sales for nuclear manufacturing and ~~aviation manufacturing~~space programs, ~~and~~as well as increased sales related to missile defense. ~~Sales of turbine engines reflected lower sales of cruise missile engines.~~ Operating income in the ~~third quarter~~first six months of ~~2018 increased~~2019 decreased primarily due to ~~higher~~lower sales ~~and product mix.~~of turbine engines.

The ~~third quarter~~first six months of ~~2018~~2019 cost of sales increased ~~$2.0~~by $7.2 million and reflected the impact of higher sales. Cost of sales as a percentage of net sales for the third quarter of 2018 increased to 80.0% from 79.3%. Selling, general and administrative expenses, including research and development and bid and proposal expense, decreased $0.8 million for the third quarter of 2018. The selling, general and administrative expense percentage was 7.6% for the third quarter of 2018, compared with 8.9%.

~~First nine months of 2018 compared with the first nine months of 2017~~

~~The Engineered Systems segment’s first nine months of 2018 net sales increased 0.6%. Operating income increased 0.8%.~~

The first nine months of 2018 sales reflected higher sales of $10.1 million of engineered products and services and $0.4 million of energy systems products, partially offset by lower sales of $9.1 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 the first nine months of 2018, increased due to higher sales of engineered products and services, partially offset by lower sales of turbine engines.

~~The first nine months of 2018 cost of sales increased $0.9 million and reflected the impact of higher sales. Cost of sales as a percentage of net~~ sales for the first ~~nine~~six months of ~~2018 decreased slightly~~2019 increased to ~~80.9%~~83.3% from ~~81.1%~~81.5%. Selling, general and administrative expenses, including research and development and bid and proposal expense, increased ~~$0.3~~to $12.8 million for the first ~~nine~~six months of 2019, compared with $11.9 million for the first six months of 2018. The selling, general and administrative expense percentage increased ~~slightly~~ to ~~8.1%~~8.6% for the first ~~nine~~six months of ~~2018~~2019 compared with ~~8.0%~~8.3%.

Financial Condition, Liquidity and Capital Resources

Our net cash provided by operating activities was ~~$321.4~~$163.3 million for the first ~~nine~~six months of ~~2018,~~2019, compared with net cash provided by operating activities of ~~$248.3 million for the first nine months of 2017.~~$179.5 million. The ~~higher~~lower cash provided by operating activities in the first ~~nine~~six months of ~~2018~~2019 reflected ~~the impact of~~higher income tax payments, partially offset by higher operating ~~income and cash flow from e2v, as well as lower income tax payments. The first nine months of 2017 reflected the impact of transaction related payments for the e2v acquisition.~~income. Our net cash used in investing activities was ~~$66.9~~$261.6 million for the first ~~nine~~six months of ~~2018,~~2019, compared with net cash used by investing activities of ~~$813.2 million for the first nine months of 2017.~~$46.5 million. The ~~2017~~2019 amount included ~~$740.6~~$225.0 million for the acquisition of ~~e2v.~~the scientific imaging businesses of Roper Technologies, Inc. Capital expenditures for the first ~~nine~~six months of 2019 and 2018 ~~and 2017~~ were ~~$68.1~~$39.4 million and ~~$40.5~~$47.2 million, respectively.

