# TELEDYNE TECHNOLOGIES INC (TDY) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from TELEDYNE TECHNOLOGIES INC's 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/1094285/000109428522000049/tdy-20220102.htm Accession: 0001094285-22-000049 Filing date: 2022-02-25 Report date: 2022-01-02 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/TDY/ All MD&A years: /company/TDY/mda/ Next year: /company/TDY/mda/a-0001094285-23-000053/ (FY 2023) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Teledyne Technologies Incorporated (“Teledyne” or the “Company”) provides enabling technologies for industrial growth markets that require advanced technology and high reliability. These markets include factory automation and condition monitoring, aerospace and defense, air and water quality environmental monitoring, electronics design and development, medical imaging and pharmaceutical research, oceanographic research, and deepwater energy exploration and production. Following the 2021 acquisition of FLIR Systems, Inc. ( “FLIR”), we further evolved into a global sensing and decision-support technology company: providing specialty sensors, cameras, instrumentation, algorithms and software across the electromagnetic spectrum, as well as unmanned systems, in the subsea, land and air domains. 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. We believe that technological capabilities and innovation and the ability to invest in the development of new and enhanced products are critical to obtaining and maintaining leadership in our markets and the industries in which we compete. Strategy/Overview Our strategy continues to emphasize growth in our core markets of digital imaging, instrumentation, aerospace and defense electronics and engineered systems. Our core markets are characterized by high barriers to entry and include specialized products and services not likely to be commoditized. We intend to strengthen and expand our core businesses with targeted acquisitions and through product development. We continue to focus on balanced and disciplined capital deployment among capital expenditures, acquisitions and product development. We aggressively pursue operational excellence to continually improve our margins and earnings by emphasizing cost containment and cost reductions in all aspects of our business. At Teledyne, operational excellence includes the rapid integration of the businesses we acquire. Using complementary technology across our businesses and internal research and development, we seek to create new products to grow our company and expand our addressable markets. We continue to evaluate our businesses to ensure that they are aligned with our strategy. In connection with this strategy, on May 14, 2021, Teledyne completed the acquisition of FLIR, our largest acquisition to date. In addition to the acquisition of FLIR, we made one acquisition in 2020 and three acquisitions in 2019. See the Recent Acquisitions section for additional information. COVID and Other Matters With regard to the COVID pandemic, our first priority remains the health and safety of our employees and their families. Our manufacturing sites are deemed essential businesses and remain operational. Since the beginning of the COVID pandemic, we have practiced social distancing, enhanced cleaning protocols, increased usage of personal protective equipment and other preventative measures. Although the COVID pandemic continued to impact our business operations and practices, we experienced limited disruptions in 2021. We expect to continue to take robust actions to help protect the health, safety and well-being of our employees, to support continued performance, to support our suppliers and partners and to continue to serve our customers. Our goals have been, and continue to be to lessen the potential adverse impacts, both health and economic, and to continue to position the company for long-term success. Like the communities in which we operate, our actions have varied depending on the severity of the COVID pandemic and applicable government requirements, the needs of our employees, the needs of our customers and the needs of our business. Contingency plans remain in place in the event of significant impacts from COVID infection resurgences, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, partners and suppliers. While no company is immune to global economic challenges, Teledyne's business portfolio is well-balanced across end markets and geographies, and includes a high degree of businesses serving critical infrastructure sectors such as the defense industrial base, water and wastewater, and healthcare and public health. However, given the continuing dynamic nature of this situation, we may not fully estimate the impacts of COVID on our financial condition, results of operations or cash flows. We have experienced supply chain challenges, including increased lead times, as well as cost inflation for parts and components, logistics and labor due to availability constraints and high demand. We expect inflationary and supply chain constraint trends to continue in 2022. As part of a continuing effort to reduce costs and improve operating performance, as well as to respond to the impact of the COVID pandemic, beginning in 2020 we took actions to reduce headcount across various businesses, reducing our exposure to weak end markets, such as commercial aerospace. We also exited certain facilities no longer needed. In 2021, we took actions to integrate FLIR into our businesses resulting in higher severance and facility closure costs in the Digital Imaging segment. At January 2, 2022, an immaterial amount remains to be paid related to these actions. 21 Table of Contents The following pre-tax charges were incurred related to severance and facility consolidations (in millions): [[GREPCENT_TABLE]] [["","","2021","","2020","","2019"],["Digital Imaging","","$","23.9","","","$","2.9","","","$","1.1"],["Instrumentation","","1.3","","","5.9","","","1.5"],["Aerospace and Defense Electronics","","0.7","","","11.1","","","0.5"],["Engineered Systems","","0.4","","","0.5","","","0.1"],["Corporate","","0.1","","","0.4","","","\u2014"],["Total","","$","26.4","","","$","20.8","","","$","3.2"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","2021","","2020","","2019"],["Severance","","$","14.5","","","$","16.0","","","$","3.5"],["Facility consolidations (a)","","11.9","","","4.8","","","(0.3)"],["Total","","$","26.4","","","$","20.8","","","$","3.2"]] [[/GREPCENT_TABLE]] (a) 2019 includes the reversal of certain amounts recorded in 2018 no longer needed. [[GREPCENT_TABLE]] [["","","2021","","2020","","2019"],["Cost of sales","","$","2.4","","","$","10.3","","","$","0.8"],["Selling, general and administrative expenses","","24.0","","","10.5","","","2.4"],["Total","","$","26.4","","","$","20.8","","","$","3.2"]] [[/GREPCENT_TABLE]] Recent Acquisitions See Note 3 of the Notes to Consolidated Financial Statements for additional information about our recent acquisitions. Acquisition of FLIR Systems, Inc. On May 14, 2021, Teledyne acquired the outstanding stock of FLIR for approximately $8.1 billion, comprising of net cash payments of $3.7 billion, $3.9 billion of Teledyne common stock, and the assumption of FLIR debt of $0.5 billion. FLIR stockholders received $28.00 per share in cash and 0.0718 shares of Teledyne common stock for each FLIR share, and Teledyne issued approximately 9.5 million shares of common stock at $409.41 per share. See Note 9 to these Notes to Consolidated Financial Statements for information regarding financing activities undertaken in connection with the FLIR acquisition. FLIR is an industrial technology company focused on intelligent sensing solutions for defense and industrial applications. FLIR offers a diversified portfolio that serves a number of applications in government and defense, industrial, and commercial markets. FLIR develops technologies that enhance perception and awareness. FLIR designs, develops, markets, and distributes solutions that detect people, objects and substances that may not be perceived by human senses and improve the way people interact with the world around them. FLIR technologies include thermal imaging systems, visible-light imaging systems, locater systems, measurement and diagnostic systems, and advanced threat-detection solutions. FLIR is part of the Digital Imaging segment. The significant factors that resulted in recognition of goodwill include the acquired businesses market presence and leading positions, growth opportunities in the markets in which they operate, their experienced work force and established operating infrastructures. Goodwill resulting from the FLIR acquisition will not be deductible for tax purposes. We are accounting for the FLIR acquisition under the acquisition method and are required to measure identifiable assets acquired and liabilities assumed of the acquiree at the fair values on the closing date. The Company made an initial allocation of the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities. As of January 2, 2022, the measurement period (not to exceed one year) is open; therefore, the assets acquired and liabilities assumed related to the FLIR acquisition are subject to adjustment until the end of the respective measurement period. The Company is in the process of specifically identifying the amounts assigned to certain assets, including acquired intangible assets, and liabilities and the related impact on taxes and goodwill for the FLIR acquisition. The Company is in the process of reviewing a third-party valuation of certain intangible assets and tangible assets of FLIR. The fair values of acquired intangibles are determined based on estimates and assumptions that are deemed reasonable by the Company. The amounts recorded as of January 2, 2022 are preliminary since there was insufficient time between the acquisition date and the end of the period to finalize the analysis. 2020 Acquisition On January 5, 2020, we acquired OakGate Technology, Inc. (“OakGate”) for $28.5 million in cash, net of cash acquired. Based in Loomis, California, OakGate provides software and hardware designed to test electronic data storage devices from development through manufacturing and end-use applications. The acquired business is part of the Test and Measurement product line within the Instrumentation segment. 22 Table of Contents 2019 Acquisitions On February 5, 2019, we acquired the scientific imaging businesses of Roper Technologies, Inc. for $224.8 million in cash. The acquired businesses include Princeton Instruments, Photometrics and Lumenera. The acquired businesses provide a range of imaging solutions, primarily for life sciences, academic research and customized OEM industrial imaging solutions. Princeton Instruments and Photometrics manufacture state-of-the-art cameras, spectrographs and optics for advanced research in physical sciences, life sciences research and spectroscopy imaging. Applications and markets include materials analysis, quantum technology and cell biology imaging using fluorescence and chemiluminescence. Lumenera primarily provides rugged USB-based customized cameras for markets such as traffic management, as well as life sciences applications. Principally located in the United States and Canada, the acquired businesses are part of the Digital Imaging segment. On August 1, 2019, we acquired the gas and flame detection businesses of 3M Company for $233.5 million in cash. The gas and flame detection businesses includes Oldham, Simtronics, Gas Measurement Instruments, Detcon and select Scott Safety products. The gas and flame detection businesses provides a portfolio of fixed and portable industrial gas and flame detection instruments used in a variety of industries including petrochemical, power generation, oil and gas, food and beverage, mining and waste water treatment. Principally located in France, the United Kingdom and the United States, the acquired businesses are part of the Environmental Instrumentation product line of the Instrumentation segment. On August 30, 2019, we acquired Micralyne Inc. (“Micralyne”) for $25.7 million in cash. Micralyne provides micro electromechanical systems (“MEMS”) devices. In particular, Micralyne possesses unique microfluidic technology for biotech applications, as well as capabilities in non-silicon-based MEMS (e.g. gold, polymers) often required for human body compatibility. Based in Edmonton, Alberta, Canada, the acquired business is part of the Digital Imaging segment. Consolidated Operating Results Our fiscal year is determined based on a 52- or 53-week convention ending on the Sunday