Quarterly Report (10-q)

Date : 07/29/2019 @ 10:04AM
Source : Edgar (US Regulatory)
Stock : Teledyne Technologies Inc (TDY)
Quote : 376.88  -0.66 (-0.17%) @ 1:00AM
After Hours
Last Trade
Last $ 376.88 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-Q
_____________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 1-15295
_____________________________________
TELEDYNE TECHNOLOGIES INC ORPORATED
(Exact name of registrant as specified in its charter)
_____________________________________
Delaware
 
 
25-1843385
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer
Identification Number)
1049 Camino Dos Rios
 
Thousand Oaks
California
 
91360-2362
(Address of principal executive offices)
 
 
(Zip Code)
805 373-4545
(Registrant’s telephone number, including area code)
____________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
TDY
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes        No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes        No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
 
 
 
 
Non-accelerated filer
Smaller reporting company
 
 
 
 
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  
    No  
There were 36,379,266 shares of common stock, $.01 par value per share, outstanding as of July 24, 2019.



TELEDYNE TECHNOLOGIES INCORPORATED
TABLE OF CONTENTS
 
 
PAGE
Part I
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II
 
 
 
 
Item 1. Legal Proceedings
 
 
 
 
 
 
 
 
 
 
 
 

1


PART I FINANCIAL INFORMATION
 
Item 1.    Financial Statements
TELEDYNE TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 2019 AND JULY 1, 2018
(Unaudited - Amounts in millions, except per-share amounts)
 
Second Quarter
 
Six Months
 
2019
 
2018
 
2019
 
2018
Net sales
$
782.0

 
$
732.5

 
$
1,527.2

 
$
1,428.1

Costs and expenses
 
 
 
 
 
 
 
Cost of sales
463.6

 
447.0

 
927.5

 
885.2

Selling, general and administrative expenses
186.5

 
174.0

 
370.5

 
343.0

Total costs and expenses
650.1

 
621.0

 
1,298.0

 
1,228.2

Operating income
131.9

 
111.5

 
229.2

 
199.9

Interest and debt expense, net
(5.4
)
 
(6.7
)
 
(10.8
)
 
(13.8
)
Non-service retirement benefit income
2.0

 
3.3

 
4.2

 
6.7

Other expense, net
(0.6
)
 
(3.7
)
 
(1.8
)
 
(6.2
)
Income before income taxes
127.9

 
104.4

 
220.8

 
186.6

Provision for income taxes
23.3

 
18.5

 
40.9

 
34.2

Net income
$
104.6

 
$
85.9

 
$
179.9

 
$
152.4

 
 
 
 
 
 
 
 
Basic earnings per common share
$
2.89

 
$
2.40

 
$
4.97

 
$
4.27

Weighted average common shares outstanding
36.2

 
35.8

 
36.2

 
35.7

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
2.80

 
$
2.32

 
$
4.82

 
$
4.13

Weighted average diluted common shares outstanding
37.4

 
37.0

 
37.3

 
36.9

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

TELEDYNE TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 2019 AND JULY 1, 2018
(Unaudited - Amounts in millions)
 
Second Quarter
 
Six Months
 
2019
 
2018
 
2019
 
2018
Net income
$
104.6

 
$
85.9

 
$
179.9

 
$
152.4

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign exchange translation adjustment
(4.6
)
 
(59.3
)
 
12.4

 
(42.1
)
Hedge activity, net of tax
1.3

 
(2.9
)
 
3.1

 
(4.5
)
Pension and postretirement benefit adjustments, net of tax
4.9

 
5.1

 
9.5

 
9.4

Other comprehensive income (loss)
1.6

 
(57.1
)
 
25.0

 
(37.2
)
Comprehensive income
$
106.2

 
$
28.8

 
$
204.9

 
$
115.2

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

2


TELEDYNE TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - Amounts in millions, except share amounts)
 
June 30, 2019
 
December 30, 2018
Assets
 
 
 
Current Assets
 
 
 
Cash
$
108.1

 
$
142.5

Accounts receivable, net
432.3

 
416.5

Unbilled receivables, net
176.5

 
145.3

Inventories, net
390.4

 
364.3

Prepaid expenses and other current assets
53.7

 
45.8

Total current assets
1,161.0

 
1,114.4

Property, plant and equipment, net of accumulated depreciation and amortization of $595.4 at June 30, 2019 and $566.0 at December 30, 2018
450.9

 
442.6

Goodwill
1,888.0

 
1,735.2

Acquired intangibles, net
379.9

 
344.3

Prepaid pension assets
101.4

 
88.2

Operating lease right-of-use assets
129.6

 

Other assets, net
89.4

 
84.6

Total Assets
$
4,200.2

 
$
3,809.3

Liabilities and Stockholders’ Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
221.7

 
$
227.8

Accrued liabilities
353.8

 
355.6

Current portion of long-term debt and other debt
135.5

 
137.4

Total current liabilities
711.0

 
720.8

Long-term debt
656.2

 
610.1

Long-term operating lease liabilities
121.9

 

Other long-term liabilities
238.1

 
248.7

Total Liabilities
1,727.2

 
1,579.6

Commitments and contingencies

 

Stockholders’ Equity

 

Preferred stock, $0.01 par value; outstanding shares - none

 

Common stock, $0.01 par value; authorized 125,000,000 shares; issued shares: 37,697,865 at June 30, 2019 and December 30, 2018; outstanding shares: 36,376,376 at June 30, 2019 and 36,087,297 at December 30, 2018
0.4

 
0.4

Additional paid-in capital
352.4

 
343.7

Retained earnings
2,703.6

 
2,523.7

Treasury stock, 1,321,489 shares at June 30, 2019 and 1,610,568 shares at December 30, 2018
(115.2
)
 
(144.9
)
Accumulated other comprehensive loss
(468.2
)
 
(493.2
)
Total Stockholders’ Equity
2,473.0

 
2,229.7

Total Liabilities and Stockholders’ Equity
$
4,200.2

 
$
3,809.3

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

3


TELEDYNE TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
 
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Balance, December 30, 2018
$
0.4

 
$
343.7

 
$
(144.9
)
 
$
2,523.7

 
$
(493.2
)
 