Our goodwill was ~~$1,755.5~~$1,888.0 million at ~~September~~June 30, ~~2018~~2019 and ~~$1,776.7~~$1,735.2 million at December ~~31, 2017.~~30, 2018. The ~~decrease~~increase in the balance of goodwill in ~~2018 included~~2019 resulted from $145.5 million in goodwill from the ~~impact~~acquisition of ~~exchange rate changes, partially offset by adjustments for~~ the ~~purchase accounting allocation for the e2v and SSI acquisitions.~~scientific imaging businesses of Roper Technologies, Inc. Teledyne’s net acquired intangible assets were ~~$357.8~~$379.9 million at ~~September~~June 30, ~~2018~~2019 and ~~$398.9~~$344.3 million at December ~~31, 2017.~~30, 2018. The ~~decrease~~increase in the balance of net acquired intangible assets ~~reflected amortization and~~resulted from $52.4 million in acquired intangible assets from the ~~impact~~acquisition of ~~exchange rate changes,~~the scientific imaging businesses of Roper Technologies, Inc., partially offset by ~~adjustments for the purchase accounting allocation for the SSI acquisition.~~amortization of acquired intangible assets. The Company ~~completed~~is in the process of specifically identifying the amount to be assigned to certain assets, including acquired intangible assets, and liabilities and the related impact on taxes and goodwill for the ~~e2v~~acquisition of the scientific imaging businesses of Roper Technologies, Inc. since there was insufficient time between the acquisition date and ~~SSI acquisitions, resulting~~the end of the period to finalize the analysis.

Effective June 4, 2019, Teledyne and 3M Company entered into a purchase agreement whereby Teledyne agreed to acquire the gas and flame detection business of 3M Company for $230.0 million in ancash. The transaction is expected to close in the third quarter of 2019, and is subject to customary closing conditions, including French regulatory approval.

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 ~~goodwill of $3.9~~$250.0 million ~~for e2v and $4.8 million for SSI in 2018.~~

subject to certain conditions.

Financing activities ~~used~~provided cash of ~~$190.5~~$64.6 million for the first ~~nine~~six months of ~~2018,~~2019, compared with cash ~~provided~~used by financing activities of ~~$535.6 million for the first nine months of 2017.~~$90.9 million. Financing activities for the first ~~nine~~six months of 2019 reflected net proceeds from the $750.0 million credit facility of $47.5 million. Financing activities for the first six months of 2018 reflected net payments against the $750.0 million credit facility of ~~$165.0~~$115.0 million. Financing activities for the first nine months of 2017 reflected net borrowings from the $750.0 million credit facility of $285.0 million and the proceeds from a $100.0 million term loan, primarily to fund the e2v acquisition. Proceeds from the exercise of stock options were ~~$36.1~~$20.7 million and ~~$18.7~~$23.8 million for the first ~~nine~~six months of 2019 and 2018, ~~and 2017,~~ respectively. In March 2017, Teledyne entered into a $100.0 million term loan with a maturity date of October 30, 2019. Subsequently, in March 2017, Teledyne entered into a cross currency swap to effectively convert the $100.0 million term loan to a 93.0 million Euro denominated instrument with a fixed euro interest rate of 0.7055%. The proceeds from the term loan were used in connection with the acquisition of e2v. Teledyne used the proceeds of a private placement to, among other things, repay indebtedness incurred in connection with the acquisition of e2v and for general corporate purposes.

Our principal cash and capital requirements are to fund working capital needs, capital expenditures, income tax payments, pension contributions, debt service requirements and the stock repurchase program, as well as acquisitions. It is anticipated that operating cash flow, together with available borrowings under the credit facility described below, will be sufficient to meet these requirements over the next twelve months. We may raise debt capital, depending on financial, market and economic conditions. We may need to raise additional capital to support acquisitions. We currently expect to spend approximately $90.0 million for capital expenditures in ~~2018,~~2019, of which ~~$68.1~~$39.4 million has been spent in the first ~~nine~~six months of ~~2018.~~2019. No cash pension contributions have been made since 2013 or are planned for the remainder of ~~2018~~2019 for the domestic qualified pension plan.

Total debt ~~including capital lease obligations,~~ at ~~September~~June 30, ~~2018~~2019 was ~~$837.3~~$791.7 million. At ~~September~~June 30, ~~2018, no amounts were~~2019, $76.5 million was outstanding under the $750.0 million credit facility. At ~~September~~June 30, ~~2018,~~2019, Teledyne had ~~$38.4~~$33.1 million in outstanding letters of credit. Available borrowing capacity under the $750.0 million credit facility, which is reduced by borrowings and certain outstanding letters of credit, was ~~$714.8~~$644.8 million at ~~September~~June 30, ~~2018.~~2019. The credit agreements require the Company to comply with various financial and operating covenants and at ~~September~~June 30, ~~2018,~~2019, the Company was in compliance with these covenants.