nearest to December 31. Fiscal years 2021 and 2019 contained 52 weeks while fiscal year 2020 contained 53 weeks. Certain prior year amounts have been reclassified to conform to the current period presentation. The Company now discloses acquired intangible asset amortization on a separate income statement line. Acquired intangible asset amortization was previously included in selling, general and administrative expenses. In addition, the Company now discloses the balance of long-term deferred tax liabilities on the face of the balance sheet. Long-term deferred tax liabilities was previously included in other long-term liabilities. The following are selected financial highlights for 2021, 2020 and 2019 (in millions, except per-share amounts): [[GREPCENT_TABLE]] [["","","2021","","2020","","2019"],["Net sales","","$","4,614.3","","","$","3,086.2","","","$","3,163.6"],["Costs and expenses"],["Cost of sales","","2,772.9","","","1,905.3","","","1,920.3"],["Selling, general and administrative expenses (a)","","1,067.8","","","662.0","","","715.1"],["Acquired intangible asset amortization (a)","","149.3","","","38.8","","","36.5"],["Total costs and expenses","","3,990.0","","","2,606.1","","","2,671.9"],["Operating income","","624.3","","","480.1","","","491.7"],["Interest and debt expense, net","","(104.2)","","","(15.3)","","","(21.0)"],["Non-service retirement benefit income","","11.2","","","12.1","","","8.0"],["Other income (expense), net","","2.5","","","(7.2)","","","(5.0)"],["Income before income taxes","","533.8","","","469.7","","","473.7"],["Provision for income taxes","","88.5","","","67.8","","","71.4"],["Net income","","$","445.3","","","$","401.9","","","$","402.3"],["Basic earnings per common share","","$","10.31","","","$","10.95","","","$","11.08"],["Diluted earnings per common share","","$","10.05","","","$","10.62","","","$","10.73"]] [[/GREPCENT_TABLE]] (a)     Acquired intangible asset amortization was previously included in selling, general and administrative expenses. Prior period amounts have been reclassified to conform to the current presentation.  23 Table of Contents Our businesses are aligned in four business segments: Digital Imaging, Instrumentation, Aerospace and Defense Electronics and Engineered Systems. Our four business segments and their respective percentage contributions to our total net sales in 2021, 2020 and 2019 are summarized in the following table: [[GREPCENT_TABLE]] [["","","Percentage of Total Net Sales"],["Segment contribution to total net sales:","","2021","","2020","","2019"],["Digital Imaging","","52","%","","32","%","","31","%"],["Instrumentation","","25","%","","35","%","","35","%"],["Aerospace and Defense Electronics","","14","%","","19","%","","22","%"],["Engineered Systems","","9","%","","14","%","","12","%"],["","","100","%","","100","%","","100","%"]] [[/GREPCENT_TABLE]] Results of Operations 2021 compared with 2020 [[GREPCENT_TABLE]] [["Net sales (dollars in millions)","","2021","","2020","","% Change"],["Digital Imaging","","$","2,412.9","","","$","986.0","","","144.7","%"],["Instrumentation","","1,166.9","","","1,094.5","","","6.6","%"],["Aerospace and Defense Electronics","","628.7","","","589.4","","","6.7","%"],["Engineered Systems","","405.8","","","416.3","","","(2.5)","%"],["Total net sales","","$","4,614.3","","","$","3,086.2","","","49.5","%"],["Results of operations (dollars in millions)","","2021","","2020","","% Change"],["Digital Imaging","","$","325.6","","","$","192.8","","","68.9","%"],["Instrumentation","","253.7","","","213.2","","","19.0","%"],["Aerospace and Defense Electronics","","133.2","","","80.8","","","64.9","%"],["Engineered Systems","","48.6","","","50.1","","","(3.0)","%"],["Corporate expense","","(136.8)","","","(56.8)","","","140.8","%"],["Operating income","","624.3","","","480.1","","","30.0","%"],["Interest and debt expense, net","","(104.2)","","","(15.3)","","","581.0","%"],["Non-service retirement benefit income","","11.2","","","12.1","","","(7.4)","%"],["Other income (expense), net","","2.5","","","(7.2)","","","*"],["Income before income taxes","","533.8","","","469.7","","","13.6","%"],["Provision for income taxes","","88.5","","","67.8","","","30.5","%"],["Net income","","$","445.3","","","$","401.9","","","10.8","%"]] [[/GREPCENT_TABLE]]  * not meaningful 24 Table of Contents Net sales and cost of sales by segment and total company (dollars in millions): [[GREPCENT_TABLE]] [["","2021","","2020","","Change"],["Digital Imaging"],["Net sales","$","2,412.9","","","$","986.0","","","$","1,426.9"],["Cost of sales","$","1,421.7","","","$","569.2","","","$","852.5"],["Cost of sales % of net sales","58.9","%","","57.7","%"],["Instrumentation"],["Net sales","$","1,166.9","","","$","1,094.5","","","$","72.4"],["Cost of sales","$","617.8","","","$","603.4","","","$","14.4"],["Cost of sales % of net sales","53.0","%","","55.1","%"],["Aerospace and Defense Electronics"],["Net sales","$","628.7","","","$","589.4","","","$","39.3"],["Cost of sales","$","400.9","","","$","395.1","","","$","5.8"],["Cost of sales % of net sales","63.8","%","","67.0","%"],["Engineered Systems"],["Net sales","$","405.8","","","$","416.3","","","$","(10.5)"],["Cost of sales","$","332.5","","","$","337.6","","","$","(5.1)"],["Cost of sales % of net sales","81.9","%","","81.1","%"],["Total Company"],["Net sales","$","4,614.3","","","$","3,086.2","","","$","1,528.1"],["Cost of sales","$","2,772.9","","","$","1,905.3","","","$","867.6"],["Cost of sales % of net sales","60.1","%","","61.7","%"]] [[/GREPCENT_TABLE]] We reported net sales of $4,614.3 million in 2021, compared with net sales of $3,086.2 million for 2020, an increase of 49.5%. Net income increased 10.8% to $445.3 million ($10.05 per diluted share) in 2021, compared with net income of $401.9 million ($10.62 per diluted share) in 2020.   Total year 2021 net sales included $1,273.6 million in incremental net sales from the acquisition of FLIR. In connection with the 2021 FLIR acquisition, Teledyne incurred pretax expenses of $350.3 million, which included $110.3 million in acquired intangible asset amortization expense, $106.4 million in acquired inventory step-up expense, $103.0 million of transaction and integration-related costs and $30.6 million in bridge loan and debt extinguishment fees. Total year 2021 also included $39.0 million of acquired intangible asset amortization expense for acquisitions completed in prior periods. Total year 2020 included pretax charges of $72.1 million which included $38.8 million in acquired intangible asset amortization expense and $33.3 million in severance, facility consolidation and other costs. Net income for 2021 and 2020 also included net discrete tax benefits of $34.7 million and $34.6 million, respectively. Net sales The increase in net sales in 2021, compared with 2020, reflected higher net sales in each segment except the Engineered Systems segment. Total year 2021 also included net sales from the acquisition of FLIR in the Digital Imaging segment, as well as organic sales growth. Sales under contracts with the U.S. Government were approximately 26% of net sales in both 2021 and in 2020. Sales to international customers represented approximately 47% of net sales in 2021 and 45% of net sales in 2020. Cost of Sales Cost of sales increased by $867.6 million in 2021, compared with 2020, which primarily reflected the impact of higher net sales and $106.4 million in acquired inventory step-up expense from the acquisition of FLIR. Cost of sales as a percentage of net sales for 2021 was 60.1%, compared with 61.7% for 2020. The lower cost of sales percentage in 2021, primarily reflects the impact of the FLIR acquisition which carries a lower cost of sales percentage than the other Teledyne businesses, partially offset by the impact of acquired inventory step-up expense from the acquisition of FLIR. Selling, general and administrative expenses Selling, general and administrative expenses, including research and development expense, were higher in 2021, compared with 2020, and primarily reflected the impact of higher net sales, as well as $102.7 million in acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition and higher research and development expense. Corporate administrative expense in 2021 was $136.8 million, compared with $56.8 million in 2020. The higher 2021 amount included $77.1 million in acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition. For 2021, we recorded a total of $20.0 million in stock option expense, of which $6.1 million was recorded within corporate 25 Table of Contents expense and $13.9 million was recorded in the operating segment results. For 2020, we recorded a total of $24.7 million in stock option expense, of which $7.2 million was recorded within corporate expense and $17.5 million was recorded in the operating segment results. Selling, general and administrative expenses as a percentage of net sales was 23.2% for 2021, compared with 21.5% for 2020. The higher percentage in 2021 primarily reflected the impact of acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition. Acquired Intangible Asset Amortization Acquired intangible asset amortization for 2021 was $149.3 million, compared with $38.8 million for 2020. The 2021 includes $110.3 million in acquired intangible asset amortization from the FLIR acquisition. Pension Service Expense Pension service expense is included in both cost of sales and selling, general and administrative expense. Pension service expense in 2021 was $10.6 million compared with $10.4 million in 2020. Operating Income Operating income for 2021 was $624.3 million, compared with $480.1 million for 2020, an increase of 30.0%. The increase in operating income primarily reflected higher operating income in each segment except the Engineered Systems segment. Corporate expense was $136.8 million in 2021 compared with $56.8 million and included $77.1 million in acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition in 2021. Operating income in 2021 and 2020 included charges of $26.4 million and $33.3 million, respectively, primarily related to severance, facility consolidation and other costs. Of these amounts, severance and facility consolidation expense totaled $26.4 million in 2021 and $20.8 million in 2020. The incremental operating income included in the results for 2021 from the FLIR acquisitions was $80.4 million, which included $242.6 million of acquisition-related transaction and purchase accounting expenses. Interest Expense, Interest Income, Non-Service Retirement Benefit Income and Other Expense Interest expense, including credit facility fees and other bank charges, was $104.8 million in 2021, compared with $15.8 million in 2020. The 2021 amount primarily reflected interest and debt expense on the debt incurred to fund the cash portion of the FLIR acquisition, which included $30.6 million in bridge loan and debt extinguishment fees. Interest income was less than $1.0 million in both 2021 and 2020. Non-service retirement benefit income was $11.2 million in 2021, compared with $12.1 million in 2020. Other income and expense was income of $2.5 million for 2021, compared with expense of $7.2 million in 2020. The 2020 amount reflected higher foreign currency translation losses. Income Taxes The Company’s effective tax rate for 2021 was 16.6%, compared with 14.4% for 2020. For 2021, net discrete income tax benefits were $34.7 million, which included an income tax benefit of $18.2 million primarily related to the resolution of certain FLIR tax reserves and a $13.1 million income tax benefit related to share-based accounting. For 2020, net discrete income tax benefits were $34.6 million, which included a $20.9 million income tax benefit related to share-based accounting, $9.8 million in income tax benefit related to U.S. export sales, U.S. research credits and other items. Excluding the net discrete income tax benefits in both years, the effective tax rates would have been 23.1% for 2021 and 21.8% for 2020. 