$
2,229.7

Net income

 

 

 
75.3

 

 
75.3

Other comprehensive income, net of tax

 

 

 

 
23.4

 
23.4

Treasury stock issued

 
(15.0
)
 
15.0

 

 

 

Stock-based compensation

 
10.9

 

 

 

 
10.9

Exercise of stock options and other

 
10.2

 

 

 

 
10.2

Balance, March 31, 2019
0.4

 
349.8

 
(129.9
)
 
2,599.0

 
(469.8
)
 
2,349.5

Net income

 

 

 
104.6

 

 
104.6

Other comprehensive income, net of tax

 

 

 

 
1.6

 
1.6

Treasury stock issued

 
(14.7
)
 
14.7

 

 

 

Stock-based compensation

 
6.8

 

 

 

 
6.8

Exercise of stock options and other

 
10.5

 

 

 

 
10.5

Balance, June 30, 2019
$
0.4

 
$
352.4

 
$
(115.2
)
 
$
2,703.6

 
$
(468.2
)
 
$
2,473.0


 
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Balance, December 31, 2017
$
0.4

 
$
337.3

 
$
(200.7
)
 
$
2,139.6

 
$
(329.3
)
 
$
1,947.3

Net income

 

 

 
66.5

 

 
66.5

Other comprehensive income, net of tax

 

 

 

 
19.9

 
19.9

Treasury stock issued

 
(20.4
)
 
20.4

 

 

 

Stock-based compensation

 
6.6

 

 

 

 
6.6

Exercise of stock options and other

 
12.3

 

 

 

 
12.3

Cumulative effect of new accounting standards

 

 

 
50.9

 
(47.6
)
 
3.3

Balance, April 1, 2018
0.4

 
335.8

 
(180.3
)
 
2,257.0

 
(357.0
)
 
2,055.9

Net income

 

 

 
85.9

 

 
85.9

Other comprehensive loss, net of tax

 

 

 

 
(57.1
)
 
(57.1
)
Treasury stock issued

 
(17.2
)
 
17.2

 

 

 

Stock-based compensation

 
6.5

 

 

 

 
6.5

Exercise of stock options and other

 
11.6

 

 

 

 
11.6

Balance, July 1, 2018
$
0.4

 
$
336.7

 
$
(163.1
)
 
$
2,342.9

 
$
(414.1
)
 
$
2,102.8

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

4


TELEDYNE TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND JULY 1, 2018
(Unaudited - Amounts in millions)
 
Six Months
 
2019
 
2018
Operating Activities
 
 
 
Net income
$
179.9

 
$
152.4

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
54.7

 
56.4

Stock-based compensation
17.7

 
13.1

Changes in operating assets and liabilities excluding the effect of business acquired:
 
 
 
Accounts receivable
(36.6
)
 
(38.5
)
Inventories
(10.1
)
 
(12.2
)
Prepaid expenses and other assets
(4.3
)
 
(1.3
)
Accounts payable
(7.8
)
 
25.9

Accrued liabilities
(22.8
)
 
(15.7
)
Deferred and income taxes receivable/payable, net
(4.5
)
 
(1.0
)
Long-term assets
(11.7
)
 
(8.3
)
Other long-term liabilities
8.1

 
(1.6
)
     Other operating, net
0.7

 
10.3

Net cash provided by operating activities
163.3

 
179.5

Investing Activities
 
 
 
Purchases of property, plant and equipment
(39.4
)
 
(47.2
)
Purchase of businesses, net of cash acquired
(222.5
)
 

Other investing, net
0.3

 
0.7

Net cash used in investing activities
(261.6
)
 
(46.5
)
Financing Activities
 
 
 
Net proceeds from (payments on) credit facility
47.5

 
(115.0
)
Net proceeds from (payments on) other debt
(2.2
)
 
2.3

Proceeds from exercise of stock options
20.7

 
23.8

Other financing, net
(1.4
)
 
(2.0
)
Net cash provided by (used in) financing activities
64.6

 
(90.9
)
Effect of exchange rate changes on cash
(0.7
)
 
(11.6
)
Change in cash
(34.4
)
 
30.5

Cash—beginning of period
142.5

 
70.9

Cash—end of period
$
108.1

 
$
101.4

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

5


TELEDYNE TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2019

Note 1. General
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by Teledyne Technologies Incorporated (“Teledyne” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in notes to consolidated financial statements have been condensed or omitted pursuant to such rules and regulations, but resultant disclosures are in accordance with accounting principles generally accepted in the United States (“GAAP”) as they apply to interim reporting. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes in Teledyne’s Annual Report on Form 10-K for the fiscal year ended December 30, 2018 (“ 2018 Form 10-K”).
In the opinion of Teledyne’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly, in all material respects, Teledyne’s consolidated financial position as of June 30, 2019 and the consolidated results of operations, consolidated comprehensive income for the three and six months then ended and consolidated cash flows for the six months then ended. The results of operations and cash flows for the periods ended June 30, 2019 are not necessarily indicative of the results of operations or cash flows to be expected for any subsequent quarter or the full fiscal year. Certain prior year amounts have been reclassified to conform to the current period presentation.
Recent Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, to address a specific consequence of the Tax Cuts and Jobs Act (“Tax Act”) by allowing a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the Tax Act reduction of the U.S. federal corporate income tax rate. The guidance is effective for all entities for annual periods beginning after December 15, 2018, with early adoption permitted. In the second quarter of 2018, we elected to early adopt this ASU and elected to reclassify, in the period of enactment, stranded tax effects totaling $47.6 million from AOCI to retained earnings in our condensed consolidated balance sheet. The reclassification amount primarily included income tax effects related to our pension and postretirement benefit plans. Income tax effects remaining in AOCI will be released into earnings as the related pretax amounts are reclassified to earnings.
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities.” This guidance better aligns an entity’s risk management activities and financial reporting for hedging relationships and expands and refines hedge accounting for both nonfinancial and financial risk components. This guidance also simplifies and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This guidance is effective for fiscal years beginning after December 15, 2018 and for interim periods therein, with early adoption permitted. We adopted the guidance as of December 31, 2018 using the modified retrospective approach, there was no cumulative adjustment to retained earnings related to hedge ineffectiveness for the year ended December 31, 2018. Additionally, as a result of the adoption, we no longer disclose the ineffective portion of the change in fair value of our derivative financial instruments.  The entire change in the fair value of the cash flow hedging instruments aside from components excluded from the assessment of hedge effectiveness will now be recorded in other comprehensive income and subsequently reclassified to earnings in the period the hedged item impacts earnings.   The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates the computation of the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record a goodwill impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We expect the adoption of this guidance will reduce the complexity surrounding the evaluation of goodwill for impairment. The impact of this guidance for the Company will depend on the outcomes of future goodwill impairment tests.

