Teledyne Technologies (TDY) 10-K2019 FY Annual report

As of June 28, 2019, the aggregate market value of Common Stock (based upon closing price of the stock on the New York Stock Exchange) of the registrant held by non-affiliates was approximately $9.7 billion.

At February 19, 2020, there were 36,630,917 shares of the registrant’s Common Stock outstanding.

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

Our strategy continues to emphasize growth in our core markets of instrumentation, digital imaging, aerospace and defense electronics and engineered systems. Our core markets are characterized by high barriers to entry and include specialized products and services not likely to be commoditized. We intend to strengthen and expand our core businesses with targeted acquisitions and through product development. We continue to focus on balanced and disciplined capital deployment among capital expenditures, product development, acquisitions and share repurchases. We aggressively pursue operational excellence to continually improve our margins and earnings 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.

Our businesses are aligned in four segments: Instrumentation, Digital Imaging, Aerospace and Defense Electronics and Engineered Systems. Financial information about our business segments can be found in Note 12 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

We design and manufacture geophysical streamer cables, hydrophones, seismic energy sources and specialty products used in offshore hydrocarbon exploration to locate oil and gas reserves beneath the ocean floor. Our Acoustic Doppler Current Profilers (“ADCPs”) precisely measure currents at varying depths in oceans and rivers, and our Doppler Velocity Logs (“DVLs”) are used for navigation by civilian and military surface ships, unmanned underwater vehicles and naval divers. We design and manufacture inertial sensing and navigation products, as well as subsea pipe and cable detection systems for offshore energy, oceanographic and military marine markets. We also design and manufacture remotely controlled and tethered instrumentation deployment vehicles used for current measurement, seafloor mapping and measurement of physical parameters such as salinity.

Additionally, we design and manufacture single and multibeam hydrographic survey instrumentation used in port surveys, dredging, pre- and post-installation of offshore energy infrastructure and other challenging underwater applications. Our multibeam sonar systems range from portable high-resolution systems used on tripods, autonomous and remotely operated underwater vehicles (“AUVs” and “ROVs”) to full ocean depth vessel-mounted oceanographic systems as well as sub bottom profilers that can survey structures beneath the seafloor. Our multibeam sonar systems can be used to create highly accurate maps of underwater offshore constructions, wrecks or quay walls in harbors, and in particular, high-quality maps of the seafloor. Our products are being utilized in both commercial and defense applications where we provide systems for detecting mines in the water. We provide solutions that are ready-to-operate and fully installed, including a comprehensive software package that ties together the variety of sensors that may be configured on an AUV or ROV platform.

Other marine products used by the U.S. Navy and commercial customers include acoustic modems for networked underwater communication and optical underwater cameras and LED lighting sources.

We believe our test and measurement products provide unique, world-class capabilities that enable the designers of complex electronic systems in many industry sectors to bring their products to market reliably and quickly. Our customers use our equipment in the design, development, manufacture, installation, deployment and operation of electronics equipment in broad range of industry end markets, including aerospace and defense, internet infrastructure, automotive, industrial, computer and semiconductor, consumer electronics and power electronics.

Our oscilloscopes are tools used by designers and engineers to measure and analyze complex electronic signals in order to develop high-performance systems, validate electronic designs and improve time to market. We offer a broad range of real-time oscilloscopes addressing different end user needs. Our five high-definition oscilloscope (“HD”) product families address needs from the lower-bandwidth bench top sector to the mid-range general-purpose sector of the market. The HD families offer superior signal fidelity for the ultimate in measurement accuracy and repeatability. Our LabMaster and WaveMaster product families are industry leading high-end oscilloscopes with bandwidths extending to 65GHz. Our WaveProHD product family covers the mid-to high-range performance and the WaveRunner product family covers the mid-range performance and general purpose and bench-top sector. Our WaveSurfer product-line is designed for users in the lower bandwidth bench-top sector of the market and value-oriented users in the economy sector. We also make high-speed, high-resolution modular analog-to-digital conversion systems. These systems are used in many applications including test and measurement, medical imaging, Light Detection and Ranging (“LIDAR”) and software defined radio. We recently introduced the WavePulser, using Teledyne InP technology which enables hardware designers and test engineers to characterize and analyze interconnects and cables for high-speed serial protocols such as PCI Express, HDMI, USB, SAS, SATA, Fibre Channel, InfiniBand, Gigabit Ethernet and Automotive Ethernet.