26 Table of Contents 2020 compared with 2019 [[GREPCENT_TABLE]] [["Net sales (dollars in millions)","","2020","","2019","","% Change"],["Digital Imaging","","$","986.0","","","$","992.9","","","(0.7)","%"],["Instrumentation","","1,094.5","","","1,105.1","","","(1.0)","%"],["Aerospace and Defense Electronics","","589.4","","","690.1","","","(14.6)","%"],["Engineered Systems","","416.3","","","375.5","","","10.9","%"],["Total sales","","$","3,086.2","","","$","3,163.6","","","(2.4)","%"],["Results of operations (dollars in millions)","","2020","","2019","","% Change"],["Digital Imaging","","$","192.8","","","$","176.5","","","9.2","%"],["Instrumentation","","213.2","","","200.4","","","6.4","%"],["Aerospace and Defense Electronics","","80.8","","","143.4","","","(43.7)","%"],["Engineered Systems","","50.1","","","36.5","","","37.3","%"],["Corporate expense","","(56.8)","","","(65.1)","","","(12.7)","%"],["Operating income","","480.1","","","491.7","","","(2.4)","%"],["Interest and debt expense, net","","(15.3)","","","(21.0)","","","(27.1)","%"],["Non-service retirement benefit income","","12.1","","","8.0","","","51.3","%"],["Other expense, net","","(7.2)","","","(5.0)","","","44.0","%"],["Income before income taxes","","469.7","","","473.7","","","(0.8)","%"],["Provision for income taxes","","67.8","","","71.4","","","(5.0)","%"],["Net income","","$","401.9","","","$","402.3","","","(0.1)","%"]] [[/GREPCENT_TABLE]] Net sales and cost of sales by segment and total company (dollars in millions): [[GREPCENT_TABLE]] [["","2020","","2019","","Change"],["Digital Imaging"],["Net sales","$","986.0","","$","992.9","","$","(6.9)"],["Cost of sales","$","569.2","","$","580.6","","$","(11.4)"],["Cost of sales % of net sales","57.7","%","","58.5","%"],["Instrumentation"],["Net sales","$","1,094.5","","$","1,105.1","","$","(10.6)"],["Cost of sales","$","603.4","","$","612.8","","$","(9.4)"],["Cost of sales % of net sales","55.1","%","","55.5","%"],["Aerospace and Defense Electronics"],["Net sales","$","589.4","","$","690.1","","$","(100.7)"],["Cost of sales","$","395.1","","$","414.7","","$","(19.6)"],["Cost of sales % of net sales","67.0","%","","60.1","%"],["Engineered Systems"],["Net sales","$","416.3","","","$","375.5","","","$","40.8"],["Cost of sales","$","337.6","","","$","312.2","","","$","25.4"],["Cost of sales % of net sales","81.1","%","","83.1","%"],["Total Company"],["Net sales","$","3,086.2","","$","3,163.6","","$","(77.4)"],["Cost of sales","$","1,905.3","","$","1,920.3","","$","(15.0)"],["Cost of sales % of net sales","61.7","%","","60.7","%"]] [[/GREPCENT_TABLE]] 27 Table of Contents We reported net sales of $3,086.2 million in 2020, compared with net sales of $3,163.6 million for 2019, a decrease of 2.4%. Net income was $401.9 million ($10.62 per diluted share) in 2020, compared with net income of $402.3 million ($10.73 per diluted share) in 2019, a decrease of 0.1%. Total year 2020 and 2019 reflected pretax charges totaling $33.3 million and $8.8 million, respectively, primarily in severance, facility consolidation, acquisition and certain changes in contract cost estimates. Net income for 2020 and 2019 also included net discrete tax benefits of $34.6 million and $26.1 million, respectively. Net sales The decrease in net sales in 2020, compared with 2019, reflected lower net sales in each segment except the Engineered Systems segment. Net sales in 2020 included $68.9 million in incremental net sales from recent acquisitions. Sales under contracts with the U.S. Government were approximately 26% of net sales in 2020 and 24% of net sales in 2019. Sales to international customers represented approximately 45% of net sales in 2020 and 44% of net sales in 2019. Cost of Sales Cost of sales decreased by $15.0 million in 2020, compared with 2019, which primarily reflected the impact of lower net sales, partially offset by higher severance and facility consolidation expense. Cost of sales as a percentage of net sales for 2020 was 61.7%, compared with 60.7% for 2019. Selling, general and administrative expenses Selling, general and administrative expenses, including research and development expense, were lower in 2020, compared with 2019. The decrease primarily reflected the impact of lower net sales. Corporate administrative expense in 2020 was $56.8 million, compared with $65.1 million in 2019. The lower 2020 amount primarily reflected lower compensation expense. For 2020, we recorded a total of $24.7 million in stock option expense, of which $7.2 million was recorded within corporate expense and $17.5 million was recorded in the operating segment results. For 2019, we recorded a total of $26.1 million in stock option expense, of which $9.7 million was recorded within corporate expense and $16.4 million was recorded in the operating segment results. Selling, general and administrative expenses as a percentage of net sales was 21.5% for 2020, compared with 22.6% for 2019. Acquired Intangible Asset Amortization Acquired intangible asset amortization for 2020 was $38.8 million, compared with $36.5 million for 2019. Pension Service Expense Pension service expense is included in both cost of sales and selling, general and administrative expense. Pension service expense in 2020 was $10.4 million compared with $9.4 million in 2019. Operating Income Operating income for 2020 was $480.1 million, compared with $491.7 million for 2019, a decrease of 2.4%. The decrease in operating income primarily reflected lower operating income in the Aerospace and Defense Electronics segment, partially offset by higher operating income in our other three segments. Operating income in 2020 and 2019 included charges of $33.3 million and $8.8 million, respectively, primarily related to severance, facility consolidation and acquisition expense and certain changes in contract cost estimates. Of these amounts, severance and facility consolidation expense totaled $20.8 million in 2020 and $3.2 million in 2019. The incremental operating income included in the results for 2020 from acquisitions was $4.1 million. Interest Expense, Interest Income, Non-Service Retirement Benefit Income and Other Expense Interest expense, including credit facility fees and other bank charges, was $15.8 million in 2020 compared with $22.0 million in 2019 and reflected the impact of lower average debt levels in 2020. Interest income was $0.5 million in 2020 and $1.0 million in 2019. Non-service retirement benefit income was $12.1 million in 2020, compared with $8.0 million in 2019. Other expense was $7.2 million for 2020, compared with expense of $5.0 million in 2019 and reflected higher foreign currency translation losses. Income Taxes The Company’s effective tax rate for 2020 was 14.4%, compared with 15.1% for 2019. For 2020, net discrete income tax benefits were $34.6 million, which included a $20.9 million income tax benefit related to share-based accounting, $9.8 million primarily related to U.S. export sales, U.S. research credits and other items. For 2019, net discrete income tax benefits were $26.1 million, which included a $15.4 million income tax benefit related to share-based accounting, $13.1 million in income tax benefit as a result of the remeasurement of uncertain tax positions due to expiration of statute of limitations, a favorable tax settlement and a tax benefit related to U.S. export sales. Excluding the net discrete income tax benefits in both years, the effective tax rates would have been 21.8% for 2020 and 20.6% for 2019. 28 Table of Contents Segments The following discussion of our four segments should be read in conjunction with Note 12 of the Notes to Consolidated Financial Statements. Digital Imaging [[GREPCENT_TABLE]] [["(Dollars in millions)","","2021 (a)","","2020","","2019"],["Net sales","","$","2,412.9","","$","986.0","","$","992.9"],["Cost of sales","","$","1,421.7","","$","569.2","","$","580.6"],["Selling, general and administrative expenses (b)","","$","537.2","","$","205.9","","$","217.2"],["Acquired intangible asset amortization (b)","","$","128.4","","$","18.1","","$","18.6"],["Operating income","","$","325.6","","$","192.8","","$","176.5"],["Cost of sales % of net sales","","58.9","%","","57.7","%","","58.5","%"],["Selling, general and administrative expenses % of net sales","","22.3","%","","20.9","%","","21.9","%"],["Acquired intangible asset amortization % of net sales","","5.3","%","","1.8","%","","1.8","%"],["Operating income % of net sales","","13.5","%","","19.6","%","","17.8","%"],["International sales % of net sales","","55.1","%","","60.8","%","","59.7","%"],["U.S. Government sales % of net sales","","21.4","%","","12.3","%","","10.8","%"]] [[/GREPCENT_TABLE]] (a)     On May 14, 2021, the Company completed the acquisition of FLIR, and the 2021 financial results of FLIR have been included since the date of the acquisition. (b)    Acquired intangible asset amortization was previously included in selling, general and administrative expenses. Our Digital Imaging segment includes high-performance sensors, cameras and systems, within the visible, infrared and X-ray spectra for use in industrial, government and medical applications, as well as MEMS and high-performance, high-reliability semiconductors including analog-to-digital and digital-to-analog converters. It also includes our sponsored and centralized research laboratories which benefit government programs and commercial businesses. Teledyne acquired FLIR in May 2021. FLIR offers a diversified portfolio that serves a number of applications in government and defense, industrial, and commercial markets. FLIR develops technologies that enhance perception and awareness. FLIR designs, develops, markets, and distributes solutions that detect people, objects and substances that may not be perceived by human senses and improve the way people interact with the world around them. FLIR technologies include thermal imaging systems, visible-light imaging systems, locater systems, measurement and diagnostic systems, and advanced threat-detection solutions. 2021 compared with 2020 Our Digital Imaging segment net sales for 2021 increased 144.7%, compared with 2020. Operating income for 2021 increased 68.9%, compared with 2020. Total year 2021 net sales included $1,273.6 million of incremental net sales from the FLIR acquisition as well as organic sales growth from industrial and scientific sensors and cameras, x-ray products, micro-electro-mechanical systems (“MEMS”) and detectors for space imaging applications, partially offset by lower sales for geospatial imaging systems. The increase in operating income in the 2021 reflected the contribution from FLIR, partially offset by $242.6 million of FLIR acquisition-related transaction and purchase accounting expenses, which included $110.3 million in acquired intangible asset amortization expense, $106.4 million in inventory step-up expense and $25.9 million of integration-related costs. The increase in operating income also reflected the impact of organic sales growth. The incremental operating income included in the results for 2021 from the FLIR acquisition was $80.4 million, which included $242.6 million of acquisition-related transaction and purchase accounting expenses. Cost of sales for 2021 increased by $852.5 million, compared with 2020, and reflected the impact of higher net sales and $106.4 million in acquired inventory step-up expense relating to the acquisition of FLIR. The cost of sales percentage in 2021 increased to 58.9% compared with 57.7% in 2020 and reflected the impact of acquired inventory step-up expense. Selling, general and administrative expenses for 2021 increased to $537.2 million, compared with $205.9 million in 2020 and reflected the impact of higher net sales, as well as the acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition. The selling, general and administrative expense percentage increased to 22.3% in 2021 from 20.9% in 2020 and reflected the impact of acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition. 