6


In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance requires lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability, other than leases that meet the definition of a short-term lease. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. We adopted the guidance on December 31, 2018, the beginning of our 2019 fiscal year using the modified retrospective transition method. Prior period comparative information was not adjusted. In addition, we elected the package of practical expedients permitted under the transition guidance, which among other things, allowed us to carry forward the historical lease classification. The adoption of this guidance did not have a material impact related to existing leases and as a result, a cumulative-effect adjustment was not recorded. Also, the adoption of the guidance did not have a material impact on our results of operations or cash flows. Upon adoption, on December 31, 2018, we recognized right-of-use assets of $128.4 million and a total lease liability of $139.8 million for operating leases.
Lease Commitments
We determine if an arrangement is a lease at inception. Effective December 31, 2018, operating leases are recorded as right-of-use assets, other long-term lease liabilities and current accrued liabilities in our condensed consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our condensed consolidated balance sheets.  
Operating lease right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Since most of our leases do not provide an implicit rate, we use our incremental borrowing rate to determine the present value of lease payments at the commencement date. We use the implicit rate when readily determinable. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Many lease agreements contain renewal options at either a fixed cost, fixed increase or market value adjustment. For those leases with renewal options, we will include the renewal options that are reasonably certain to be exercised, for purposes of calculating the lease liability and corresponding right-of-use asset. Teledyne will evaluate the likelihood of exercising each renewal option based on many factors, including the length of the renewal option and the future new lease cost, if known, or the estimated future new lease cost if it is not a fixed amount. 
Operating Leases
Teledyne has approximately 120 operating lease agreements, which are primarily for manufacturing facilities and office space. These agreements frequently include one or more renewal options and may require the Company to pay for utilities, taxes, insurance and maintenance expense. No lease agreement imposes a restriction on the Company’s ability to engage in financing transactions or enter into further lease agreements. At June 30, 2019, Teledyne has right-of-use assets of $129.6 million and a total lease liability for operating leases of $139.8 million of which $121.9 million is included in long-term lease liabilities and $17.9 million is included in current accrued liabilities.
At June 30, 2019, future minimum lease payments for operating leases with non-cancelable terms of more than one year were as follows (in millions):
Remainder of 2019
$
11.5

2020
22.3

2021
20.5

2022
18.2

2023
16.7

Thereafter
84.7

Total minimum lease payments
173.9

Less:
 
Imputed interest
(34.1
)
Current portion
(17.9
)
Present value of minimum lease payments, net of current portion
$
121.9


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

7



As previously disclosed in Note 13 of the Notes to Consolidated Financial Statements included in our 2018 Form 10-K and under the previous lease accounting, future minimum lease payments for operating leases having initial or remaining non-cancelable lease terms in excess of one year were as follows (in millions):
 
As of December 30, 2018
2019
$
23.2

2020
20.6

2021
18.4

2022
18.4

2023
11.8

Thereafter
48.2

Total minimum lease payments
$
140.6


Other
Our finance leases and subleases are not material.
Note 2. Accumulated Other Comprehensive Loss
The changes in AOCI by component, net of tax, for the second quarter and six months ended June 30, 2019 and July 1, 2018 are as follows (in millions):
 
Foreign Currency Translation
 
Cash Flow Hedges and Other
 
Pension and Postretirement Benefits
 
Total
Balance as of March 31, 2019
$
(164.5
)
 
$
(3.1
)
 
$
(302.2
)
 
$
(469.8
)
   Other comprehensive income/(loss) before reclassifications
(4.6
)
 
0.5

 

 
(4.1
)
   Amounts reclassified from AOCI

 
0.8

 
4.9

 
5.7

Net other comprehensive income/(loss)
(4.6
)
 
1.3

 
4.9

 
1.6

Balance as of June 30, 2019
$
(169.1
)
 
$
(1.8
)
 
$
(297.3
)
 
$
(468.2
)
 
 
 
 
 
 
 
 
 
Foreign Currency Translation
 
Cash Flow Hedges and Other
 
Pension and Postretirement Benefits
 
Total
Balance as of April 1, 2018
$
(84.8
)
 
$
(1.1
)
 
$
(271.1
)
 
$
(357.0
)
   Other comprehensive income/(loss) before reclassifications
(59.3
)
 
2.6

 

 
(56.7
)
   Amounts reclassified from AOCI

 
(5.5
)
 
5.1

 
(0.4
)
Net other comprehensive income/(loss)
(59.3
)
 
(2.9
)
 
5.1

 
(57.1
)
Balance as of July 1, 2018
$
(144.1
)
 
$
(4.0
)
 
$
(266.0
)
 
$
(414.1
)





8


 
Foreign Currency Translation
 
Cash Flow Hedges and Other
 
Pension and Postretirement Benefits
 
Total
Balance as of December 30, 2018
$
(181.5
)
 
$
(4.9
)
 
$
(306.8
)
 
$
(493.2
)
   Other comprehensive income before reclassifications
12.4

 
3.7

 

 
16.1

   Amounts reclassified from AOCI

 
(0.6
)
 
9.5

 
8.9

Net other comprehensive income
12.4

 
3.1

 
9.5

 
25.0

Balance as of June 30, 2019
$
(169.1
)
 
$
(1.8
)
 
$
(297.3
)
 
$
(468.2
)
 
 
 
 
 
 
 
 
 
Foreign Currency Translation
 
Cash Flow Hedges and Other
 
Pension and Postretirement Benefits
 
Total
Balance as of December 31, 2017
(102.0
)
 
0.5

 
(227.8
)
 
(329.3
)
   Other comprehensive loss before reclassifications
(42.1
)
 