We also manufacture torque sensors and automatic data acquisition systems that are used to test critical control valves in nuclear power and industrial plants. Our torque sensors are also used in other markets, including automotive and power tools.

We produce and provide manufacturing services for MEMS. The majority of our semiconductor manufacturing capacity is consumed by external customers with the remaining capacity applied towards supplying unique CCD and microbolometer (for long-wave infrared detection) fabrication services for our internal image sensor requirements.

Additionally, we produce components and sub-systems that deliver high performance and high reliability radio frequency power generation for healthcare, transportation and industrial applications. Such products include critical components used in radiotherapy applications for cancer treatment, magnetrons and thyratrons for X-ray cargo scanning systems and microwave sources for marine and airborne radar.

We also provide high performance semiconductors, sub-systems, and signal and data processing solutions. As a partner of choice for high performance signal and data conditioning solutions for professional applications, we provide solutions that meet the demanding specifications of our customers. Our design capability enables us to partner with customers and ascend the value chain by providing multi-chip modules and boards. Our proprietary high-speed analog-to-digital and digital-to-analog data converters provide market leading performance for space and radio frequency communications.

We provide space and quantum technology products and services, including space-qualified imaging and quantum subsystems, radiation hardened imaging sensors for high radiation and space environments, cold atom quantum technology devices and system development services. We also provide atomic clocks and gravity sensing and ground based astronomical telescope sensors and subsystems.

In addition, our Digital Imaging segment provides LIDAR systems for airborne terrestrial mapping, mobile mapping, bathymetry and laser-based 3D imaging applications through our Optech business.  These imaging and mapping systems are used by commercial and government customers serving energy, natural resources and infrastructure applications. We also provide geospatial software designed for the hydrographic and marine community.

We provide research and engineering capabilities primarily in the areas of electronics, materials, optical systems, and information science to military, aerospace and industrial customers, as well as to various businesses throughout Teledyne. We receive funding from the Defense Advanced Research Products Agency (“DARPA”) and various other U.S. Department of Defense funding agencies, and we collaborate with researchers at universities and national laboratories to stay at the forefront of emerging technologies. We have developed high-speed electronics, precision timing and navigation devices, advanced functional and structural materials, liquid-crystal based optical devices, and image processing algorithms.

We are a leader in the development and production of large format focal plane array sensors for astronomy, defense and space science markets. Our advanced focal plane arrays, sensors, and subsystems cover a broad spectrum of frequencies from X-ray wavelengths to 15 micron long-wave infrared wavelengths. We deliver advanced imaging solutions to the U.S. Department of Defense, National Aeronautics and Space Administration (“NASA”), the European Space Agency (“ESA”), prime system integrators, other foreign space agencies and commercial customers. Our sensor technologies are on many of NASA’s major astronomy missions and can be found operating at nearly every major ground-based observatory telescope. Our image sensors also play a critical role in defense applications in airborne and satellite systems. We have developed sensors, subassemblies and cameras for air- and ground-based applications, including hyperspectral sensors for long-wave infrared and for simultaneous visible-shortwave infrared applications. We also produce a wide variety of infrared photodiodes for the commercial market. Our photodiodes are used in laboratory instrumentation and industrial equipment. In addition, we design and manufacture advanced military laser eye protection spectacles and sensor protection filters.

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.

We provide a range of microwave products to our customers ranging from components to highly integrated subsystems and solutions. Our helix traveling wave tubes, commonly called TWTs, are used to provide broadband power amplification of microwave signals. Military applications include radar, electronic warfare and satellite communication. We make TWTs for commercial applications as well, such as electromagnetic compatibility test equipment and satellite communication terminals. We also provide high-power solid-state TWT replacement amplifiers and complete amplifiers that incorporate a TWT and a power supply.

We design and manufacture solid state radio frequency (“RF”) and microwave components and subassemblies used in a wide variety of applications.  As components which form the building blocks for electronic systems, we produce amplifiers, voltage-controlled oscillators, YIGs, BAWs, low-noise amplifiers (“LNAs”), microwave mixers, and detectors using LDMOS, GaAs, GaN, and SiC technologies.  These components form the basis for our line of solid state power amplifiers, RF converters, and modems which are used in systems that provide communications links between ground stations, mobile units,

We supply a variety of connectors and cable assemblies, including specialized high voltage connectors and subassemblies and coax microwave interconnects, for defense, aerospace and high-end industrial applications. Additionally, we produce pilot helmet mounted display quick disconnect harnesses for the Joint Helmet Mounted Cueing System (“JHMCS”) used in the F-15, F-16 and F-18 aircrafts. The JHMCS system is a multi-role system designed to enhance pilot situational awareness and provides visual control of aircraft targeting systems and sensors. We manufacture microprocessor-controlled aircraft ejection seat sequencers and related support elements to military aircraft programs. We also provide initiators and electronic safe and arm devices for use in military applications.