2020 compared with 2019 Our Digital Imaging segment net sales for 2020 decreased 0.7%, compared with 2019. Operating income for 2020 increased 9.2%, compared with 2019. Total year 2020 net sales primarily reflected lower sales of X-ray products for dental and medical applications, due in part to deferred patient treatments, partially offset by greater sales of infrared detectors for defense and space applications, MEMS products, and $2.3 million in incremental sales from recent acquisitions. The increase in operating income for 2020 reflected the impact of favorable product mix. 29 Table of Contents Cost of sales for 2020 decreased by $11.4 million, compared with 2019, and reflected the impact of lower net sales. The cost of sales percentage in 2020 decreased to 57.7% compared with 58.5% in 2019. Selling, general and administrative expenses for 2020 decreased to $205.9 million, compared with $217.2 million in 2019 and reflected the impact of lower net sales and lower research and development expense. The selling, general and administrative expense percentage decreased to 20.9% in 2020 from 21.9% in 2019 and reflected the impact of lower selling and research and development expense. Instrumentation [[GREPCENT_TABLE]] [["(Dollars in millions)","","2021","","2020","","2019"],["Net sales","","$","1,166.9","","$","1,094.5","","$","1,105.1"],["Cost of sales","","$","617.8","","$","603.4","","$","612.8"],["Selling, general and administrative expenses (a)","","$","275.3","","$","258.1","","$","274.9"],["Acquired intangible asset amortization (a)","","$","20.1","","$","19.8","","$","17.0"],["Operating income","","$","253.7","","$","213.2","","$","200.4"],["Cost of sales % of net sales","","53.0","%","","55.1","%","","55.5","%"],["Selling, general and administrative expenses % of net sales","","23.6","%","","23.6","%","","24.9","%"],["Acquired intangible asset amortization % of net sales","","1.7","%","","1.8","%","","1.5","%"],["Operating income % of net sales","","21.7","%","","19.5","%","","18.1","%"],["International sales % of net sales","","56.1","%","","57.0","%","","54.8","%"],["U.S. Government sales % of net sales","","7.9","%","","7.4","%","","7.3","%"]] [[/GREPCENT_TABLE]] (a)     Acquired intangible asset amortization was previously included in selling, general and administrative expenses. Our Instrumentation segment provides monitoring and control instruments for marine, environmental, industrial and other applications, as well as electronic test and measurement equipment. We also provide power and communications connectivity devices for distributed instrumentation systems and sensor networks deployed in mission critical, harsh environments. 2021 compared with 2020 Our Instrumentation segment net sales for 2021 increased 6.6%, compared with 2020. Operating income for 2021 increased 19.0%, compared with 2020. The 2021 net sales increase primarily resulted from higher sales of test and measurement instrumentation and environmental instrumentation, partially offset by lower sales of marine instrumentation. Sales of test and measurement instrumentation and environmental instrumentation increased $39.6 million and $35.0 million, respectively. Sales of marine instrumentation decreased $2.2 million. The increase in operating income in 2021 reflected the impact of higher sales and improved margins across most product categories resulting from ongoing margin improvement initiatives. Cost of sales increased by $14.4 million in 2021, compared with 2020, and primarily reflected the impact of higher net sales. The cost of sales percentage decreased to 53.0% in 2021 from 55.1% in 2020. Selling, general and administrative expenses, including research and development expense, in 2021, increased by $17.2 million, compared with 2020, and reflected the impact of higher net sales, $6.0 million in higher research and development expense, partially offset by $4.6 million in lower severance and facility consolidation expense. Selling, general and administrative expenses for 2021, as a percentage of sales, remained at 23.6%. 2020 compared with 2019 Our Instrumentation segment net sales for 2020 decreased 1.0%, compared with 2019. Operating income for 2020 increased 6.4%, compared with 2019. The 2020 net sales decrease primarily resulted from lower sales of marine instrumentation and test and measurement instrumentation, partially offset by higher sales of environmental instrumentation. Sales of environmental instrumentation increased $19.9 million and included $51.8 million in incremental sales from the gas and flame detection business acquisition. Sales of marine instrumentation decreased by $23.9 million. Sales of test and measurement instrumentation decreased $6.6 million and included $14.8 million in incremental sales from the acquisition of OakGate. The increase in operating income reflected the impact of improved product line margins and lower severance, facility consolidation and acquisition expense. The incremental operating income included in the results for 2020 from recent acquisitions was $4.1 million, including $3.4 million in incremental intangible asset amortization expense. Operating income in 2020 included $7.6 million in severance, facility consolidation and acquisition expense compared with $2.9 million in similar costs for 2019. Cost of sales decreased by $9.4 million in 2020, compared with 2019, and primarily reflected the impact of lower net sales. The cost of sales percentage decreased slightly to 55.1% in 2020 from 55.5% in 2019. Selling, general and administrative expenses, including research and development expense, in 2020, decreased by $16.8 million, compared with 2019, and reflected the impact of lower sales, $3.0 million in lower research and development expense, partially offset by higher severance, facility consolidation and acquisition expense. Selling, general and administrative expenses for 2020, as a percentage of sales, decreased to 23.6%, compared with 24.9% for 2019, and reflected the impact of $3.0 million in lower research and development expense, partially offset by the impact of higher severance and facility consolidation and acquisition expense. 30 Table of Contents Aerospace and Defense Electronics [[GREPCENT_TABLE]] [["(Dollars in millions)","","2021","","2020","","2019"],["Net sales","","$","628.7","","$","589.4","","$","690.1"],["Cost of sales","","$","400.9","","$","395.1","","$","414.7"],["Selling, general and administrative expenses (a)","","$","93.8","","$","112.6","","$","131.1"],["Acquired intangible asset amortization (a)","","$","0.8","","$","0.9","","$","0.9"],["Operating income","","$","133.2","","$","80.8","","$","143.4"],["Cost of sales % of net sales","","63.8","%","","67.0","%","","60.1","%"],["Selling, general and administrative expenses % of net sales","","14.9","%","","19.1","%","","19.0","%"],["Acquired intangible asset amortization % of net sales","","0.1","%","","0.2","%","","0.1","%"],["Operating income % of net sales","","21.2","%","","13.7","%","","20.8","%"],["International sales % of net sales","","25.4","%","","27.1","%","","27.4","%"],["U.S. Government sales % of net sales","","36.2","%","","39.0","%","","32.6","%"]] [[/GREPCENT_TABLE]] (a)    Acquired intangible asset amortization was previously included in selling, general and administrative expenses. Our Aerospace and Defense Electronics segment provides sophisticated electronic components and subsystems and communications products, including defense electronics, harsh environment interconnects, data acquisition and communications equipment for aircraft, and components and subsystems for wireless and satellite communications, as well as general aviation batteries. 2021 compared with 2020 Our Aerospace and Defense Electronics segment net sales for 2021 increased 6.7%, compared with 2020. Operating income for 2021 increased 64.9%, compared with 2020. The 2021 net sales increase reflected $32.4 million of higher sales for defense and space electronics and $6.9 million for aerospace electronics. The increase in operating income for 2021 primarily reflected the impact of higher sales, $10.4 million of lower severance, facility consolidation cost and lower research and development expense of $11.8 million. The lower research and development expense primarily reflected lower spending for aerospace electronics. Cost of sales for 2021 increased by $5.8 million, compared with 2020, and reflected the impact of higher net sales, partially offset by the impact of lower severance and facility consolidation costs. Cost of sales as a percentage of net sales for 2021 decreased to 63.8% from 67.0% in 2020 and reflected the impact of lower severance, facility consolidation costs. Selling, general and administrative expenses, including research and development expense, decreased to $93.8 million in 2021, from $112.6 million in 2020 and reflected impact of lower severance, facility consolidation and lower research and development expense. The selling, general and administrative expense percentage was 14.9% in 2021 compared to 19.1% in 2020 and reflected impact of lower severance, facility consolidation and lower research and development expense. 2020 compared with 2019 Our Aerospace and Defense Electronics segment net sales for 2020 decreased 14.6%, compared with 2019. Operating income for 2020 decreased 43.7%, compared with 2019. The 2020 net sales decrease reflected $94.8 million of lower sales of aerospace electronics and lower sales of $5.9 million of defense electronics. The weakness in the commercial aerospace industry, due to COVID, negatively affected sales of aerospace electronics. The decrease in operating income in 2020 primarily reflected the impact of lower sales and $18.3 million of higher severance, facility consolidation expense and certain unfavorable changes in contract cost estimates. Cost of sales for 2020 decreased by $19.6 million, compared with 2019, and reflected the impact of lower net sales. Cost of sales as a percentage of net sales for 2020 increased to 67.0% from 60.1% in 2019 and reflected the impact of higher severance, facility consolidation expense and certain unfavorable changes in contract cost estimates. Selling, general and administrative expenses, including research and development expense, decreased to $112.6 million in 2020, from $131.1 million in 2019 and reflected the impact of lower net sales, partially offset by higher severance and facility consolidation expense. The selling, general and administrative expense percentage was 19.1% in 2020 compared to 19.0% in 2019. 31 Table of Contents Engineered Systems [[GREPCENT_TABLE]] [["(Dollars in millions)","","2021","","2020","","2019"],["Net sales","","$","405.8","","$","416.3","","$","375.5"],["Cost of sales","","$","332.5","","$","337.6","","$","312.2"],["Selling, general and administrative expenses","","$","24.7","","$","28.6","","$","26.8"],["Operating income","","$","48.6","","$","50.1","","$","36.5"],["Cost of sales % of net sales","","81.9","%","","81.1","%","","83.1","%"],["Selling, general and administrative expenses % of net sales","","6.1","%","","6.9","%","","7.2","%"],["Operating income % of net sales","","12.0","%","","12.0","%","","9.7","%"],["International sales % of net sales","","0.9","%","","0.7","%","","1.1","%"],["U.S. Government sales % of net sales","","88.3","%","","92.9","%","","92.3","%"]] [[/GREPCENT_TABLE]] Our Engineered Systems segment provides innovative systems engineering and integration, advanced technology development, and manufacturing solutions for defense, space, environmental and energy applications, including the design and manufacture of electrochemical energy systems. 2021 compared with 2020 Our Engineered Systems segment net sales for 2021 decreased 2.5%, compared with 2020. Operating income for 2021 decreased 3.0%, compared with 2020. The 2021 net sales decrease primarily reflected lower sales of $19.1 million for turbine engines, partially offset by higher sales of $8.3 million for engineered products $0.3 million for energy systems. The higher net sales for engineered products primarily reflected increased sales from missile defense, medical modeling and analysis, and marine and other manufacturing programs. Teledyne exited the cruise missile turbine engine business in the first quarter of 2021. Operating income in 2021 primarily reflected the impact of lower sales. Cost of sales for 2021 decreased by $5.1 million, compared with 2020, and primarily reflected the impact of lower net sales. Cost of sales as a percentage of net sales for 2021 increased slightly to 81.9%, compared with 81.1% in 2020. Selling, general and administrative expenses, including research and development and bid and proposal expense, decreased to $24.7 million in 2021, compared with $28.6 million in 2020. The selling, general and administrative expense percentage decreased slightly to 6.1% for 2021, compared with 6.9% in 2020. 2020 compared with 2019 Our Engineered Systems segment net sales for 2020 increased 10.9%, compared with 2019. Operating income for 2020 increased 37.3%, compared with 2019. The 2020 net sales increase reflected higher sales of $35.2 million of engineered products and services and $8.4 million of turbine engines, partially offset by lower sales of $2.8 million of energy systems products. The higher sales of engineered products and services primarily reflected increased sales from marine, space, nuclear and other manufacturing programs, as well as electronic manufacturing services products, partially offset by lower sales related to missile defense. The higher sales of turbine engines reflected increased sales for the Harpoon missile program. Operating income in 2020 reflected the impact of higher sales and a greater mix of higher margin fixed-price manufacturing programs. Cost of sales for 2020 increased by $25.4 million, compared with 2019, and primarily reflected the impact of higher net sales. Cost of sales as a percentage of net sales for 2020 decreased to 81.1%, compared with 83.1% in 2019. Selling, general and administrative expenses, including research and development and bid and proposal expense, increased to $28.6 million in 2020, compared with $26.8 million in 2019. The selling, general and administrative expense percentage decreased slightly to 6.9% for 2020, compared with 7.2% in 2019. 