 

 
(42.1
)
   Amounts reclassified from AOCI

 
(4.5
)
 
9.4

 
4.9

Net other comprehensive income/(loss)
(42.1
)
 
(4.5
)
 
9.4

 
(37.2
)
Reclassification of income tax effects for ASU 2018-02

 

 
(47.6
)
 
(47.6
)
Balance as of July 1, 2018
(144.1
)
 
(4.0
)
 
(266.0
)
 
(414.1
)

The reclassifications out of AOCI to net income for the second quarter and six months ended June 30, 2019 and July 1, 2018 are as follows (in millions):
 
Amount Reclassified from AOCI for the Three Months Ended
 
Amount Reclassified from AOCI for the Three Months Ended
Statement of Income
 
June 30, 2019
 
July 1, 2018
Presentation
(Gain) loss on cash flow hedges:
 
 
 
 
(Gain) loss recognized in income on derivatives
$
1.1

 
$
(7.4
)
See Note 4
Income tax impact
(0.3
)
 
1.9

Provision for income taxes
Total
$
0.8

 
$
(5.5
)
 
 
 
 
 
 
Amortization of defined benefit pension and postretirement plan items:
 
 
 
 
Amortization of prior service cost
$
(1.5
)
 
$
(1.5
)
Costs and expenses
Amortization of net actuarial loss
7.9

 
8.1

Costs and expenses
Total before tax
6.4

 
6.6

 
Income tax impact
(1.5
)
 
(1.5
)
Provision for income taxes
Total
$
4.9

 
$
5.1

 


9


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

 
1.6

Provision for income taxes
Total
$
(0.6
)
 
$
(4.5
)
 
 
 
 
 
 
Amortization of defined benefit pension and postretirement plan items:
 
 
 
 
Amortization of prior service cost
(3.0
)
 
(3.0
)
Costs and expenses
Amortization of net actuarial loss
15.5

 
15.4

Costs and expenses
Total before tax
12.5

 
12.4

 
Income tax impact
$
(3.0
)
 
$
(3.0
)
Provision for income taxes
Total
$
9.5

 
$
9.4

 

Note 3. Business Combinations, Goodwill and Acquired Intangible Assets
Acquisition of the scientific imaging businesses of Roper Technologies, Inc.
On February 5, 2019, we acquired the scientific imaging businesses of Roper Technologies, Inc. for $225.0 million in cash. Principally located in the United States and Canada, the acquired businesses are part of the Digital Imaging segment. 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. Teledyne funded the acquisition with borrowings under its credit facility and cash on hand. The results of the acquisition have been included in Teledyne’s results since the date of the acquisition.
Goodwill and Acquired Intangible Assets
Teledyne’s goodwill was $1,888.0 million at June 30, 2019 and $1,735.2 million at December 30, 2018 . The increase in the balance of goodwill in 2019 resulted from $145.5 million in goodwill from the acquisition of the scientific imaging businesses of Roper Technologies, Inc. Teledyne’s net acquired intangible assets were $379.9 million at June 30, 2019 and $344.3 million at December 30, 2018 . The increase in the balance of net acquired intangible assets resulted from $52.4 million in acquired intangible assets from the acquisition of the scientific imaging businesses of Roper Technologies, Inc., partially offset by amortization of acquired intangible assets. The Company is in the process of specifically identifying the amount to be assigned to certain assets, including acquired intangible assets, and liabilities and the related impact on taxes and goodwill for the acquisition of the scientific imaging businesses of Roper Technologies, Inc. since there was insufficient time between the acquisition date and the end of the period to finalize the analysis.
Pending Acquisition
See Note 14 to these condensed consolidated financial statements for information about a pending acquisition.



10


Note 4. Derivative Instruments
Teledyne transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company’s primary foreign currency risk management objective is to protect the U.S. dollar value of future cash flows and minimize the volatility of reported earnings. All derivatives are recorded on the balance sheet at fair value. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting. The Company utilizes foreign currency forward contracts to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in Canadian dollars for our Canadian companies, including Teledyne DALSA and in British pounds for our UK companies, including Teledyne e2v. These contracts are designated and qualify as cash flow hedges. The Company has converted a U.S. dollar denominated, variable rate debt obligation into a euro fixed rate obligation using a receive float, pay fixed cross currency swap. This cross currency swap is designated as a cash flow hedge.
Cash Flow Hedging Activities
The effectiveness of the forward contract cash flow hedge, and the cross currency swap cash flow hedge is assessed prospectively and retrospectively on a monthly basis using quantitative and qualitative analysis, as well as using other timing and probability criteria. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedges and must be highly effective in offsetting changes to future cash flows on hedged transactions. The effective portion of the cash flow hedge forward contracts’ gains or losses resulting from changes in the fair value of these hedges is initially reported, net of tax, as a component of AOCI in stockholders’ equity until the underlying hedged item is reflected in our consolidated statements of income, at which time the effective amount in AOCI is reclassified to revenue in our consolidated statements of income. For the cross currency swap cash flow hedge, effective amounts are recorded in AOCI, and reclassified into interest expense in the consolidated statements of income. In addition, for the cross currency swap an amount is reclassified from AOCI to other income and expense each reporting period, to offset the earnings impact of the remeasurement of the hedged liability. Net deferred gains recorded in AOCI, net of tax, for the forward contracts that will mature in the next twelve months total $0.2 million . These losses are expected to be offset by anticipated gains in the value of the forecasted underlying hedged item. Amounts related to the cross currency swap expected to be reclassified from AOCI into income in the next twelve months total $0.1 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. As of June 30, 2019 , Teledyne had foreign currency forward contracts designated as cash flow hedges to buy Canadian dollars and to sell U.S. dollars totaling $80.1 million . These foreign currency forward contracts have maturities ranging from September 2019 to August 2020. Teledyne had foreign currency forward contracts designated as cash flow hedges to buy British pounds and to sell U.S. dollars totaling $21.2 million . These foreign currency forward contracts have maturities ranging from September 2019 to November 2020. The cross currency swap has notional amounts of €93.0 million equivalent to $100.0 million , and matures in October 2019.
The effect of derivative instruments designated as cash flow hedges in the condensed consolidated financial statements for the second quarter and six months ended June 30, 2019 and July 1, 2018 was as follows (in millions):
 