We provide high performance, high reliability semiconductor solutions which address critical functions of the complete signal chain and RF signal path, including design, assembly and test, packaging, qualification and long-term support for customer’s program life cycle management.

We supply electromechanical relays, solid state power relays and coaxial switching devices to military, aerospace and other industrial markets. Applications include microwave and wireless communication infrastructure, RF and general broadband test equipment, test equipment used in semiconductor manufacturing, and industrial and commercial machinery and control equipment. On commercial aircraft, our solid state and electromechanical relays are used in a variety of applications, including jet engine fuel control, management of control surfaces and other on-board applications.

We are a supplier of digital flight data acquisition and analysis systems to the civil aviation and military aircraft markets. These systems acquire data for use by the aircraft’s flight data recorder as well as record additional data for the airline’s operation. We provide the means to transfer this data, using Teledyne’s wireless technology, from the aircraft to the airline operation center. We also design and manufacture airborne networking products, including servers, wireless access points and aircraft interface device software, as well as aircraft data loading equipment, flight data analysis software, and data distribution software used by commercial airlines and the U.S. military, and we provide services related to our products. We also provide lead acid aircraft batteries for general aviation, business and light jet, and U.S. military applications.

Our Engineered Systems segment provides innovative systems engineering and integration and advanced technology development as well as complex manufacturing solutions for defense, space, environmental and energy applications. This segment also designs and manufactures electrochemical energy systems and manufactures specialty electronics for demanding military applications.

Teledyne Brown Engineering, Inc. is a well-recognized engineering and manufacturing company providing advanced solutions across the whole lifecycle of systems in space, missile defense, maritime, environmental and energy markets.

We lead and support air and missile defense programs, including the Optical Signatures Code (“OSC”) and Optical Signature In-Line Generator (“OPTISIG”) tools for modeling, simulation and analysis of next-generation hypersonic weapons. In addition, our patent-pending test and evaluation solutions can enable ground test facilities to produce more effectively simulated conditions a hypersonic vehicle, engine or subsystem may encounter to include; temperature and time of flight. We are also the prime contractor for the Extended Air Defense Simulation (“EADSIM”) contract providing analysis, training, test, and operational planning in a single integrated package for the U. S. Army Space and Missile Defense Command (“SMDC”). Under the Naval Health Research contract, we provide medical modeling and simulation tools. We are the prime contractor for SMDC’s Design, Development, and Integration (“D3I”) Domain 1 - Space/High Altitude and Missile Defense contract. Under this contract we provide a suite of threat-realistic ballistic target missiles (“Zombie” targets) used for testing missile defense systems. We recently joined with Raytheon to produce several large systems in direct support of the missile defense radar systems.

We specialize in marine systems design, development, and manufacturing. For the U.S. Special Operations Command, contracted through Naval Sea Systems Command (“NAVSEA”), we are the prime contractor for the design, development, test, manufacture and sustainment of the Shallow Water Combat Submersible (“SWCS”) vehicle which will replace the current SEAL Delivery Vehicle. With the design and development test phase of the SWCS engineering development model completed, we began low-rate initial production in late 2016 with production scheduled through 2023. We are responsible for the production, test and training of maintenance and operation crews for the Pluto Gigas remotely operated mine countermeasure system sold to the Egyptian Navy through the NAVSEA Foreign Military Sales Office. We are producing the Littoral Battlespace Sensing Glider (“LBS-G”) system for the U.S. Navy Program Executive Office - Command, Control, Communications, Computers, and Intelligence. Teledyne Webb Research is the Glider developer and manufacturer on the LBS-G program. For Northrop Grumman, we manufacture gun mounts and surface to surface mission modules for the Littoral Combat Ship program. Under contract to Raytheon, we continue to manufacture advanced mine detection and neutralization systems.