32 Table of Contents Financial Condition, Liquidity and Capital Resources Principal Cash and Capital Requirements Our principal cash and capital requirements are to fund working capital needs, capital expenditures, income tax payments and debt service requirements, as well as acquisitions. It is anticipated that operating cash flow, together with available borrowings under the credit facility and the debt financing arrangement described below will be sufficient to meet these requirements. To support acquisitions, we may need to raise additional capital. Our liquidity is not dependent upon the use of off-balance sheet financial arrangements. We have no off-balance sheet financing arrangements that incorporate the use of special purpose or unconsolidated entities. Credit Facility, Senior Notes and Term Loan [[GREPCENT_TABLE]] [["Long-term debt (dollars in millions, except as noted):","","January 2, 2022","","January 3, 2021"],["$1.15 billion credit facility due March 2026, weighted average variable rate of 1.20% at January 2, 2022 and 1.05% at January 3, 2021","","$","125.0","","","$","125.0"],["Term loan due October 2024, variable rate of 1.35% at January 2, 2022 and 1.15% at January 3, 2021, swapped to a Euro fixed rate of 0.612%","","150.6","","","150.0"],["0.65% Fixed Rate Senior Notes due April 2023","","300.0","","","\u2014"],["0.95% Fixed Rate Senior Notes due April 2024, callable after April 2022","","450.0","","","\u2014"],["1.60% Fixed Rate Senior Notes due April 2026","","450.0","","","\u2014"],["2.25% Fixed Rate Senior Notes due April 2028","","700.0","","","\u2014"],["2.50% Fixed Rate Senior Notes due August 2030","","500.0","","","\u2014"],["2.75% Fixed Rate Senior Notes due April 2031","","1,100.0","","","\u2014"],["Term loan due May 2026, variable rate of 1.35% at January 2, 2022","","355.0","","","\u2014"],["3.09% Fixed Rate Senior Notes due December 2021","","\u2014","","","95.0"],["3.28% Fixed Rate Senior Notes due November 2022","","\u2014","","","100.0"],["0.70% \u20ac50 Million Fixed Rate Senior Notes due April 2022","","\u2014","","","61.1"],["0.92% \u20ac100 Million Fixed Rate Senior Notes due April 2023","","\u2014","","","122.1"],["1.09% \u20ac100 Million Fixed Rate Senior Notes due April 2024","","\u2014","","","122.1"],["Other debt","","0.7","","","4.0"],["Debt issuance costs","","(31.9)","","","(0.8)"],["Total long-term debt","","4,099.4","","","778.5"],["Current portion of long-term debt","","\u2014","","","(97.6)"],["Total long-term debt, net of current portion","","$","4,099.4","","","$","680.9"]] [[/GREPCENT_TABLE]] At January 2, 2022, we had $281.9 million in outstanding letters of credit. Of this amount, $244.6 million was released in February 2022. Our credit facility, senior notes and term loan agreement require the Company to comply with various financial and operating covenants, including maintaining certain consolidated leverage and interest coverage ratios, as well as minimum net worth levels and limits on acquired debt. At January 2, 2022, the Company was in compliance with these covenants and we had a significant amount of margin between required financial covenant ratios and our actual ratios. Currently, we do not believe our ability to undertake additional debt financing, if needed, is reasonably likely to be materially impacted by debt restrictions under our credit agreements subject to our complying with required financial covenants listed in the table below. Financial covenant ratios and the actual ratios at January 2, 2022:  [[GREPCENT_TABLE]] [["$1.15 billion Credit Facility expires March 2026, $1.0 billion term loan due May 2026 and $150.0 million term loan due October 2024 (issued October 2019)"],["Financial Covenant","Requirement","","Actual Measure"],["Consolidated Leverage Ratio (Net Debt/EBITDA) (a)","No more than 4.75 to 1","","2.913 to 1"],["Consolidated Interest Coverage Ratio (EBITDA/Interest) (b)","No less than 3.0 to 1","","10.6 to 1"]] [[/GREPCENT_TABLE]] (a) The Consolidated Leverage Ratio is equal to Net Debt/EBITDA as defined in our $1.15 billion credit agreement. Requirement changes to 4.5 to 1 for the second and third quarter of 2022 and to 4.0 to 1 for the fourth quarter of 2022 and 3.5 to 1 thereafter. (b) The Consolidated Interest Coverage Ratio is equal to EBITDA/Interest as defined in our $1.15 billion credit agreement. Available borrowing capacity under the $1.15 billion credit facility, which is reduced by borrowings and $281.9 million in outstanding letters of credit, was $759.2 million at January 2, 2022. Of the $281.9 million in outstanding letters of credit, $244.6 million was released in February 2022. See Note 9, Long-Term Debt to these Consolidated Financial Statements for additional information regarding our credit facility and term loan. 33 Table of Contents Contractual Obligations The following table summarizes our expected cash outflows resulting from financial contracts and commitments at January 2, 2022: [[GREPCENT_TABLE]] [["Contractual obligations (in millions):","","2022","","2023","","2024","","2025","","2026","","After 2026","","Total"],["Debt obligations","","$","\u2014","","","$","300.2","","","$","600.7","","","$","0.1","","","$","930.2","","","$","2,300.1","","","$","4,131.3"],["Interest expense (a)","","81.6","","","80.0","","","76.1","","","73.6","","","63.1","","","194.2","","","568.6"],["Operating lease obligations (b)","","33.5","","","29.9","","","24.3","","","21.7","","","18.6","","","65.4","","","193.4"],["Purchase obligations (c)","","264.4","","","10.3","","","6.4","","","1.2","","","0.6","","","0.9","","","283.8"],["Total","","$","379.5","","","$","420.4","","","$","707.5","","","$","96.6","","","$","1,012.5","","","$","2,560.6","","","$","5,177.1"]] [[/GREPCENT_TABLE]] (a)    Interest expense related to the credit facility, including facility fees, is assumed to accrue at the rates in effect at year-end 2021 and is assumed to be paid at the end of each quarter with the final payment in March 2026 when the credit facility expires. (b)        Includes imputed interest and the short-term portion of lease obligations. (c)    Purchase obligations generally include contractual obligations for the purchase of goods and services and capital commitments that are enforceable and legally binding on us and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Unrecognized tax benefits of $402.0 million and accrued interest and penalties on these tax matters of $160.8 million are not included in the table above. As discussed in Note 10 of the Notes to Consolidated Financial Statements, Teledyne paid $296.4 million in February 2022 for the Swedish tax matter, including accrued interest and penalties. The remaining unrecognized tax benefits and accrued interest and penalties are not included in the table above because $52.9 million is offset by deferred tax assets, and the remainder cannot be reasonably estimated to be settled in cash due to a lack of prior settlement history and offsetting credits. At January 2, 2022, we were not required, and accordingly are not planning, to make any cash contributions to the domestic qualified pension plans for 2022. Our minimum funding requirements after 2021 as set forth by ERISA, are dependent on several factors as discussed under “Accounting for Pension Plans” in the Critical Accounting Policies section of this Management’s Discussion and Analysis of Financial Condition and Results of Operation. Estimates beyond 2022 have not been provided due to the significant uncertainty of these amounts, which are subject to change until the Company’s pension assumptions can be updated at the appropriate times. In addition, certain pension contributions are eligible for future recovery through the pricing of products and services to the U.S. government under certain government contracts, therefore, future cash contributions are not necessarily indicative of the impact these contributions may have on our liquidity. We also have payments due under our other postretirement benefit plans. These plans are not required to be funded in advance, but are pay as you go. See further discussion in Note 11 of the Notes to Consolidated Financial Statements. Teledyne intends to continue to monitor and manage its defined benefit pension plans obligation and may take additional actions to manage risk in the future. Operating Activities In 2021, net cash provided by operating activities was $824.6 million, compared with $618.9 million in 2020 and $482.1 million in 2019. The higher cash provided by operating activities in 2021, compared with 2020, reflected the impact of higher net income and the cash flow contribution from FLIR, partially offset by $9.1 million of higher income tax payments. The higher cash provided by operating activities in 2020, compared with 2019, was driven by the timing of accounts receivable collections, cash flow from recent acquisitions and $35.6 million of lower income tax payments. Free cash flow (cash provided by operating activities less capital expenditures) was $723.0 million in 2021, compared with $547.5 million in 2020 and $393.7 million in 2019. [[GREPCENT_TABLE]] [["Free Cash Flow(a)(in millions, brackets indicate use of funds)","","2021","","2020","","2019"],["Cash provided by operating activities","","$","824.6","","$","618.9","","$","482.1"],["Capital expenditures for property, plant and equipment","","(101.6)","","(71.4)","","(88.4)"],["Free cash flow","","$","723.0","","$","547.5","","$","393.7"]] [[/GREPCENT_TABLE]] a) We define free cash flow as cash provided by operating activities (a measure prescribed by generally accepted accounting principles) less capital expenditures for property, plant and equipment. We believe that this supplemental non-GAAP information is useful to assist management and the investment community in analyzing our ability to generate cash flow. On January 26, 2022, the Administrative Court of Appeal in Stockholm, Sweden generally affirmed the March 2020 ruling of the First Instance Court and determined a tax liability in the amount of SEK 2.765 billion. Teledyne paid the tax on February 2, 2022 totaling $296.4 million. 34 Table of Contents Investing Activities Net cash used in investing activities was $3,824.3 million, $99.4 million and $571.9 million for 2021, 2020 and 2019, respectively. Cash flows relating to investing activities consist primarily of cash used for acquisitions and other investments and capital expenditures. [[GREPCENT_TABLE]] [["Capital expenditures (in millions):","","2021","","2020","","2019"],["Digital Imaging","","$","64.2","","","$","33.4","","","$","45.2"],["Instrumentation","","13.3","","","18.0","","","18.9"],["Aerospace and Defense Electronics","","8.4","","","10.4","","","19.0"],["Engineered Systems","","12.9","","","7.5","","","3.6"],["Corporate","","2.8","","","2.1","","","1.7"],["","","$","101.6","","","$","71.4","","","$","88.4"]] [[/GREPCENT_TABLE]] During 2022, we plan to invest approximately $100.0 million in capital expenditures, principally to upgrade facilities and manufacturing equipment. Acquisitions Investing activities used cash for acquisitions and other investments of $3,723.3 million, $29.0 million and $484.0 million, in 2021, 2020 and 2019, respectively (see “Recent Acquisitions”). Teledyne funded the acquisitions from borrowings under its credit facilities, issuance of senior notes and term loans, the issuance of Teledyne common stock and cash on hand. For all acquisitions, the results of operations and cash flows are included in our consolidated financial statements from the date of each respective acquisition. The following table shows the purchase price (net of cash acquired), goodwill acquired and intangible assets acquired for the acquisitions and other investments made in 2021 and 2020 (in millions): [[GREPCENT_TABLE]] [["","","2021"],["Acquisition","","Acquisition date","","Consideration Transferred(a)","","Goodwill Acquired","","Acquired Intangible Assets"],["FLIR","","May 14, 2021","","$","7,620.9","","","$","5,905.5","","","$","2,490.0"],["(a) Net of cash acquired. The consideration included approximately $3.9 billion of Teledyne shares issued to existing shareholders of the acquired company. This $3.9 billion of equity consideration is a non-cash transaction. An immaterial portion of the cash consideration for certain vested FLIR restricted stock awards was deferred at the election of the award holder and will be paid out in future periods."