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Item 1. Financial Statements

2021-10-28 compared with 2021-08-02 · 422 added, 415 removed, 801 unchanged (51% of the section changed)

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 4, 2021 AND JUNE 28, 2020

FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 2021 AND SEPTEMBER 27, 2020

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

Second Quarter Six Months

Third Quarter Nine Months

2021 2020 2021 2020

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE SECOND QUARTER SIX MONTHS ENDED JULY 4, 2021 AND JUNE 28, 2020

FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 3, 2021 AND SEPTEMBER 27, 2020

(Unaudited - Amounts in millions)

Second Quarter Six Months

Third Quarter Nine Months

2021 2020 2021 2020

10 unchanged sentences

(Unaudited - Amounts in millions, except share amounts)

July 4, 2021 January 3, 2021

October 3, 2021 January 3, 2021

Current Assets

5 unchanged sentences

Total current assets 2,534.9 1,722.6

Property, plant and equipment, net of accumulated depreciation and amortization of $ 709.6 at July 4, 2021 and $ 673.4

Property, plant and equipment, net of accumulated depreciation and amortization of $ 749.0 at October 3, 2021 and $ 673.4

at January 3, 2021

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issued shares:

47,194,766 at July 4, 2021 and 37,697,865 at January 3, 2021;

47,194,766 at October 3, 2021 and 37,697,865 at January 3, 2021;

outstanding shares:

46,605,286 at July 4, 2021 and 36,951,607 at January 3, 2021

46,653,888 at October 3, 2021 and 36,951,607 at January 3, 2021

Additional paid-in capital 4,307.5 389.9

Retained earnings 3,611.4 3,327.9

Treasury stock, 589,480 shares at July 4, 2021 and 746,258 shares at January 3, 2021

Treasury stock, 540,878 shares at October 3, 2021 and 746,258 shares at January 3, 2021

( 42.0 ) ( 59.5 )

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Balance, July 4, 2021 0.5 4,297.4 ( 46.1 ) 3,477.3 ( 416.7 ) 7,312.4

Net income — — — 134.1 — 134.1

Other comprehensive loss, net of tax — — — — ( 44.1 ) ( 44.1 )

Treasury stock issued — ( 4.1 ) 4.1 — — —

Stock-based compensation — 8.7 — — — 8.7

Exercise of stock options — 5.5 — — — 5.5

Balance, October 3, 2021 $ 0.5 $ 4,307.5 $ ( 42.0 ) $ 3,611.4 $ ( 460.8 ) $ 7,416.6

Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total

1 unchanged sentence

Net income — — — 82.2 — 82.2

Other comprehensive income, net of tax — — — — ( 63.7 ) ( 63.7 )

Other comprehensive loss, net of tax — — — — ( 63.7 ) ( 63.7 )

Treasury stock issued — ( 9.4 ) 9.4 — — —

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Balance, June 28, 2020 0.4 376.2 ( 67.6 ) 3,101.9 ( 531.0 ) 2,879.9

Net income — — — 93.9 — 93.9

Other comprehensive income, net of tax — — — — 44.2 44.2

Treasury stock issued — ( 1.3 ) 1.3 — — —

Stock-based compensation — 6.7 — — — 6.7

Exercise of stock options — 1.3 — — — 1.3

Balance, September 27, 2020 $ 0.4 $ 382.9 $ ( 66.3 ) $ 3,195.8 $ ( 486.8 ) $ 3,026.0

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

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JULY 4, 2021 AND JUNE 28, 2020

FOR THE NINE MONTHS ENDED OCTOBER 3, 2021 AND SEPTEMBER 27, 2020

(Unaudited - Amounts in millions)

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Other financing, net ( 22.8 ) —

Net cash provided by financing activities 3,451.4 27.8

Net cash provided by (used in) financing activities 3,147.3 ( 45.9 )

Effect of exchange rate changes on cash ( 7.2 ) ( 0.7 )

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

October 3, 2021

Basis of Presentation

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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 January 3, 2021 (“2020 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 July 4, 2021 and the consolidated results of operations, consolidated comprehensive income for the second quarter and six months ended July 4, 2021 and the consolidated cash flows for the six months then ended.

The results of operations and cash flows for the periods ended July 4, 2021 are not necessarily indicative of the results of operations or cash flows to be expected for any subsequent quarter or the full fiscal year.

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 October 3, 2021 and the consolidated results of operations, consolidated comprehensive income for the third quarter and nine months ended October 3, 2021 and the consolidated cash flows for the nine months then ended.

The results of operations and cash flows for the periods ended October 3, 2021 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.

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The Company has categorized its cash equivalents as a Level 1 financial asset, measured at fair value based on quoted prices in active markets of identical assets.

Cash equivalents totaled $ 160.1 million at July 4, 2021 and $ 471.0 million at January 3, 2021.