As described under risk factors, there are risks associated with doing business with the U.S. Government. In 2019, approximately 64% of our U.S. Government prime contracts and subcontracts were fixed-price type contracts, compared to 67% in 2018 and 58% in 2017. Under these types of contracts, we bear the inherent risk that actual performance cost may exceed the fixed contract price. Such contracts are typically not subject to renegotiation of profits if we fail to anticipate technical problems, estimate costs accurately or control costs during performance. Additionally, U.S. Government contracts are subject to termination by the U.S. Government at its convenience, without identification of any default. When contracts are terminated for convenience, we recover costs incurred or committed, settlement expenses and profit on work completed prior to termination. We had three U.S. Government contracts terminated for convenience in 2019, compared with 15 in 2018 and nine in 2017.

Our total backlog of confirmed and funded orders was approximately $1,699.3 million at December 29, 2019, compared with $1,568.8 million at December 30, 2018, and $1,250.2 million at December 31, 2017. We expect to fulfill a majority of such backlog of confirmed orders during 2020.

Generally, our businesses have experienced minimal fluctuations in the supply of raw materials, but not without some price volatility. While some of our businesses provide services, for those businesses that sell hardware and product, a portion of the value that we provide is labor-oriented, such as design, engineering, assembly and test activities. In manufacturing our products, we use our own production capabilities and third-party suppliers and subcontractors, including international sources. Some of the items we use for the manufacture of our products, including certain gyro components for some marine navigation applications, certain magnets and helix wire for our traveling wave tubes, certain infrared detectors substrates and certain ceramics and molding compounds used in our sonar systems, as well as certain scintillator materials used in the production of our X-ray detectors, are purchased from limited or single sources, including international sources, due to technical capability, price and other factors. At times we have experienced difficulty in procuring raw materials, components, sub-assemblies and other supplies required in our manufacturing processes due to shortages and supplier-imposed allocation of components.

Our sales and marketing approach varies by segment and by products within our segments. A shared fundamental tenet is the commitment to work closely with our customers to understand their needs, with an aim to secure preferred supplier and longer-term relationships.

Our segments use a combination of internal sales forces, third-party distributors and third-party commissioned sales representatives to market and sell our products and services. Our businesses have been working over the years to consolidate or share internal sales and servicing efforts. Several Teledyne businesses have been marketing and selling products collaboratively to similar customers to promote “one-stop” shopping under singular “brand” names, including Teledyne Marine, Teledyne Oil & Gas, Teledyne Defense Electronics, Teledyne Microwave Solutions, Teledyne HiRel Electronics and Teledyne Advanced Chemistry Systems.

Products are also advertised in trade journals and by means of various websites. To promote our products and other capabilities, our personnel regularly participate in trade shows and professional associations.

Many of our government contracts are awarded after a competitive bidding process in which we seek to emphasize our ability to provide superior products and technical solutions in addition to competitive pricing.

Through Teledyne Technologies International Corp. and other subsidiaries, we have established offices in foreign countries to facilitate international sales for various businesses. Locations include Brazil, China, France, Germany, India, Italy, Japan, Malaysia, Singapore, South Korea and the United Arab Emirates.

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. Although we have certain advantages that we believe help us compete effectively in our markets, each of our markets is highly competitive. With regard to our defense businesses, it is common in the defense industry for work on programs to be shared among several companies, including competitors. In any event, because of the diversity of products sold and the number of markets we serve, we encounter a wide variety of competitors, none of which we believe offer the same product and service lines or serve all of the same markets as we do. Our businesses vigorously compete on quality, product performance and reliability, technical expertise, price and service. Many of our competitors have, and potential competitors could have, greater name recognition, a larger installed base of products, more extensive engineering, manufacturing, marketing and distribution capabilities and greater financial, technological and personnel resources than we do.

While we own and control various intellectual property rights, including patents, trade secrets, confidential information, trademarks, trade names, and copyrights, which, in the aggregate, are of material importance to our business, we believe that our business as a whole is not materially dependent upon any one intellectual property or related group of such properties. We own several hundred active patents and are licensed to use certain patents, technology and other intellectual property rights owned and controlled by others. Similarly, other companies are licensed to use certain patents, technology and other intellectual property rights owned and controlled by us.

Patents, patent applications and license agreements will expire or terminate over time by operation of law, in accordance with their terms or otherwise. We do not expect the expiration or termination of these patents, patent applications and license agreements to have a material adverse effect on our business, results of operations or financial condition.