As of ~~September~~June 30, ~~2018,~~2019, the Company had an adequate amount of margin between required financial covenant ratios (as required by applicable credit agreements) and our actual ratios. At ~~September~~June 30, ~~2018,~~2019, the required financial ratios and the actual ratios were as follows:



$750.0 million Credit Facility expires ~~December 2020 and $114.0 million term loans due through January 2022 (issued in October 2012)~~March 2024 and $100.0 million term loan due October 2019 (issued in March 2017)
Financial Covenants	Requirement	Actual Measure
Consolidated Leverage Ratio (Net Debt/EBITDA) (a)	No more than 3.25 to 1	~~1.7~~1.4 to 1
Consolidated Interest Coverage Ratio (EBITDA/Interest) (b)	No less than 3.0 to 1	~~18.9~~22.7 to 1

$~~615.9~~609.3 million Private Placement Senior Notes due from 2019 to 2024
Financial Covenants	Requirement	Actual Measure
Consolidated Leverage Ratio (Net Debt/EBITDA) (a)	No more than 3.25 to 1	~~1.7~~1.4 to 1
Consolidated Interest Coverage Ratio (EBITDA/Interest) (b)	No less than 3.0 to 1	~~18.9~~22.7 to 1


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


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

Our liquidity is not dependent upon the use of off-balance sheet financial arrangements. We have no off-balance sheet financing arrangements that incorporate the use of special purpose entities or unconsolidated entities.

Critical Accounting Policies

Our critical accounting policies are those that are reflective of significant judgments and uncertainties, and may potentially result in materially different results under different assumptions and conditions. Our critical accounting policies are the following: revenue recognition; accounting for pension plans; accounting for business combinations, goodwill, acquired intangible assets and other long-lived assets; and accounting for income taxes.

For additional discussion of the application of the critical accounting policies and other accounting policies, see Note 1 to these condensed consolidated financial statements and also Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Note 2 of the Notes to Consolidated Financial Statements included in Teledyne’s ~~2017~~2018 Form 10-K.

Safe Harbor Cautionary Statement Regarding Forward-Looking Information

From time to time we make, and this report contains, forward looking statements, as defined in the Private Securities Litigation Reform Act of 1995, directly or indirectly relating to sales, earnings, operating margin, growth opportunities, acquisitions, ~~and divestitures,~~ product sales, capital expenditures, pension matters, stock option compensation expense, the credit facility, interest expense, severance, relocation and facility consolidation costs, environmental remediation costs, stock repurchases, taxes, exchange rate fluctuations and strategic plans. Forward-looking statements are generally accompanied by words such as “estimate”, “project”, “predict”, “believes” or “expect”, that convey the uncertainty of future events or outcomes. All statements made in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in other sections of this Form 10-Q 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 ~~decision to~~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 the ~~Company’s~~company’s businesses that supply the oil and gas industry. Increasing fuel costs and disruptions from the grounding of Boeing's 737 Max aircraft could negatively affect the markets of our commercial aviation businesses. In addition, financial market fluctuations affect the value of the ~~Company’s~~company’s pension assets.

Information regarding the impact of the Tax Act is based on our current calculations, as well as our current interpretations, assumptions and expectations relating to the Tax Act, which are subject to change, possibly material changes.

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

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

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

Readers are urged to read our periodic reports filed with the Securities and Exchange Commission for a more complete description of our Company, its businesses, its strategies and the various risks that we face. Various risks are identified in Teledyne’s ~~2017~~2018 Form 10-K and subsequent Quarterly Reports on Form 10-Q.