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","2020"],["Acquisition","","Acquisition date","","Cash Paid (a)","","Goodwill Acquired","","Acquired Intangible Assets"],["OakGate Technology, Inc.","","January 5, 2020","","$","28.5","","","$","16.9","","","$","7.0"],["Purchase price adjustment - Micralyne Inc. (acquired in 2019)","","","","0.5","","","\u2014","","","\u2014"],["Total","","","","$","29.0","","","$","16.9","","","$","7.0"],["(a) Net of cash acquired ."]] [[/GREPCENT_TABLE]] Goodwill resulting from the OakGate and Micralyne acquisitions will not be deductible for tax purposes. Financing Activities Financing activities for 2021 reflected net proceeds from debt of $2,834.2 million, compared with net payments on debt of $98.1 million in 2020 and net proceeds from debt of $108.8 million for 2019. Fiscal years 2021, 2020 and 2019 reflect proceeds from the exercise of stock options of $25.4 million, $36.3 million and $34.6 million, respectively. In the first quarter of 2021, Teledyne completed various financing activities related to the then pending acquisition of FLIR. These activities included entering into a $4.5 billion short term stand-by bridge facility on January 4, 2021, as required by the definitive agreement, resulting in debt expense of $17.2 million. In addition, on March 17, 2021 Teledyne called $493.3 million of existing fixed rate senior notes and incurred debt extinguishment expenses of $13.4 million, which is included in interest and debt expense, net. On March 22, 2021, Teledyne completed all permanent financing for the acquisition of FLIR and terminated the $4.5 billion stand-by bridge facility. The permanent financing consists of $3.0 billion investment-grade bonds (the “Notes”), including $300.0 million aggregate principal amount of 0.65% Notes due 2023, $450.0 million aggregate principal amount of 0.95% Notes due 2024, $450.0 million aggregate principal amount of 1.60% Notes due 2026, $700.0 million aggregate principal amount of 2.25% Notes due 2028 and $1.1 billion aggregate principal amount of 2.75% Notes due 2031. Teledyne may redeem the $450.0 million of 0.95% Notes due 2024 at any time or from time to time, in whole or in part, at the Company’s option, from and after April 1, 2022, at a redemption price equal to 100% of the principal amount of the Notes redeemed. In addition, we guaranteed FLIR’s $500.0 million, 2.50% Fixed Rate Senior Notes due August 2030. 35 Table of Contents Previously on March 4, 2021, Teledyne entered into a $1.0 billion Term Loan Credit Agreement (maturing May 2026) and an Amended and Restated Credit Agreement (maturing March 2026) with capacity of $1.15 billion. The terms of the $1.0 billion Term Loan Credit Agreement allow for prepayments, at the Company’s option, at any time or from time to time, in whole or in part without premium or penalty. Teledyne used the proceeds from the Notes together with the proceeds from the $1.0 billion Term Loan Credit Agreement and cash on hand to pay the cash portion of the consideration for the FLIR acquisition and refinance certain existing debt. Other Matters Pension Plans Teledyne has two domestic qualified defined benefit pension plans covering substantially all U.S. employees hired before January 1, 2004, or approximately 6% of Teledyne’s active employees as of January 2, 2022. As of January 1, 2004, new U.S. hires participate in a domestic defined contribution plan. In 2021, 2020 and 2019, Teledyne was not required, and did not make any cash contributions to the domestic pension plans. For the Company’s domestic qualified defined benefit pension plans, the discount rate for 2022 will increase to an average of 2.97% from 2.64% in 2021. The Company also has several small non-qualified domestic and foreign-based defined benefit pension plans. Income Taxes Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense. We intend to reinvest indefinitely the earnings of our material foreign subsidiaries in our operations outside of the United States. The cash that the Company’s foreign subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including foreign acquisitions. We estimate that future domestic cash generation will be sufficient to meet future domestic cash requirements. U.S. federal and applicable state income taxes have been accrued for deemed repatriations. At January 2, 2022, the amount of undistributed foreign earnings was $619.8 million, for which we have not recorded a deferred tax liability of approximately $1.3 million for corporate income taxes which would be due if reinvested foreign earnings were repatriated. Should we decide to repatriate the foreign earnings, we would need to adjust our income tax provision in the period we determined that we would no longer indefinitely reinvest the earnings outside the United States. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amount in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state, federal and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income. Based on the Company’s history of operating earnings, expectations of future operating earnings and potential tax planning strategies, management believes that it is possible that some portion of deferred taxes will not be realized as a future tax benefit and therefore has recorded a valuation allowance. We file income tax returns in the United States federal jurisdiction and in various states and foreign jurisdictions. The Company has substantially concluded on all U.S. federal income tax matters for all years through 2011, Canadian income tax matters for all years through 2012, Swedish income tax matters for all years through 2011, Norwegian income tax matters for all years through 2016, Belgian income tax matters for all years through 2018, French income tax matters for all years through 2018 and United Kingdom income tax matters for all years through 2019. Costs and Pricing Inflation has been rising in the markets in which we operate. Current inventory costs, the increasing costs of labor, materials, equipment and other costs are considered in establishing sales pricing policies. The Company emphasizes cost containment and cost reductions in all aspects of its business. Hedging Activities and Market Risk Disclosures Teledyne transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company’s primary foreign currency risk objective is to protect the U. S. dollar value of future cash flows and minimize the volatility of reported earnings. The Company utilizes foreign currency forward contracts to reduce the volatility of cash flows primarily related to forecasted revenue and expenses denominated in Canadian dollars for our Canadian companies, and in British pounds for our U.K. companies. These contracts are designated and qualify as cash flow hedges. The Company has converted U.S. dollar denominated, variable rate and fixed 36 Table of Contents rate debt obligations of a European subsidiary, into euro fixed rate obligations using a receive float, pay fixed cross currency swap, and a receive fixed, pay fixed cross currency swap. These cross currency swaps are designated as cash flow hedges. In addition, the Company has converted domestic U.S. variable rate debt to fixed rate debt using a receive variable, pay fixed interest rate swap. The interest rate swap is also designated as a cash flow hedge. The effectiveness of the cash flow hedge forward contracts, the cross currency swap hedges, and the interest rate swap cash flow hedge is assessed prospectively and retrospectively on a monthly basis using regression analysis, as well as using other timing and probability criteria. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedges and must be highly effective in offsetting changes to future cash flows on hedged transactions. The effective portion of the cash flow hedge forward contracts’ gains or losses resulting from changes in the fair value of these hedges is initially reported, net of tax, as a component of accumulated other comprehensive income/(loss) (“AOCI”) in stockholders’ equity until the underlying hedged item is reflected in our consolidated statements of income, at which time the effective amount in AOCI is reclassified to revenue in our consolidated statements of income. For the cross currency swap and interest rate cash flow hedges, effective amounts are recorded in AOCI, and reclassified into interest expense in the consolidated statements of income. In addition, for the cross currency swaps an amount is reclassified from AOCI to other income and expense each reporting period, to offset the earnings impact of the remeasurement of the hedged liabilities. Net deferred losses recorded in AOCI, net of tax, for forward contracts that will mature in the next 12 months total $0.7 million. These losses are expected to be offset by anticipated gains in the value of the forecasted underlying hedged item. Amounts related to the cross currency swaps and interest rate swap expected to be reclassified from AOCI into income in the coming 12 months total $2.8 million. In the event that the underlying forecasted transactions do not occur, or it becomes remote that they will occur, within the defined hedge period, the gains or losses on the related cash flow hedges will be reclassified from AOCI to other income and expense. During the current reporting period, all forecasted transactions occurred and, therefore, there were no such gains or losses reclassified to other income and expense, due to missed forecasts. As of January 2, 2022, Teledyne had foreign currency forward contracts designated as cash flow hedges to buy Canadian dollars and to sell U.S. dollars totaling $148.2 million. These foreign currency forward contracts have maturities ranging from March 2022 to February 2023. Teledyne had foreign currency forward contracts designated as cash flow hedges to buy British pounds and to sell U.S. dollars totaling $18.9 million. These foreign currency forward contracts have maturities ranging from March 2022 to February 2023. The cross currency swaps have notional amounts of €113.0 million and $125.0 million, and €135.0 million and $150.0 million, and mature in March 2023 and October 2024, respectively. The interest rate swap has a notional amount of $125.0 million and matures in March 2023. In addition, the Company utilizes foreign currency forward contracts to mitigate foreign exchange rate risk associated with foreign currency denominated monetary assets and liabilities, including intercompany receivables and payables. As of January 2, 2022, Teledyne primarily had foreign currency contracts of this type in the following currency pairs (in millions): [[GREPCENT_TABLE]] [["Contracts to Buy","","Contracts to Sell"],["Currency","Amount","","Currency","Amount"],["Canadian Dollars","C$","169.4","","","U.S. Dollars","US$","132.0"],["Euros","\u20ac","147.3","","","U.S. Dollars","US$","167.1"],["Euros","\u20ac","33.5","","","Canadian Dollars","C$","48.4"],["Great Britain Pounds","\u00a3","59.2","","","U.S. Dollars","US$","78.9"],["U.S. Dollars","US$","31.0","","","Swedish Krona","kr","280.1"],["Danish Krone","Kr.","395.3","","","U.S. Dollars","US$","60.2"],["Swedish Krona","kr","355.7","","","Euros","\u20ac","35.0"],["Norwegian Krone","kr","228.0","","","Swedish Krona","kr","227.1"],["Norwegian Krone","kr","78.9","","","U.S. Dollars","US$","8.6"]] [[/GREPCENT_TABLE]] The above table includes non-designated hedges derived from terms contained in triggered or previously designated cash flow hedges. These contracts had a positive fair value of $1.6 million at January 2, 2022. The gains and losses on these derivatives which are not designated as hedging instruments, are intended to, at a minimum, partially offset the transaction gains and losses recognized in earnings. All derivatives are recorded on the balance sheet at fair value. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting. Teledyne does not use foreign currency forward contracts for speculative or trading purposes. Notwithstanding our efforts to mitigate portions of our foreign currency exchange rate risks, there can be no assurance that our hedging activities will adequately protect us against the risks associated with foreign currency fluctuations. A 37 Table of Contents hypothetical 10 percent price change of the U.S. dollar from its value at January 2, 2022, 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 $14.8 million. A hypothetical 10 percent price change in the U.S. dollar from its value at January 2, 2022 would result in a decrease in the fair value of our foreign currency forward contracts designated as cash flow hedges to buy British Pounds and to sell U.S. dollars by approximately $1.9 million. A hypothetical 10 percent price change in the U.S. dollar from its value at January 2, 2022 would result in a decrease or increase in the fair value of our Euro/U.S. Dollar cross currency swaps designated as cash flow hedges by approximately $28.7 million. A hypothetical 100 basis point increase in U.S. interest rates at January 3, 2021 would result in an increase in the fair value of our U.S. Dollar interest rate swap designated as a cash flow hedge by approximately $1.4 million, while a 100 basis point decrease would result in a decrease in its fair value of $0.8 million. Borrowings under our credit facility are at fixed rates that vary with the term and timing of each loan under the facility. Loans under the facility typically have terms of one, two, three or six months and the interest rate for each such loan is subject to change if the loan is continued or converted following the applicable maturity date. Interest rates are also subject to change based on our debt to earnings before interest, taxes, depreciation and amortization ratio. As of January 2, 2022, we had $125.0 million outstanding under our $1.15 billion credit facility. Any borrowings under the Company’s credit facility are based on a fluctuating market interest rate and, consequently, the fair value of any outstanding debt should not be affected materially by changes in market interest rates. Our primary exposure to market risk relates to changes in interest rates and foreign currency exchange rates. We periodically evaluate these risks and have taken measures to mitigate these risks. We own assets and operate facilities in countries that have been politically stable. Environmental We are subject to various federal, state, local and international environmental laws and regulations which require that we investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. These include sites at which Teledyne has been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund, and comparable state laws. We are currently involved in the investigation and remediation of a number of sites. Reserves for environmental investigation and remediation totaled $6.3 million and $6.5 million as of January 2, 2022 and January 3, 2021, respectively. As investigation and remediation of these sites proceed and new information is received, the Company will adjust accruals to reflect new information. Based on current information, we do not believe that future environmental costs, in excess of those already accrued, will materially and adversely affect our financial condition or liquidity. See also our environmental risk factor disclosure beginning on page 16 and Notes 2 and 14 of the Notes to Consolidated Financial Statements. Government Contracts We perform work on a number of contracts with the U.S. Department of Defense and other agencies and departments of the U.S. Government including sub-contracts with government prime contractors. Sales under these contracts with the U.S. Government, which included contracts with the U.S. Department of Defense, were approximately 26% of total net sales in both 2021 and 2020 and 24% of total net sales in 2019. For a summary of sales to the U.S. Government by segment, see Note 12 of the Notes to Consolidated Financial Statements. Sales to the U.S. Department of Defense represented approximately 19%, 19% and 17% of total net sales for 2021, 2020 and 2019, respectively. Performance under government contracts has certain inherent risks that could have a material adverse effect on the Company’s business, results of operations and financial condition. Government contracts are conditioned upon the continuing availability of Congressional appropriations, which usually are made available on a fiscal year basis even though contract performance may take more than one year. See also our government contracts risks factor disclosure beginning on page 12. For information on accounts receivable from the U.S. Government, see Note 5 of the Notes to Consolidated Financial Statements. Estimates and Reserves Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates, including those related to product returns and replacements, allowance for doubtful accounts, inventories, intangible assets, income taxes, warranty obligations, pension and other postretirement benefits, long-term contracts, environmental, workers’ compensation and general liability, employee benefits and other contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances at the time, the results of which form the basis for making our judgments. Actual results may differ materially from these estimates under different assumptions or conditions. In some cases, such differences may be material. See also Critical Accounting Policies and Estimates. 38 Table of Contents The following table reflects significant reserves and valuation accounts, which are estimates and based on judgments as described above, at January 2, 2022, and January 3, 2021: [[GREPCENT_TABLE]] [["Reserves and Valuation Accounts (in millions): (a)","","2021","","2020"],["Allowance for doubtful accounts","","$","13.8","","","$","12.3"],["Workers\u2019 compensation and general liability reserves (b)","","$","5.9","","","$","6.2"],["Environmental reserves (b)","","$","6.3","","","$","6.5"],["Other accrued liability reserves (b)","","$","12.4","","","$","12.9"]] [[/GREPCENT_TABLE]]  (a) This table should be read in conjunction with the Notes to Consolidated Financial Statements. (b) Includes both long-term and short-term reserves. Some of the Company’s products are subject to standard warranties and the Company provides for the estimated cost of product warranties. We regularly assess the adequacy of our pre-existing warranty liabilities and adjust amounts as necessary based on a review of historical warranty experience with respect to the applicable business or products, as well as the length and actual terms of the warranties, which are typically one year. The product warranty reserve is included in current accrued liabilities and other long-term liabilities on the balance sheet. [[GREPCENT_TABLE]] [["Warranty Reserve (in millions):","","2021","","2020","","2019"],["Balance at beginning of year","","$","22.4","","","$","24.8","","","$","21.0"],["Product warranty expense","","11.9","","","3.3","","","13.1"],["Deductions","","(10.1)","","","(8.2)","","","(14.2)"],["Acquisitions","","25.3","","","2.5","","","4.9"],["Balance at year-end","","$","49.5","","","$","22.4","","","$","24.8"]] [[/GREPCENT_TABLE]] Critical Accounting Policies and Estimates The preparation of our consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to the financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. Our critical accounting policies are those that are reflective of significant judgment, complexity and uncertainty, and may potentially result in materially different results under different assumptions and conditions. We have identified the following as critical accounting policies: revenue recognition; accounting for business combinations, goodwill and acquired intangible assets; accounting for income taxes; and accounting for pension plans. For additional discussion of the application of these and other accounting policies, see Note 2 of the Notes to Consolidated Financial Statements. Revenue Recognition Prior to the acquisition of FLIR, approximately 40% of our revenue was recognized over time, with the remaining 60% of our revenue recognized at a point in time. The majority of FLIR revenue is recognized at a point in time. In future periods, we expect approximately 30% of revenue to be recognized over time, with the remaining 70% recognized at a point in time. Revenue recognized over time relates primarily to contracts to design, develop and/or manufacture highly engineered products used in both defense and commercial applications. The transaction price in these arrangements may include estimated amounts of variable consideration, including award fees, incentive fees, contract amounts not yet funded, or other provisions that can either increase or decrease the transaction price. We estimate variable consideration at the amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the estimation uncertainty is resolved. The estimation of this variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. As control transfers continuously over time on these contracts, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We generally use the cost-to-cost measure of progress as this measure best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. For over time contracts using cost-to-cost, we have an Estimate at Completion (“EAC”) process in which management reviews the progress and execution of our performance obligations. This EAC process requires management judgment relative to assessing risks, estimating contract revenue, determining reasonably dependable cost estimates, and making assumptions for schedule and technical issues. Since certain contracts extend over a longer period of time, the impact of revisions in cost and revenue estimates during the progress of work may adjust the current period earnings through a cumulative catch-up basis. This method recognizes, in the current period, the cumulative effect of the changes on current and prior quarters. Additionally, if the 39 Table of Contents current contract estimate indicates a loss, a provision is made for the total anticipated loss in the period that it becomes evident. Contract cost and revenue estimates for significant contracts are generally reviewed and reassessed quarterly. We do not believe that any discrete event or adjustment to an individual contract within the aggregate changes in contract estimates for 2021, 2020 or 2019 was material to the consolidated statements of income for such annual periods. Revenue recognized at a point in time relates primarily to the sale of standard or minimally customized products, with control transferring to the customer generally upon the transfer of title. See Note 2 of the Notes to Consolidated Financial Statements for additional revenue recognition disclosures. Business Combinations, Goodwill and Acquired Intangible Assets The results for all acquisitions are included in the Company’s consolidated financial statements from the date of each respective acquisition. Business acquisitions are accounted for under the acquisition method by assigning the purchase price to tangible and intangible assets acquired and liabilities assumed. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. We determine the fair value of such assets and liabilities, often in consultation with third-party valuation advisors. Acquired intangible assets with finite lives are amortized over their estimated useful lives. Adjustments to fair value assessments are recorded to goodwill over the purchase price allocation period. Goodwill and acquired intangible assets with indefinite lives are not amortized. We review goodwill and acquired indefinite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company also performs an annual impairment test in the fourth quarter of each year. We test goodwill and acquired indefinite-lived intangible assets for impairment between annual tests if events occur or circumstances change that would more likely than not reduce our enterprise fair value below its book value. These events or circumstances could include a significant change in the business climate, including a significant sustained decline in an entity’s market value, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business, or other factors. We may use either a qualitative or quantitative approach when testing a reporting unit’s goodwill for impairment. For selected reporting units where we use the qualitative approach, we perform a qualitative evaluation of events and circumstances impacting the reporting unit to determine the likelihood of goodwill impairment. Based on that qualitative evaluation, if we determine it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, no further evaluation is necessary. Otherwise we perform a quantitative impairment test. We perform a quantitative test for each reporting unit at least once every three years. For goodwill impairment testing using the quantitative approach, we estimate the fair value of the selected reporting units primarily through the use of a discounted cash flow model based on our best estimate of amounts and timing of future revenues and cash flows and our most recent business and strategic plans, and compares the estimated fair value to the carrying value of the reporting