Second Quarter
 
Six Months
 
2019
 
2018
 
2019
 
2018
Net gain (loss) recognized in AOCI (a)
$
0.7

 
$
3.6

 
$
5.0

 
$
(0.1
)
Net gain (loss) reclassified from AOCI into revenue (a)
$
(0.6
)
 
$
0.8

 
$
(1.2
)
 
$
2.0

Net gain reclassified from AOCI into interest expense (a)
$
0.7

 
$
0.6

 
$
1.5

 
$
1.1

Net gain (loss) reclassified from AOCI into other income and expense, net (b)
$
(1.2
)
 
$
6.0

 
$
0.6

 
$
3.0

Net foreign exchange gain (loss) recognized in other income, net (c)
$
(0.2
)
 
$
(0.2
)
 
$
(0.4
)
 
$
(0.2
)
a)    Effective portion, pre-tax
b)     Amount reclassified to offset earnings impact of liability hedged by cross currency swap
c)     Amount excluded from effectiveness testing

11


Non-Designated Hedging Activities
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 June 30, 2019 , Teledyne had non-designated foreign currency contracts of this type in the following pairs (in millions):
Contracts to Buy
 
Contracts to Sell
Currency
Amount
 
Currency
Amount
Canadian Dollars
C$
23.2

 
U.S. Dollars
US$
18.0

Canadian Dollars
C$
15.4

 
Euros
10.3

Great Britain Pounds
£
1.2

 
Australian Dollars
A$
2.1

Great Britain Pounds
£
33.3

 
U.S. Dollars
US$
42.4

Singapore Dollars
S$
2.3

 
U.S. Dollars
US$
1.7

Euros
35.4

 
U.S. Dollars
US$
40.4

U.S. Dollars
US$
1.9

 
Japanese Yen
¥
200.0

Danish Krone
DKR
60.2

 
U.S. Dollars
US$
9.2

Great Britain Pounds
£
4.9

 
Euros
5.5

Great Britain Pounds
£
2.5

 
Hong Kong Dollars
HK$
24.8


The above table includes non-designated hedges derived from terms contained in triggered or previously designated cash flow hedges. The gains and losses on these derivatives which are not designated as hedging instruments are intended to, at a minimum, partially offset the transaction gains and losses recognized in earnings. Teledyne does not use foreign currency forward contracts for speculative or trading purposes.
The effect of derivative instruments not designated as cash flow hedges recognized in other income and expense for the second quarter and six months ended June 30, 2019 was expense of $0.7 million and income $0.9 million , respectively. The effect of derivative instruments not designated as cash flow hedges in other income and expense for the second quarter and six months ended July 1, 2018 was expense of $17.0 million and $17.8 million , respectively. The income/expense was largely offset by losses/gains in the value of the underlying hedged item excluding the impact of forward points.
Fair Value of Derivative Financial Instruments
The Company has elected to use the income approach to value the derivatives, using observable Level 2 market expectations at measurement date and standard valuation techniques to convert future amounts to a single present amount. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR and EURIBOR) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR and EURIBOR cash and swap rates, foreign currency forward rates and cross currency basis spreads). Mid-market pricing is used as a practical expedient for fair value measurements. The fair value measurement of an asset or liability must reflect the nonperformance risk of the entity and the counterparty. Therefore, the impact of the counterparty’s creditworthiness when in an asset position and the Company’s creditworthiness when in a liability position has also been factored into the fair value measurement of the derivative instruments and did not have a material impact on the fair value of these derivative instruments. Both the counterparty and the Company are expected to continue to perform under the contractual terms of the instruments.
The fair values of the Company’s derivative financial instruments are presented below. All fair values for these derivatives were measured using Level 2 information as defined by the accounting standard hierarchy (in millions):
Asset/(Liability) Derivatives
Balance sheet location
 
June 30, 2019
 
December 30, 2018
Derivatives designated as hedging instruments:
 
 
 
 
 
Cash flow forward contracts
Other assets
 
$
0.8

 
$

Cash flow cross currency swap
Accrued liabilities
 
(5.8
)
 
(6.3
)
Cash flow forward contracts
Accrued liabilities
 
(0.9
)
 
(4.2
)
Total derivatives designated as hedging instruments
 
 
(5.9
)
 
(10.5
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
Non-designated forward contracts
Other current assets
 
0.1

 

Non-designated forward contracts
Accrued liabilities
 
(0.4
)
 
(0.6
)
Total derivatives not designated as hedging instruments
 
 
(0.3
)
 
(0.6
)
Total liability derivatives, net
 
 
$
(6.2
)
 
$
(11.1
)


12



Note 5. Earnings Per Share
For the second quarter of 2019, no stock options were excluded in the computation of earnings per share. For the first six months of 2019, 3,240 stock options were excluded in the computation of diluted earnings per share because they had exercise prices that were greater than the weighted average market price of the Company’s common stock during the period. For the second quarter of 2018, no stock options were excluded in the computation of earnings per share. For the first six months of 2018, 185,292 stock options were excluded in the computation of diluted earnings per share because they had exercise prices that were greater than the weighted average market price of the Company’s common stock during the period.
The weighted average number of common shares used in the calculation of basic and diluted earnings per share consisted of the following (in millions):
 
Second Quarter
 
Six Months
 
2019
 
2018
 
2019
 
2018
Weighted average basic common shares outstanding
36.2

 
35.8

 
36.2

 
35.7

Effect of dilutive securities (primarily stock options)
1.2

 
1.2

 
1.1

 
1.2

Weighted average diluted common shares outstanding
37.4

 
37.0

 
37.3

 
36.9


Note 6. Stock-Based Compensation Plans
Teledyne has long-term incentive plans pursuant to which it has granted non-qualified stock options, restricted stock and performance shares to certain employees. The Company also has non-employee Board of Director stock compensation plans, pursuant to which common stock, stock options and restricted stock units have been issued to its directors.
Stock Incentive Plan
Stock option compensation expense was $5.8 million for the second quarter of 2019 and was $5.4 million for the second quarter of 2018. Stock option compensation expense was $14.7 million for the first six months of 2019 and was $10.3 million for the first six months of 2018. Employee stock option grants are charged to expense evenly over the three year vesting period except for stock options that were granted in January 2019 to Teledyne’s President and Chief Executive Officer and Teledyne’s Executive Chairman which were expensed immediately. For 2019 , the Company currently expects approximately $26.5 million in stock option compensation expense based on stock options currently outstanding. This amount can be impacted by employee retirements and terminations or stock options granted during the remainder of the year. The Company issues shares of common stock upon the exercise of stock options.
The following assumptions were used in the valuation of stock options granted in 2019:
 