Accumulated Other Comprehensive Loss

The changes in AOCI by component, net of tax, for the second quarter and six months ended July 4, 2021 and June 28, 2020 are as follows (in millions):

Foreign Currency Translation Cash Flow Hedges and Other Pension and Postretirement Benefits Total

Balance as of April 4, 2021 $ ( 83.6 ) $ 2.2 $ ( 343.5 ) $ ( 424.9 )

Other comprehensive income before reclassifications 3.2 2.2 — 5.4

Amounts reclassified from AOCI — ( 1.7 ) 4.5 2.8

Net other comprehensive income (loss) 3.2 0.5 4.5 8.2

Balance as of July 4, 2021 $ ( 80.4 ) $ 2.7 $ ( 339.0 ) $ ( 416.7 )

Foreign Currency Translation Cash Flow Hedges and Other Pension and Postretirement Benefits Total

Balance as of March 29, 2020 $ ( 211.7 ) $ ( 8.2 ) $ ( 319.6 ) $ ( 539.5 )

Other comprehensive income (loss) before reclassifications 1.4 ( 0.2 ) — 1.2

Amounts reclassified from AOCI — 4.1 3.2 7.3

Net other comprehensive income 1.4 3.9 3.2 8.5

Balance as of June 28, 2020 $ ( 210.3 ) $ ( 4.3 ) $ ( 316.4 ) $ ( 531.0 )

Foreign Currency Translation Cash Flow Hedges and Other Pension and Postretirement Benefits Total

Balance as of January 3, 2021 $ ( 84.6 ) $ 2.3 $ ( 347.8 ) $ ( 430.1 )

Other comprehensive income before reclassifications 4.2 11.7 — 15.9

Amounts reclassified from AOCI — ( 11.3 ) 8.8 ( 2.5 )

Net other comprehensive income 4.2 0.4 8.8 13.4

Balance as of July 4, 2021 $ ( 80.4 ) $ 2.7 $ ( 339.0 ) $ ( 416.7 )

Foreign Currency Translation Cash Flow Hedges and Other Pension and Postretirement Benefits Total

Balance as of December 29, 2019 ( 150.4 ) ( 2.3 ) ( 323.1 ) ( 475.8 )

Other comprehensive income (loss) before reclassifications ( 59.9 ) ( 3.8 ) — ( 63.7 )

Amounts reclassified from AOCI — 1.8 6.7 8.5

Net other comprehensive income (loss) ( 59.9 ) ( 2.0 ) 6.7 ( 55.2 )

Balance as of June 28, 2020 $ ( 210.3 ) $ ( 4.3 ) $ ( 316.4 ) $ ( 531.0 )

The reclassifications out of AOCI to net income for the second quarter and six months ended July 4, 2021 and June 28, 2020 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

July 4, 2021 June 28, 2020 Presentation

(Gain) loss on cash flow hedges:

Gain recognized in income on derivatives $ ( 2.2 ) $ 5.5 See Note 4

Income tax impact 0.5 ( 1.4 ) Provision for income taxes

Total $ ( 1.7 ) $ 4.1

Amortization of defined benefit pension and postretirement plan items:

Amortization of prior service cost $ ( 0.9 ) $ ( 1.5 ) Costs and expenses

Amortization of net actuarial loss 6.8 5.7 Costs and expenses

Total before tax 5.9 4.2

Income tax impact ( 1.4 ) ( 1.0 ) Provision for income taxes

Total $ 4.5 $ 3.2

Amount Reclassified from AOCI for the Six Months Ended Amount Reclassified from AOCI for the Six Months Ended Statement of Income

July 4, 2021 June 28, 2020 Presentation

(Gain) loss on cash flow hedges:

(Gain) loss recognized in income on derivatives $ ( 15.1 ) $ 2.4 See Note 4

Income tax impact 3.8 ( 0.6 ) Provision for income taxes

Total $ ( 11.3 ) $ 1.8

Amortization of defined benefit pension and postretirement plan items:

Amortization of prior service cost ( 1.8 ) ( 3.0 ) Costs and expenses

Amortization of net actuarial loss 13.4 11.7 Costs and expenses

Total before tax 11.6 8.7

Income tax impact ( 2.8 ) ( 2.0 ) Provision for income taxes

Cash equivalents totaled $ 38.1 million at October 3, 2021 and $ 471.0 million at January 3, 2021.

Business Combinations, Goodwill and Acquired Intangible Assets

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FLIR stockholders received $ 28.00 per share in cash and 0.0718 shares of Teledyne common stock for each FLIR share, and Teledyne issued approximately 9.5 million shares at $ 409.41 per share.

In 2021, Teledyne completed various financing activities related to the acquisition of FLIR.

See Note 10 to these Notes to Condensed Consolidated Financial Statements for information regarding financing activities undertaken in connection with the FLIR acquisition.