unit, including goodwill. The discounted cash flow model requires judgmental assumptions about projected revenue growth, future operating margins, discount rates and terminal values over a multi-year period. There are inherent uncertainties related to these assumptions and management’s judgment in applying them to the analysis of goodwill impairment. While we believe we have made reasonable estimates and assumptions to calculate the fair value of its reporting units, it is possible a material change could occur. If actual results are not consistent with management’s estimates and assumptions, goodwill may be overstated and a charge would need to be taken against net earnings. When using a quantitative approach, changes in our projections used in the discounted cash flow model could affect the estimated fair value of certain of the Company’s reporting units and could result in a goodwill impairment charge in a future period. In order to evaluate the sensitivity of the fair value calculations used in the quantitative goodwill impairment test, the Company will apply a hypothetical 10% decrease to the fair values of each reporting unit subject to a quantitative impairment test and compare those values to the reporting unit carrying values. Due to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of our recorded goodwill, differences in assumptions may have a material effect on the results of our impairment analysis. As of January 2, 2022, the Company had eleven reporting units for goodwill impairment testing. A qualitative test was performed for all reporting units in the four quarter of 2021. Excluding the FLIR reporting unit, the carrying value of goodwill included in the Company’s individual reporting units ranged from $20.4 million to $885.0 million on the most recent quantitative test date. While goodwill for the FLIR reporting unit is provisional during the measurement period, the provisional acquired goodwill balance is $5,905.5 million. The Company’s analysis in 2021 indicated that in all instances, the fair value of the Company’s reporting units exceeded their carrying values and consequently did not result in an impairment charge. Income Taxes We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions, and in the calculation of certain tax assets and liabilities which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. In addition, uncertainty exists regarding tax positions taken in previously filed tax returns still under 40 Table of Contents examination and positions expected to be taken in the current year and future returns which may impact income tax expense. On a quarterly basis, we provide for income taxes based upon an estimated annual effective tax rate which is dependent on the geographic composition of worldwide earnings, tax regulations governing each region, availability of tax credits, and the effectiveness of our tax planning strategies. Although we believe our income tax expense is reasonable, no assurance can be given that the final tax outcome will not be different from that which is reflected in our historical income tax provisions. To the extent that the final tax outcome is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. An increase of 100 basis points in our nominal tax rate would have resulted in additional income tax provision for the fiscal year ended January 2, 2022, of $5.3 million. Deferred tax assets and liabilities arise due to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax carryforwards. Significant management judgment is required in determining whether deferred tax assets will be realized in full or in part. When it is more-likely-than-not that all or some portion of deferred tax assets may not be realized, a valuation allowance must be established against the deferred tax assets. In assessing the need for a valuation allowance, we consider all available positive and negative evidence including past operating results, estimates of future taxable income and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations across domestic and foreign jurisdictions. We establish reserves for uncertain tax positions when, despite the belief that our tax positions are supportable, there remains uncertainty in a tax position taken in our filed tax returns or planned to be taken in a future tax return or claim. We follow a recognition and measurement approach, considering the facts, circumstances, and information available at the reporting date. Judgment is exercised in determining the level of evidence necessary and appropriate to support its assessment using all available information. The technical merits of a given tax position are derived from sources of authority in the tax law and their applicability to the facts and circumstances of the position. In measuring the tax position, we consider the amount and probabilities of the outcomes that could be realized upon settlement. When it is more-likely-than-not that a tax position will be sustained, we record a liability for the anticipated tax and interest due upon ultimate settlement with a taxing authority. Unrecognized tax benefits, including accrued penalties and interest, increased $529.3 million from the prior year, primarily related to the FLIR acquisition on May 14, 2021. During the first quarter of 2022, we paid approximately $296.4 million related to an acquired uncertain tax position, refer to Note 3 of the Notes to Consolidated Financial Statements for additional detail. To the extent we prevail in matters for which reserves have been established or are required to pay amounts in excess of reserves, there could be a significant impact on our consolidated financial position and annual results of operations. For a description of the Company’s tax accounting policies, refer to Note 2 and Note 10 of the Notes to Consolidated Financial Statements. Pension Plans The Company’s accounting for its defined benefit pension plans requires that amounts recognized in financial statements be determined on an actuarial basis, rather than as contributions are made to the plan. In consultation with our actuaries, we determine the appropriate assumptions for use in determining the liability for future pension benefits. Net actuarial gains or losses are amortized to expense on a plan-by-plan basis when they exceed the accounting corridor. The accounting corridor is a defined range within which amortization of net gains and losses is not required and is equal to 10 percent of the greater of the market related value of assets or benefit obligations. Gains or losses outside of the corridor are subject to amortization. For our plan which covers mostly inactive participants, gains and losses subject to amortization are amortized over the average participants future life expectancy which is approximately 17 years. This plan represents the majority of the pension obligations. For our other plan, gains and losses subject to amortization are amortized over the average employee future service period which is approximately nine years. Significant assumptions used in determining the our pension income or expense are the expected long-term rate of return on plan assets, participant mortality estimates, expected rates of increase in future compensation levels, employee turnover, as well as the assumed discount rate on pension obligations. Differences in the discount rate and expected long-term rate of return on assets within the indicated range would have had the following impact on 2021 pension expense (in millions): [[GREPCENT_TABLE]] [["","","0.25 Percentage Point Increase","","0.25 Percentage Point Decrease"],["Increase (decrease) to pension expense resulting from:"],["Change in discount rate","","$","(0.2)","","","$","0.2"],["Change in long-term rate of return on plan assets","","$","(2.1)","","","$","2.1"]] [[/GREPCENT_TABLE]] See Note 11 of the Notes to Consolidated Financial Statements for additional pension disclosures. 41 Table of Contents Recent Accounting Standards For a discussion of recent accounting standards see Note 2 of the Notes to Consolidated Financial Statements. Safe Harbor Cautionary Statement Regarding Forward-Looking Information This Annual Report on Form 10-K contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, directly and indirectly relating to earnings, growth opportunities, acquisitions and divestitures, product sales, capital expenditures, pension matters, stock option compensation expense, the credit facility, interest expense, severance and relocation costs, statements and goals relating to greenhouse gas emission reductions, environmental remediation cost, stock repurchases, taxes, exchange rate fluctuations and strategic plans. Forward-looking statements involve risks and uncertainties, are based on the current expectations of the management of Teledyne and are subject to uncertainty and changes in circumstances. All statements made in this Annual Report on Form 10-K 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: ongoing challenges and uncertainties posed by the COVID pandemic for businesses and governments around the world, including production, supply, contractual and other disruptions, facility closures, furloughs and travel restrictions; the inability to achieve operating synergies with respect to the FLIR acquisition; changes in relevant tax and other laws; risks associated with indebtedness, as well as our ability to reduce indebtedness and the timing thereof; the impact of semiconductor and other supply chain shortages, higher inflation, including wage competition and higher shipping costs, and labor shortages and competition for skilled personnel; the inability to develop and market new competitive products; inherent uncertainties involved in the estimates and judgments used in the preparation of financial statements and the providing of estimates of financial measures, in accordance with U.S. GAAP and related standards; operating results of FLIR being lower than anticipated; disruptions in the global economy; customer and supplier bankruptcies; 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 or changes to U.S. and foreign government spending and budget priorities triggered by the COVID pandemic; impacts from the United Kingdom’s 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; the continuing review and resolution of FLIR’s export and tax matters; escalating economic and diplomatic tension between China and the United States; the ongoing conflict between Russia and Ukraine; threats to the security of our confidential and proprietary information, including cybersecurity threats; natural and man-made disasters, including those related to or intensified by climate change; and our ability to achieve emission reduction targets and decrease our carbon footprint. 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 those implemented in response to climate change, could further negatively affect our businesses that supply the oil and gas industry. Continued weakness in the commercial aerospace industry will negatively affect the markets of our commercial aviation businesses. In addition, financial market fluctuations affect the value of the Company’s pension assets. Changes in the policies of U.S. and foreign governments, including economic sanctions, could result, over time, in reductions or realignment in defense or other government spending and further changes in programs in which the Company participates. While Teledyne’s growth strategy includes possible acquisitions, we cannot provide any assurance as to when, if or on what terms any acquisitions will be made. Acquisitions involve various inherent risks, such as, among others, our ability to integrate acquired businesses, retain key management and 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. We continue to take action to assure compliance with the internal controls, disclosure controls and other requirements of the Sarbanes-Oxley Act of 2002. While we believe our control systems are effective, there are inherent limitations in all control systems, and misstatements due to error or fraud may occur and may not be detected. Additional information concerning factors that could cause actual results to differ materially from those projected in the forward-looking statements is contained beginning on page 6 of this Form 10-K under the caption “Risk Factors; Cautionary Statement as to Forward-Looking Statements.” Forward-looking statements are generally accompanied by words such as “estimate”, “project”, “predict”, “believes” or “expect”, that convey the uncertainty of future events or outcomes. We assume no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or otherwise. 42 Table of Contents