Teledyne’s businesses continue to focus on developing solutions to address sustainability and climate challenges facing humanity today. We provide a broad range of precision measurement technologies for environmental monitoring and climate research. Our sensors and instruments are deployed everywhere, from pole to pole, in space, on aircraft and drones, on land, on the sea surface, in the water column, and on the seafloor. They operate around the clock, measuring greenhouse gases from space, precisely monitoring air and water quality throughout the world, and continuously profiling all of Earth’s oceans. Applications of our instruments provide scientists information that spans time from the origin of the universe to providing real-time data to quality of air pollution and dangerous storms, such as time-critical warning of hurricanes and tsunamis.

More specific examples of our contributions to global environmental and climate science include the following:

Pursuant to the mandate in their respective charters, the audit committee of our board regularly reviews matters related to compliance with environmental laws and the health and safety of employees, and the nominating and governance committee of our board reviews and evaluates our policies and practices and monitors our efforts in areas of legal and social responsibility, diversity and sustainability.

We consider our relations with our employees to be good. At December 29, 2019, our total workforce consisted of approximately 11,790 employees, of which approximately 7,150 employees were in the United States.

Teledyne’s executive management includes:

Furthermore, as global tensions increase, more countries are enhancing their export regulations. For example, the U.K. has recently limited the sale of certain defense equipment to Middle Eastern countries. We also have seen a recent increase in denial of export licenses for sales into Russia, Turkey and the Middle East.

Additionally, a number of well-established customers and suppliers have become listed on Government restricted party lists without much warning. In particular, U.S. export enforcement agencies have placed several Chinese and Russian companies and many of their international subsidiaries on such lists, prohibiting the export of most commercial and dual-use items subject to the Export Administration Regulations. Multiple Teledyne companies had large pending orders with some of those companies that had to be either cancelled or for which Teledyne submitted export license applications that have a low probability of approval. For example, Huawei Technologies, Co., Ltd. (“Huawei”), and its affiliates were added to the U.S. Department of Commerce Bureau of Industry and Security Entity list on May 16, 2019. Huawei was a customer of our test and measurement business, and pending license applications have not yet been approved. The U.S. Government has also made efforts to increase restrictions on some of those listed entities, including proposals to expand U.S. export jurisdiction over certain foreign made products containing U.S.-origin materials. For example, the U.S. Government had proposed modifying the minimum amount of U.S. content permitted within products before they become subject to U.S. export restrictions from 25% to 10% for anything sold to Huawei. While we will continue to work to mitigate the impact of tariffs and trade restrictions, they could result in reduction in our revenue, price increases on material used in our products or production delays, which could adversely affect our business, financial condition, operational results and cash flows.

A material amount of our total revenues is derived from customers in or connected to oil and gas exploration, development and production, especially the offshore oil and gas industry. The oil and gas industry has historically been cyclical and characterized by significant changes in the levels of exploration and development activities. Oil and gas prices, and market expectations of potential changes in those prices, significantly affect the levels of those activities. Any prolonged reduction in the overall level of offshore oil and gas exploration and development activities, whether resulting from changes in oil and gas prices or otherwise, could materially and adversely affect our financial condition and the results of our businesses within our Instrumentation segment.

Some factors that have affected and are likely to continue affecting oil and gas prices and the level of demand for our services and products include the following:

Teledyne manufactures seismic energy sources, interconnects and data acquisition products that are used in offshore energy exploration. When crude oil and natural gas prices are low, the level of marine seismic exploration activity typically decreases, potentially resulting in reduced demand for our products used in offshore energy exploration. In addition, a decline in the level of capital spending by oil and natural gas companies may result in a reduced rate of development of new energy reserves, which could adversely affect demand for our products related to energy production, and, in certain instances, result in the cancellation, modification or rescheduling of existing orders and a reduction in customer-funded research and development related to next generation products.