We assume no duty to publicly update or revise any forward-looking statements, whether as a result of new information or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Except as set forth below, there were no material changes to the information provided under “Item 7A, Quantitative and Qualitative Disclosure About Market Risk” included in our ~~2017~~2018 Form 10-K.

Market Risk

We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Foreign currency forward contracts are used primarily to hedge anticipated exposures. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Foreign Currency Exchange Rate Risk

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 in the U.S. dollar from its value at ~~September~~June 30, ~~2018~~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 ~~$10.2~~$8.0 million. A hypothetical 10 percent price change in the U.S. dollar from its value at ~~September~~June 30, ~~2018~~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 ~~$6.2~~$2.1 million. A hypothetical 10 percent price change in the U.S. dollar from its value at ~~September~~June 30, ~~2018~~2019 would result in a decrease or increase in the fair value of our Euro/U.S. Dollar cross currency swap designated as a cash flow hedge by approximately ~~$10.1~~$10.6 million. For additional information please see Derivative Instruments discussed in Note 4 to these condensed consolidated financial statements.

Interest Rate Exposure

We are exposed to market risk through the interest rate on our borrowings under our $750.0 million credit facility and our ~~$214.0~~$100.0 million in term loans. Borrowings under our credit facility and our 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 credit agreements. Eurocurrency or LIBOR based loans under the credit facility typically have terms of one, two, three or nine 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 agreements. As of ~~September~~June 30, ~~2018,~~2019, we had ~~$214.0~~$176.5 million in outstanding indebtedness under our credit facility and term loans. A 100 basis point increase in interest rates would result in an increase in annual interest expense of approximately ~~$2.1~~$1.8 million, assuming the ~~$214.0~~$176.5 million in debt was outstanding for the full year.



Item 4.	Controls and Procedures

Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934, are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to provide reasonable assurance that information required to be disclosed by us in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Our ~~Chairman and~~ Chief Executive Officer and our Senior Vice President and Chief Financial Officer, with the participation and assistance of other members of management, have reviewed the effectiveness of our disclosure controls and procedures and have concluded that the disclosure controls and procedures, as of ~~September~~June 30, ~~2018,~~2019, are effective at the reasonable assurance level.

In connection with our evaluation during the quarterly period ended ~~September~~June 30, ~~2018,~~2019, we have made no changes in our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

PART II OTHER INFORMATION



Item 1.	Legal Proceedings

See Item 1 of Part 1, “Financial Statements -- Note 11 -- Lawsuits, Claims, Commitments, Contingencies and Related Matters.”



Item 1A.	Risk Factors

There are no material changes to the risk factors previously disclosed in our ~~2017~~2018 Form 10-K in response to Item 1A to Part 1 of Form ~~10-K and in our Form 10-Q for the Second Quarter of 2018 in response to Item 1A to Part II of Form 10-Q.~~10-K. See also Part I Item 3, Quantitative and Qualitative Disclosures About Market Risk, for updated disclosures about interest rate exposure and exchange rate risks.



Item 6.	Exhibits



(a)	Exhibits



	Exhibit 31.1	302 Certification – ~~Robert Mehrabian~~Aldo Pichelli

	Exhibit 31.2	302 Certification – Susan L. Main

	Exhibit 32.1	906 Certification – ~~Robert Mehrabian~~Aldo Pichelli

	Exhibit 32.2	906 Certification – Susan L. Main

	Exhibit 101 (INS)	XBRL Instance Document

	Exhibit 101 (SCH)	XBRL Schema Document

	Exhibit 101 (CAL)	XBRL Calculation Linkbase Document

	Exhibit 101 (LAB)	XBRL Label Linkbase Document XBRL Schema Document

	Exhibit 101 (PRE)	XBRL Presentation Linkbase Document XBRL Schema Document

	Exhibit 101 (DEF)	XBRL Definition Linkbase Document XBRL Schema Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	TELEDYNE TECHNOLOGIES INCORPORATED