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The Company made an initial allocation of the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities.

As of July 4, 2021, the measurement period (not to exceed one year) is open;

As of October 3, 2021, the measurement period (not to exceed one year) is open;

therefore, the assets acquired and liabilities assumed related to the FLIR acquisition are subject to adjustment until the end of the respective measurement period.

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The fair values of acquired intangibles are determined based on estimates and assumptions that are deemed reasonable by the Company.

The amounts recorded as of July 4, 2021 are preliminary since there was insufficient time between the acquisition date and the end of the period to finalize the analysis.

The amounts recorded as of October 3, 2021 are preliminary since there was insufficient time between the acquisition date and the end of the period to finalize the analysis.

Fair values allocated to the assets acquired and liabilities assumed - FLIR (in millions):

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During fiscal year 2018, the Swedish Tax Authority (“STA”) issued a reassessment of tax for the year ending December 31, 2012 to one of FLIR’s non-operating subsidiaries in Sweden.

The reassessment concerns the use of tax credits applied against capital gains pursuant to European Union Council Directive 2009/133/EC, commonly referred to as the EU Merger Directive, and assesses taxes and penalties totaling approximately $ 357.8 million (Swedish kroner 3.1 billion) as of July 4, 2021.

On March 26, 2020, FLIR received an adverse judgment from the First Instance Court of Sweden (the “Court”) regarding the STA’s reassessment.

FLIR has appealed the decision to the Administrative Court of Appeal in Stockholm.

The Appellate Court hearing has been scheduled for September 15, 2021.

Historically, FLIR has not accrued a liability for this matter.

No adjustments have been made for this Swedish tax matter in Teledyne’s current preliminary estimates of the purchase price allocation.

The final acquisition accounting adjustments for this Swedish tax matter may be materially different, as Teledyne obtains additional information on this matter and as additional information is made known during the post-acquisition measurement period.

An adverse resolution to this Swedish tax matter could materially impact cash flow.

The total taxes, penalties and interest levied by the STA totals SEK 3.1 billion ($ 351.5 million USD).

The reassessment concerns the use of tax credits applied against capital gains pursuant to European Union Council Directive 2009/133/EC, commonly referred to as the EU Merger Directive, and the reassessment levied significant taxes and penalties.

In March 2020, FLIR received an adverse judgment from the First Instance Court of Sweden regarding the STA’s reassessment.

FLIR appealed the decision to the Administrative Court of Appeal in Stockholm, Sweden (the “ Appellate Court”).

After completing an extensive analysis, including consultation with outside specialists, Teledyne recorded a liability for this uncertain tax position that reflects the most likely outcome for this tax matter under the acquisition method for business combinations in the third quarter of 2021, which is included within Accrued Liabilities on the Condensed Consolidated Balance Sheet.

Subsequently, the Appellate Court hearing was held on September 15, 2021 and in the subsequent weeks ending on October 22, 2021, the STA and Teledyne submitted additional arguments in writing, including closing arguments.

An adverse tax ruling by the Appellate Court related to a pre-acquisition assessment by the STA against a FLIR subsidiary would materially impact our cash flow.

The Company is in the process of reviewing and identifying acquisition accounting adjustments for a number of acquired tax positions of FLIR that may meet the definition of an acquired uncertain tax position.

In addition to the STA matter described above, the Company has preliminarily recorded $ 51.2 million of provisional purchase accounting adjustments for the accrual of other uncertain tax positions of FLIR.

These amounts are included within other Long-Term Liabilities on the Condensed Consolidated Balance Sheet.

These preliminary estimates are subject to change as the Company obtains additional information on these matters and as additional information is made known during the post-acquisition measurement period.

The final acquisition accounting adjustments for these tax matter may be materially different, as Teledyne obtains additional information on this matter and as additional information is made known during the post-acquisition measurement period.

The following table is a summary at the acquisition date of the acquired intangible assets and weighted average useful life in years for the FLIR acquisition made in 2021 (dollars in millions):

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Total acquired intangible assets $ 2,400.0

a) The amounts recorded as of July 4, 2021 are preliminary since there was insufficient time between the acquisition date and the end of the period to finalize the analysis.

a) The amounts recorded as of October 3, 2021 are preliminary since there was insufficient time between the acquisition date and the end of the period to finalize the analysis.

With significant operations in the United States, Europe and Canada, FLIR had sales of approximately $ 1,932.7 million for its fiscal year ended December 31, 2020.

FLIR’s results have been included since the date of the acquisition and include $ 301.4 million in net sales and operating income of $ 23.8 million, which included $ 70.2 million in acquisition-related costs.

The second quarter of 2021 net sales reflected the historical uneven sales pattern for FLIR which resulted in higher sales in the second half of the quarter.