If another global recession emerges, if economic uncertainty in Europe continues or worsens, or if economic growth in China substantially slows, we may experience declines in revenues, profitability and cash flows from reduced orders, payment delays, collection difficulties, increased price pressures for our products, increased risk of excess and obsolete inventories or other factors caused by the economic problems of our customers. Our sales to China-based customers represented 6.6% of total revenues in 2019, 6.7% of total revenue in 2018 and 6.3% of total revenue in 2017. Economic growth in China has moderated, with a health crisis threatening already slowing economic growth. Continued growth in many of our businesses, including those in our Environmental and Electronic Measurement Instrumentation group, could be negatively impacted if an economic downturn persists in China. If negative conditions in the global credit markets prevent our customers from having access to credit or render them insolvent, orders for our products may decrease, which would result in lower revenue. Likewise, if our suppliers face challenges in obtaining credit, in selling their products, or otherwise in operating their businesses or remaining solvent, they may become unable to offer the materials we use to manufacture our products. These events could adversely impact our ability to manufacture affected products and could also result in reductions in our revenue, increased price competition, and increased operating costs, which could adversely affect our business, financial condition, operational results, and cash flows.

We develop and manufacture products for customers in the energy exploration and production markets, domestic and international commercial aerospace markets, the semiconductor industry, and the consumer electronics, telecommunications and automotive industries; each of which has been cyclical, exhibited rapid changes and suffered from fluctuating market demands. A cyclical downturn in these markets may materially affect future operating results.

In addition, we sell products and services to customers in industries that are sensitive to the level of general economic activity and consumer spending habits and to customers in more mature industries that are sensitive to capacity constraints. Adverse economic conditions affecting these industries may reduce demand for our products and services, which may reduce our revenues, profits or production levels. Some of our businesses serve industries such as power generation and petrochemical

Over time, and for a variety of reasons, programs can evolve and affect the extent of our participation. We have been a significant participant in NASA programs, primarily through our Engineered Systems segment and through Teledyne Scientific and Imaging, LLC. The prior U.S. Presidential Administration introduced significant changes to the national space policy, including the cancellation of NASA’s Constellation Program which includes Ares launch vehicles. Delayed funding and changes in support for NASA’s current space policy, including the Space Launch System (“SLS”), International Space Station (“ISS”), or Artemis Mission to the Moon could negatively impact our business. Furthermore, while funding for national space has been more positive under the current U.S. Presidential Administration, a different U.S. Presidential Administration following the 2020 election could make changes to funding for national space that could be less favorable.

Furthermore, the U.S. Government continues to place emphasis on small business quotas and may continue to increase small business contract set asides and minimum work percentages. In some cases, prime contractors are required to reduce participation by large subcontractors like Teledyne in order to fill small business quotas and be responsive to proposals and bids. As a result, our Engineered Systems segment could lose participation in some government programs.

Most of our U.S. Government contracts are subject to termination by the U.S. Government either at its convenience or upon the default of the contractor. Termination for convenience provisions provide only for the recovery of costs incurred or committed, settlement expenses, and profit on work completed prior to termination. Termination for default clauses impose liability on the contractor for excess costs incurred by the U.S. Government in re-procuring undelivered items from another source. We had three U.S. Government contracts terminated for convenience in 2019, compared with 15 in 2018 and nine in 2017. No contracts were terminated for default during such three-year period.

Our U.S. Government contracting businesses, like other government contractors, are subject to various audits, reviews and investigations (including private party “whistleblower” lawsuits) relating to our compliance with applicable federal and state laws and regulations. More routinely, the U.S. Government may audit the costs we incur on our U.S. Government contracts, including allocated indirect costs. Such audits could result in adjustments to our contract costs. Any costs found to be improperly allocated to a specific contract will not be reimbursed, and such costs already reimbursed would need to be refunded. We have recorded contract revenues based upon costs we expect to realize after final audit. In a worst case scenario, should a business or division involved be charged with wrongdoing, or should the U.S. Government determine that the business or division is not a “presently responsible contractor”, that business or division, and conceivably our Company as a whole, could be temporarily suspended or, in the event of a conviction, could be debarred for up to three years from receiving new government contracts or government-approved subcontracts. In addition, we could expend substantial amounts defending against such charges and in damages, fines and penalties if such charges were proven or were to result in negotiated settlements.

The Department of Defense as well as other U.S. Government contracting agencies have adopted rules and regulations requiring contractors to implement a set of cyber security measures to attain the safeguarding of contractor systems that process, store, or transmit certain information. Implementation and compliance with these cyber security requirements is complex and costly, and could result in unforeseen expenses, lower profitability and, in the case of non-compliance, penalties and damages, all of which could have an adverse effect on our business.