DATE: ~~October~~July 26, ~~2018~~2019	By:	/s/ Susan L. Main
		Susan L. Main, Senior Vice President and
		Chief Financial Officer
		(Principal Financial Officer and Authorized Officer)

Teledyne Technologies Incorporated

Index to Exhibits



Exhibit Number	Description


Exhibit 31.1	302 Certification – ~~Robert Mehrabian~~Aldo Pichelli

Exhibit 31.2	302 Certification – Susan L. Main

Exhibit 32.1	906 Certification – ~~Robert Mehrabian~~Aldo Pichelli

Exhibit 32.2	906 Certification – Susan L. Main

Exhibit 101 (INS)	XBRL Instance Document

Exhibit 101 (SCH)	XBRL Schema Document

Exhibit 101 (CAL)	XBRL Calculation Linkbase Document

Exhibit 101 (DEF)	XBRL Definition Linkbase Document XBRL Schema Document

Exhibit 101 (LAB)	XBRL Label Linkbase Document XBRL Schema Document

Exhibit 101 (PRE)	XBRL Presentation Linkbase Document XBRL Schema Document

3533



		PAGE
Part I	Financial Information	2

	Item 1. Financial Statements	2

	Condensed Consolidated Statements of Income	2

	Condensed Consolidated Statements of Comprehensive Income	2

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of ~~Cash Flows~~ Stockholders' Equity	4

	~~Notes to~~ Condensed Consolidated ~~Financial~~ Statements of Cash Flows	5

	Notes to Condensed Consolidated Financial Statements	6

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2021

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	3230

	Item 4. Controls and Procedures	3230

Part II	Other Information	3331

	Item 1. Legal Proceedings	3331

	Item 1A. Risk Factors	3331

	Item 6. Exhibits	3331

Signatures		3432



	Balance at December 31, 2017		Topic ASC 606 Adjustments		Balance at January 1, 2018
Assets
Accounts receivable, net	$	388.3	1.0		$	389.3
Unbilled receivables, net	$	89.8	29.0		$	118.8
Inventories, net	$	400.2	(24.8	)	$	375.4
Liabilities
Accrued liabilities	$	345.3	1.9		$	347.2
Stockholders’ Equity
Retained earnings	$	2,139.6	3.3		$	2,142.9



	For the third quarter ended September 30, 2018
	Balance as Reported		Topic ASC 606 Adjustments		Balance Without ASC 606 Adoption
Assets
Accounts receivable, net	$	387.4	(1.2	)	$	386.2
Unbilled receivables, net	$	164.4	(66.2	)	$	98.2
Inventories, net	$	377.6	46.4		$	424.0
Liabilities
Accrued liabilities	$	368.3	(6.3	)	$	362.0
Stockholders' Equity
Retained earnings	$	2,432.5	(14.7	)	$	2,417.8



	For the third quarter ended September 30, 2018						For the nine months ended September 30, 2018
	As Reported		Topic ASC 606 Adjustments		Without ASC 606 Adoption		As Reported		Topic ASC 606 Adjustments		Without ASC 606 Adoption
Net sales	$	725.3	(1.1	)	$	724.2	$	2,153.4	(44.6	)	$	2,108.8
Cost of sales	$	446.2	0.2		$	446.4	$	1,331.4	(29.5	)	$	1,301.9
Provision for income taxes	$	9.9	(0.4	)	$	9.5	$	44.1	(3.7	)	$	40.4
Net income	$	90.3	(0.9	)	$	89.4	$	242.7	(11.4	)	$	231.3



	Third Quarter (a)		Nine Months (a)
(unaudited - in millions, except per share amounts)	2017		2017
Net sales	$	662.2	$	1,992.4
Net income	$	69.0	$	142.2
Basic earnings per common share	$	1.95	$	4.04
Diluted earnings per common share	$	1.90	$	3.93