2019
Expected volatility
26.7%
Risk-free interest rate range
2.47% to 2.70%
Expected life in years
6.6
Expected dividend yield

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

Stock option transactions for the second quarter and first six months of 2019 are summarized as follows:
 
2019
 
Second Quarter
 
Six Months
 
Shares
 
Weighted
Average
Exercise
Price
 
Shares
 
Weighted
Average
Exercise
Price
Beginning balance
2,317,523

 
$
124.24

 
2,064,740

 
$
104.66

Granted

 
$

 
390,789

 
$
217.58

Exercised
(139,978
)
 
$
77.04

 
(260,761
)
 
$
80.62

Canceled
(6,702
)
 
$
187.44

 
(23,925
)
 
$
175.95

Ending balance
2,170,843

 
$
127.09

 
2,170,843

 
$
127.09

Options exercisable at end of period
1,410,369

 
$
79.43

 
1,410,369

 
$
79.43



13


Performance Share Plan and Restricted Stock Award Program
Under the 2015 to 2017 Performance Share Plan, in the first quarter of 2019 the Company issued 8,586 shares of Teledyne common stock and in the first quarter of 2018, the Company issued 6,481 shares of Teledyne common stock. A total of 15,578 shares remain to be issued in 2020, subject to the terms of the plan.
In the first quarter of 2018, the performance cycle for the three -year period ending December 31, 2020, was set.  Under the plan, the maximum number of shares that could be issued in three equal installments in 2021, 2022 and 2023, is 59,922 .
The following table shows the restricted stock activity for the first six months of 2019:
 
Shares
 
Weighted average fair value per share
Balance, December 30, 2018
74,220

 
$
108.05

Granted
17,522

 
$
200.00

Vested
(35,330
)
 
$
72.91

Balance, June 30, 2019
56,412

 
$
158.62


Note 7. Inventories
Inventories are stated at current cost net of reserves for excess, slow moving and obsolete inventory. Inventories are valued under the FIFO method, LIFO method or average cost method. Inventories at cost determined on the average cost or the FIFO methods were $358.3 million at June 30, 2019 and $331.3 million at December 30, 2018 . The remainder of the inventories using the LIFO method is $41.1 million at June 30, 2019 and $42.3 million at December 30, 2018 . Interim LIFO calculations are based on the Company’s estimates of expected year-end inventory levels and costs since an actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Because these estimates are subject to many factors beyond the Company’s control, interim results are subject to the final year-end LIFO inventory valuation.
 
Balance at
Inventories (in millions):
June 30, 2019
 
December 30, 2018
Raw materials and supplies
$
221.5

 
$
205.6

Work in process
124.6

 
117.5

Finished goods
53.3

 
50.5

 
399.4

 
373.6

Reduction to LIFO cost basis
(9.0
)
 
(9.3
)
Total inventories, net
$
390.4

 
$
364.3


Note 8. Customer Contracts
Estimate at Completion Process
For over time contracts using the cost-to-cost method, we have an Estimate at Completion (“EAC”) process in which management reviews the progress and execution of our performance obligations. This EAC process requires management judgment relative to assessing risks, estimating contract revenue and cost, and making assumptions for schedule and technical issues. Since certain contracts extend over a longer period of time, the impact of revisions in cost and revenue estimates during the progress of work may adjust the current period earnings through a cumulative catch-up basis. This method recognizes, in the current period, the cumulative effect of the changes on current and prior quarters. Additionally, if the current contract estimate indicates a loss, a provision is made for the total anticipated loss in the period that it becomes evident. Contract cost and revenue estimates for significant contracts are reviewed and reassessed quarterly. The majority of revenue recognized over time uses an EAC process. The net aggregate effects of these changes in estimates on contracts accounted for under the cost-to-cost method in the first six month of 2019 was approximately $12.6 million of favorable operating income, primarily related to favorable changes in estimates that impacted revenue, and, to a lesser degree, cost of sales, within the Digital Imaging operating segment. The net aggregate effects of these changes in estimates on contracts accounted for under the cost-to-cost method in the first six months of 2018 was less than $0.1 million of unfavorable operating income, respectively, primarily related to unfavorable changes in estimates that impacted revenue. None of the effects of changes in estimates on any individual contract were material to the condensed consolidated statements of income for any period presented.

14


Contract Liabilities
We recognize a liability for interim and advance payments in excess of revenue recognized and present it as a contract liability which is included within accrued liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheet, which represented $114.5 million and $19.9 million as of June 30, 2019, and $111.5 million and $15.3 million as of December 30, 2018, respectively.
The Company recognized revenue of $65.1 million during the six months ended June 30, 2019 from contract liabilities that existed at the beginning of year. The Company recognizes the incremental costs of obtaining or fulfilling a contract as expense when incurred if the amortization period of the asset is one year or less. Incremental costs to obtain or fulfill contracts with an amortization period greater than one year were not material.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of firm orders for which work has not been performed as of the period end date and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity). As of June 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,697.3 million . The Company expects approximately 79% of remaining performance obligations to be recognized into revenue within the next twelve months, with the remaining 21% recognized thereafter.
Product Warranty Costs
Some of the Company’s products are subject to specified warranties, and the Company provides for the estimated cost of product warranties. The adequacy of the warranty reserve is assessed regularly, and the reserve is adjusted as necessary based on a review of historic warranty experience with respect to the applicable business or products, as well as the length and actual terms of the warranties. The warranty reserve is included in current and long-term accrued liabilities on the Condensed Consolidated Balance Sheet.
 