Our domestic qualified defined benefit pension plans cover most of our U.S. employees hired prior to 2004 or approximately 10% of our active employees. We also have several small domestic non-qualified and foreign-based pension plans. As of December 29, 2019, the value of the combined pension assets is greater than our combined pension benefit obligations. The accounting rules applicable to our pension plans require that amounts recognized in the financial statements be determined on an actuarial basis, rather than as contributions are made to the plan. Two significant elements in determining our pension income or pension expense are the expected return on plan assets and the discount rate used in projecting pension benefit obligations. Declines in the stock market and lower rates of return could increase required contributions to our qualified pension plan and/or result in a change to shareholders’ equity. Our investment strategy may not produce the expected returns if the credit, financial or stock markets deteriorate. Any decreases or increases in market interest rates will affect the discount rate assumption used in projecting pension benefit obligations. In addition, changes in other actuarial assumptions such as mortality assumptions or change due to legislative or regulatory actions could impact our pension income or expense as well as funding obligations. Each year, beginning in 2014, the Society of Actuaries has released revised mortality tables, which updated life expectancy assumptions. In consideration of these tables, each year we review the mortality assumptions used in determining our pension and post-retirement benefit obligations. The impact of these mortality assumptions could increase our pension obligation and increase future pension expense. No contributions have been made to the domestic qualified pension plan since 2013. If, and to the extent, decreases in our pension assets are not offset by voluntary contributions, recovered through future asset returns, mitigated by an increase in the rate at which the benefit obligation is discounted, or other actions, our required cash contributions and pension expense could increase under the plans. In addition, we have sold approximately $63.9 million in pension liability to third parties. To the extent any of these counterparties are unable to fulfill their obligations to retirees, we may have residual liability, particularly to the extent state guarantee funds are inadequate. For additional discussion of pension matters, see the discussion under “Item 7. Management’s Discussion and Analysis of Operations and Financial Condition” and Notes 2, 11 and 15 of the Notes to Consolidated Financial Statements.

Attempts by others to gain unauthorized access to our information technology systems have become more sophisticated and are sometimes successful. These attempts, which might be related to industrial or foreign government espionage, crime, activism, or other motivations, include covertly introducing malware into our computers and computer networks, performing reconnaissance, impersonating authorized users, extortion, stealing, corrupting or restricting our access to data, among other activities. We continue to train our personnel and update our infrastructure, security tools and processes to protect against security incidents, including both external and internal threats, and to prevent their recurrence. Company personnel and third parties have been tasked to detect, respond to, and investigate such incidents, but it is possible that we might not prevent or be aware of or be able to react to an incident or its magnitude and effects. The theft, corruption, unauthorized use or publication of our intellectual property or confidential business information could harm our competitive position, reduce the value of our investment in research and development and other strategic initiatives or otherwise adversely affect our business. We are subject to U.S. Department of Defense regulations applicable to certain types of data residing on or transiting through our information systems, and these regulations have been and will continue to be incorporated into certain U.S. Department of

Our operating results depend in part on our ability to introduce new and enhanced products on a timely basis. We have major development activities at some of our businesses, for which a failure to execute in a timely manner could negatively impact those businesses. In order to improve our product development capabilities, we purchased the research center that is now Teledyne Scientific Company in 2006 and in 2011 we purchased DALSA to gain access to a well-equipped MEMS research and development center. In 2013, we opened a 52,000-square-foot technology development center in Daytona Beach, Florida primarily to serve the offshore oil and gas production and exploration industries. We are currently upgrading infrastructure at Teledyne e2v’s facility in Chelmsford, U.K. and have expanded Teledyne DALSA’s MEMS foundry in Bromont, Quebec, as well as acquired a second MEMS foundry in Edmonton, Alberta as part of the Micralyne acquisition. Successful product development and introduction depend on numerous factors, including our ability to anticipate customer and market requirements, changes in technology and industry standards, our ability to differentiate our product offerings from the product offerings of our competitors, and market acceptance. We may not be able to develop and introduce new or enhanced products in a timely and cost-effective manner or to develop and introduce products that satisfy customer requirements.

Our new products also may not achieve market acceptance or correctly address new industry standards and technological changes. We may also lose any technological advantage to competitors if we fail to develop new products in a timely manner.

Additionally, new products may trigger increased warranty costs as information on such products is augmented by actual usage. Accelerated entry of new products to meet heightened market demand and competitive pressures may cause additional warranty costs as development and testing time periods might be accelerated or condensed.