Six Months
Warranty Reserve (in millions):
2019
 
2018
Balance at beginning of year
$
21.0

 
$
21.1

Accruals for product warranties charged to expense
5.1

 
4.4

Cost of product warranty claims
(4.6
)
 
(3.9
)
Acquisition
0.3

 

Balance at end of period
$
21.8

 
$
21.6


Note 9. Income Taxes
The income tax provision is calculated using an estimated annual effective tax rate, based upon expected annual income, permanent items, statutory rates and planned tax strategies in the various jurisdictions in which the Company operates. However, losses in certain jurisdictions and discrete items, such as the resolution of uncertain tax positions, are treated separately.
The Company’s effective income tax rate for the second quarter and first six months of 2019 was 18.2% and 18.5% , respectively. The Company’s effective income tax rate for the second quarter and first six months of 2018 was 17.7% and 18.3% , respectively. The second quarter and first six months of 2019 include net discrete income tax benefits of $4.3 million and $7.4 million , respectively. The 2019 second quarter and first six months of net discrete tax benefits includes $4.8 million and $7.7 million , respectively, related to share-based accounting. The second quarter and first six months of 2018 includes net discrete income tax benefits of $3.4 million and $5.5 million , respectively. The 2018 second quarter and first six months net discrete tax benefits includes $4.7 million and $7.7 million , respectively, related to share-based accounting. The first six months of 2018 also includes an increase a provisional charge recorded as part of the Tax Cuts and Jobs Act of 2017 of $0.6 million recorded in the first quarter.
Excluding the net discrete income tax benefits in both periods, the effective tax rates would have been 21.6% for the second quarter of 2019 and 21.9% for the first six months of 2019. Excluding the net discrete income tax benefits in both periods and the increase in the provisional charge, the effective tax rates would have been 21.0% for the second quarter of 2018 and 21.3% for the first six months of 2018.

15


Note 10. Long-Term Debt and Letters of Credit
 
Balance at
Long-Term Debt (in millions):
June 30, 2019
 
December 30, 2018
$750.0 million credit facility due March 2024, weighted average rate of 4.15% at June 30, 2019 and 5.50% at December 30, 2018
$
76.5

 
$
29.0

Term loan due October 2019, variable rate of 3.53% at June 30, 2019 and 3.63% at December 30, 2018, swapped to a Euro fixed rate of 0.7055%
100.0

 
100.0

2.61% Fixed Rate Senior Notes due December 2019
30.0

 
30.0

5.30% Fixed Rate Senior Notes due September 2020
75.0

 
75.0

2.81% Fixed Rate Senior Notes due November 2020
25.0

 
25.0

3.09% Fixed Rate Senior Notes due December 2021
95.0

 
95.0

3.28% Fixed Rate Senior Notes due November 2022
100.0

 
100.0

0.70% 50 Million Fixed Rate Senior Notes due April 2022
56.9

 
57.2

0.92% 100 Million Fixed Rate Senior Notes due April 2023
113.7

 
114.4

1.09% 100 Million Fixed Rate Senior Notes due April 2024
113.7

 
114.4

Other debt
6.9

 
8.8

Total debt
792.7

 
748.8

Less: current portion of long-term debt and debt issuance costs
(136.5
)
 
(138.7
)
Total long-term debt
$
656.2

 
$
610.1


On March 15, 2019, Teledyne amended its $750.0 million credit agreement to extend the maturity date from December 2020 to March 2024. While the borrowing capacity remains at $ 750.0 million , the amendment permits Teledyne to increase the aggregate amount of the borrowing capacity by up to $250.0 million subject to certain conditions.
Available borrowing capacity under the $750.0 million credit facility, which is reduced by borrowings and certain outstanding letters of credit, was $644.8 million at June 30, 2019 . The credit agreements require the Company to comply with various financial and operating covenants and at June 30, 2019 , the Company was in compliance with these covenants. At June 30, 2019 , Teledyne had $33.1 million in outstanding letters of credit.
Teledyne estimates the fair value of its long-term debt based on debt of similar type, rating and maturity and at comparable interest rates. The Company’s long-term debt is considered a level 2 fair value hierarchy and is valued based on observable market data. The estimated fair value of Teledyne’s long-term debt at June 30, 2019 and December 30, 2018 , approximated the carrying value.
Note 11. Lawsuits, Claims, Commitments, Contingencies and Related Matters
For a further description of the Company’s commitments and contingencies, reference is made to Note 14 of the Company’s financial statements as of and for the fiscal year ended December 30, 2018 , included in the 2018 Form 10-K.
At June 30, 2019 , the Company’s reserves for environmental remediation obligations totaled $6.2 million , of which $1.5 million is included in current accrued liabilities. At December 30, 2018, the Company’s reserves for environmental remediation obligations totaled $6.0 million . The Company evaluates whether it may be able to recover a portion of future costs for environmental liabilities from its insurance carriers and from third parties. The timing of expenditures depends on a number of factors that vary by site, including the nature and extent of contamination, the number of potentially responsible parties, the timing of regulatory approvals, the complexity of the investigation and remediation, and the standards for remediation. The Company expects that it will expend present accruals over many years and will complete remediation of all sites with which it has been identified in up to 30 years .
A number of other lawsuits, claims and proceedings have been or may be asserted against the Company, including those pertaining to product liability, acquisitions, patent infringement, contracts, environmental, employment and employee benefits matters. While the outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to the Company, management does not believe that the disposition of any such pending matters is likely to have a material adverse effect on the Company’s financial statements.


16


Note 12. Pension Plans and Postretirement Benefits
For the domestic pension plans, the discount rate increased to 4.59% in 2019 compared with a 4.02% discount rate used in 2018 . Teledyne has not made any cash pension contributions to its domestic qualified pension plan since 2013. No cash pension contributions are planned for 2019 for the domestic qualified pension plan.
 
Second Quarter
 
Six Months
 
2019
 
2018
 
2019
 
2018
Service cost — benefits earned during the period (in millions)
$
2.3

 
$
2.7

 
$
4.7

 
$
5.4

 
 
 
 
 
 
 
 
Pension non-service income (in millions):
 
 
 
 
 
 
 
Interest cost on benefit obligation
$
8.4

 
$
8.2

 
$
16.8

 
$
16.3

Expected return on plan assets
(16.6
)
 
(17.9
)
 
(33.1
)
 
(35.8
)
Amortization of prior service cost
(1.5
)
 
(1.5
)
 
(3.0
)
 
(3.0
)
Amortization of net actuarial loss
7.8

 
7.9

 
15.5

 
15.8

Curtailment/settlements
(0.1
)
 

 
(0.4
)
 

Pension non-service income
$
(2.0
)
 
$
(3.3
)
 
$
(4.2
)
 
$
(6.7
)
Teledyne sponsors several postretirement defined benefit plans that provide health care and life insurance benefits for certain eligible retirees.
 
Second Quarter
 
Six Months
Postretirement benefits non-service (income)/expense (in millions):
2019
 
2018
 
2019
 
2018
Interest cost on benefit obligation
$
0.1

 
$
0.1

 
$
0.2

 
$
0.2

Amortization of net actuarial gain
(0.1
)
 
(0.1
)
 
(0.1
)
 
(0.2
)
Postretirement benefits non-service (income)/expense
$

 
$

 
$
0.1

 
$


Note 13. Segment Information
Teledyne is a leading provider of sophisticated instrumentation, digital imaging products and software, aerospace and defense electronics, and engineered systems. Our customers include government agencies, aerospace prime contractors, energy exploration and production companies, major industrial companies and airlines. The Company has four reportable segments: Instrumentation; Digital Imaging; Aerospace and Defense Electronics; and Engineered Systems.
Segment results includes net sales and operating income by segment but excludes non-service retirement benefit income, equity income or loss, unusual non-recurring legal matter settlements, interest income and expense, gains and losses on the disposition of assets, sublease rental income and non-revenue licensing and royalty income, domestic and foreign income taxes and corporate office expenses. Corporate expense includes various administrative expenses relating to the corporate office and certain non-operating expenses, including certain acquisition-related transaction costs, not allocated to our segments.

17


The following table presents Teledyne’s segment disclosures (dollars in millions):
 
Second Quarter
 
%
 
Six Months
 
%
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Net sales(a):
 
 
 
 
 
 
 
 
 
 
 
Instrumentation
$
264.1

 
$
262.6

 
0.6
 %
 
$
520.6

 
$
501.6

 
3.8
 %
Digital Imaging
251.3

 
225.3

 
11.5
 %
 
486.6

 
436.3

 
11.5
 %
Aerospace and Defense Electronics
191.0

 
173.5

 
10.1
 %
 
371.4

 
347.1

 
7.0
 %
Engineered Systems
75.6

 
71.1

 
6.3
 %
 
148.6

 
143.1

 
3.8
 %
Total net sales
$
782.0

 
$
732.5

 
6.8
 %
 
$
1,527.2

 
$
1,428.1

 
6.9
 %
Operating income:
 
 
 
 
 
 
 
 
 
 
 
Instrumentation
$
49.0

 
$
40.9

 
19.8
 %
 
$
88.9

 
$
68.7

 
29.4
 %
Digital Imaging
52.5

 
43.3

 
21.2
 %
 
89.5

 
77.9

 
14.9
 %
Aerospace and Defense Electronics
39.4

 
33.7

 
16.9
 %
 
73.2

 
65.4

 
11.9
 %
Engineered Systems
7.3

 
7.4

 
(1.4
)%
 
12.0

 
14.6

 
(17.8
)%
Corporate expense
(16.3
)
 
(13.8
)
 
18.1
 %
 
(34.4
)
 
(26.7
)
 
28.8
 %
Operating income
$
131.9

 
$
111.5

 
18.3
 %
 
$
229.2

 
$
199.9

 
14.7
 %
(a)
Net sales excludes inter-segment sales of $4.0 million and $10.4 million for the second quarter and first six months of 2019, respectively, and $5.5 million and $10.7 million for the second quarter and first six months of 2018.

Identifiable assets are those assets used in the operations of the segments. Corporate assets primarily consist of cash, deferred taxes, net pension assets/liabilities and other assets (in millions):
Identifiable assets:
 
June 30, 2019
 
December 30, 2018
Instrumentation
 
$
1,410.2

 
$
1,392.7

Digital Imaging
 
1,843.6

 
1,600.9

Aerospace and Defense Electronics
 
616.0

 
521.4

Engineered Systems
 
123.3

 
116.6

Corporate
 
207.1

 
177.7

Total identifiable assets
 
$
4,200.2

 
$
3,809.3


Product Lines
The Instrumentation segment includes three product lines: Environmental Instrumentation, Marine Instrumentation and Test and Measurement Instrumentation. Teledyne’s other three segments each contain one product line.
The following tables provide a summary of the net sales by product line for the Instrumentation segment (in millions):
 
Second Quarter
 
Six Months
Instrumentation
2019
 
2018
 
2019
 
2018
Marine Instrumentation
$
111.4

 
$
118.7

 
$
216.6

 
$
222.9

Environmental Instrumentation
87.4

 
85.7

 
173.8

 
166.9

Test and Measurement Instrumentation
65.3

 
58.2

 
130.2

 
111.8

Total
$
264.1

 
$
262.6

 
$
520.6

 
$
501.6



We also disaggregate our revenue from contracts with customers by customer type, contract-type and geographic region for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

18


 
 
Second Quarter Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
 
 
Customer Type
 
 
 
Customer Type
 
 
(in millions)
 
United States Government (a)
 
Other, Primarily Commercial
 
Total
 
United States Government (a)
 
Other, Primarily Commercial
 
Total
Net Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Instrumentation
 
$
18.6

 
$
245.5

 
$
264.1

 
$
32.8

 
$
487.8

 
$
520.6

Digital Imaging
 
26.2

 
225.1

 
251.3

 
52.4

 
434.2

 
486.6

Aerospace and Defense Electronics
 
78.5

 
112.5

 
191.0

 
146.5

 
224.9

 
371.4

Engineered Systems
 
63.7

 
11.9

 
75.6

 
125.2

 
23.4

 
148.6

 
 
$
187.0

 
$
595.0

 
$
782.0

 
$
356.9

 
$
1,170.3

 
$
1,527.2

a) Includes sales as a prime contractor or subcontractor.
 
 
Second Quarter Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
 
 
Contract Type