We intend to both adapt our existing technologies and develop new products to expand into new market segments. We may be unsuccessful in accessing these and other new markets if our products do not meet our customers’ requirements, as a result of changes in either technology and industry standards or because of actions taken by our competitors.

The markets for some of our products and services are characterized by rapid technological development, evolving industry standards, changes in customer requirements and new product introductions and enhancements. A faster than anticipated change in one or more of the technologies related to our products or services, or in market demand for products or services based on a particular technology, could result in faster than anticipated obsolescence of certain of our products or services and could lead to reduced sales of those products, which could have a material adverse effect on our business, results of operations and financial condition. Currently accepted industry and regulatory standards are also subject to change, which may contribute to the obsolescence of our products or services. The political agenda of the U.S. Presidential Administration may affect the level of environmental regulations and enforcement and government spending on scientific research, which could adversely impact the sales of our products and services, including sales of pollution monitoring instruments and instruments used to measure the Earth’s climate and climate change, such as undersea gliders and space-based imaging sensors. A change in China’s economic policies promoting pollution reduction could result in lower sales or slower sales growth for our pollution monitoring and laboratory instrumentation to China.

Industry acquisition and consolidation trends, particularly among aerospace and defense contractors, have adversely impacted demand for our aerospace and defense related engineering services as large prime contractors elect to in-source major acquisition programs and expand small business participation to meet Government contracting goals. Such consolidations can also cause delays in business as the newly consolidated organization undergoes integration.

Low-cost competition from China and other developing countries could also result in decreased demand for our products. Increasing competition could reduce the volume of our sales or the prices we may charge, which would negatively impact our revenues. Smaller defense budgets both in the United States and Europe could result in additional competition for new and existing defense programs.

While we have general liability and other insurance policies concerning product liabilities and errors and omissions, we have self-insured retentions or deductibles under such policies with respect to a portion of these liabilities. Awarded damages could be more than our accruals. We could incur losses above the aggregate annual policy limit as well. We cannot assure that, for 2020 and in future years, insurance carriers will be willing to renew coverage or provide new coverage for product liability.

Product recalls can be expensive and tarnish our reputation and have a material adverse effect on the sales of our products. We cannot assure that we will not have additional product liability claims or that we will not recall any products.

We have been joined, among a number of defendants (often over 100), in lawsuits alleging injury or death as a result of exposure to asbestos. In addition, because of the prominent “Teledyne” name, we may continue to be mistakenly joined in lawsuits involving a company or business that was not assumed by us as part of our 1999 spin-off. To date, we have not incurred material liabilities in connection with these lawsuits. However, our historic insurance coverage, including that of our predecessors, may not fully cover such claims and the defense of such matters. Coverage typically depends on the year of purported exposure and other factors. Nonetheless, we intend to vigorously defend our position against these claims.

Teledyne Brown Engineering, Inc. and other Teledyne companies manufacture components for customers in the nuclear power market, including utilities and certain governmental entities. Certain liabilities associated with such products are covered by the Price-Anderson Nuclear Industries Indemnity Act and other statutory and common law defenses, and we have received indemnities from some of our customers. However, there is no assurance we will not face product liability claims related to such products or that our exposure will not exceed the amounts for which we have liability coverage or protection.

Information on the number, ownership and location of principal operating facilities by segment was as follows at February 21, 2020:

Our Common Stock is listed on the New York Stock Exchange and traded under the symbol “TDY”. The following table sets forth, for the periods indicated, the high and low sale prices for the Common Stock as reported by the New York Stock Exchange.

As of February 18, 2020, there were 2,791 holders of record of the Common Stock. Because many of our shares of common stock are held by brokers and institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners of our stock represented by these stockholders of record.

We intend to use future earnings to fund the development and growth of our businesses, including through potential acquisitions. We may also deploy cash to fund share repurchases. Therefore, we do not anticipate paying any cash dividends in the foreseeable future.

We have stock repurchase programs authorized by our Board of Directors to repurchase up to approximately three million shares. No repurchases were made since 2015. See Note 8 of the Notes to Consolidated Financial Statements for additional information about our stock repurchase program.

Information relating to compensation plans under which our equity securities are outstanding for issuance is set forth in Part III, Item 12 of this Annual Report on Form 10-K.

In each of December 2019, December 2018 and December 2017, we withheld shares upon the vesting of restricted stock unit awards to satisfy tax withholding obligations in the amounts of 2,651 shares, 2,651 shares and 2,960 shares, respectively

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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