The second quarter of 2021 includes pretax charges of $ 140.7 million related to the acquisition of FLIR, of which, $ 23.7 million was recorded to cost of sales and $ 117.0 million was recorded to selling, general and administrative expenses.

FLIR’s results have been included since the date of the acquisition and include $ 775.0 million in net sales and operating income of $ 56.6 million, which included $ 152.5 million in acquisition-related costs for the nine months ended October 3, 2021.

The third quarter of 2021, includes $ 473.6 million in net sales and operating income of $ 35.2 million, which included $ 82.3 million in acquisition-related costs.

In connection with the FLIR acquisition, in the third quarter of 2021, Teledyne incurred pretax expenses of $ 82.6 million, consisting of $ 45.6 million in acquired intangible asset amortization expense, $ 35.2 million in acquired inventory step-up expense, recorded to cost of sales and $ 1.8 million of transaction and integration-related costs, recorded to selling, general and administrative expenses.

Of these amounts, $ 82.3 million impacted Digital Imaging segment’s operating income.

The first six months of 2021 includes pretax charges of $ 177.2 million related to the acquisition of FLIR, of which, $ 23.7 million was recorded to cost of sales, $ 122.9 million was recorded to selling, general and administrative expenses and $ 30.6 million was recorded to interest and debt expense.

Of these amounts, $ 70.2 million impacted the Digital Imaging segment’s operating income, which included $ 24.0 million of integration-related costs, $ 22.8 million in acquired intangible asset amortization expense and $ 23.4 million in inventory step-up expense.

In the first nine months of 2021, Teledyne incurred pretax expenses of $ 259.8 million, consisting of $ 68.4 million in acquired intangible asset amortization expense, $ 58.9 million recorded to cost of sales, primarily in acquired inventory step-up expense, and $ 101.9 million of transaction and integration-related costs, recorded to selling, general and administrative expenses and $ 30.6 million was recorded to interest and debt expense.

Of these amounts, $ 152.5 million impacted the Digital Imaging segment’s operating income and $ 76.7 million of transaction and integration-related costs impacted corporate expense.

The unaudited proforma information below, as required by GAAP, assumes that FLIR had been acquired at the beginning of the 2020 fiscal year and includes the effect of transaction accounting adjustments.

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The following table presents proforma net sales, net income and earnings per share data assuming FLIR was acquired at the beginning of the 2020 fiscal year:

Second Quarter (a) Six Months (a)

Third Quarter (a) Nine Months (a)

(unaudited - in millions, except per share amounts) 2021 2020 2021 2020

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Goodwill and Acquired Intangible Assets

Teledyne’s goodwill was $ 7,515.9 million at July 4, 2021 and $ 2,150.0 million at January 3, 2021.

The increase in the balance of goodwill in 2021 related to goodwill acquired in the FLIR acquisition.

Teledyne’s net acquired intangible assets were $ 2,765.8 million at July 4, 2021 and $ 409.7 million at January 3, 2021.

The increase in the balance of net acquired intangible assets reflected the acquired intangible assets acquired in the FLIR acquisition.

Teledyne’s goodwill was $ 7,899.5 million at October 3, 2021 and $ 2,150.0 million at January 3, 2021.

The increase in the balance of goodwill in 2021 related primarily to goodwill recognized in the FLIR acquisition.

Teledyne’s net acquired intangible assets were $ 2,705.2 million at October 3, 2021 and $ 409.7 million at January 3, 2021.

The increase in the balance of net acquired intangible assets primarily reflected the acquired intangible assets acquired in the FLIR acquisition.

Acquired intangible assets are summarized as follows:

July 4, 2021 January 3, 2021

October 3, 2021 January 3, 2021

Acquired intangible assets (in millions):

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Total acquired intangible assets $ 3,176.9 $ 471.7 $ 2,705.2 $ 786.9 $ 377.2 $ 409.7

Accumulated Other Comprehensive Loss

The changes in AOCI by component, net of tax, for the third quarter and nine months ended October 3, 2021 and September 27, 2020 are as follows (in millions):

Foreign Currency Translation Cash Flow Hedges and Other Pension and Postretirement Benefits Total

Balance as of July 4, 2021 $ ( 80.4 ) $ 2.7 $ ( 339.0 ) $ ( 416.7 )

Other comprehensive income (loss) before reclassifications ( 44.0 ) 2.0 — ( 42.0 )

Amounts reclassified from AOCI — ( 6.5 ) 4.4 ( 2.1 )

Net other comprehensive income (loss) ( 44.0 ) ( 4.5 ) 4.4 ( 44.1 )

Balance as of October 3, 2021 $ ( 124.4 ) $ ( 1.8 ) $ ( 334.6 ) $ ( 460.8 )

Foreign Currency Translation Cash Flow Hedges and Other Pension and Postretirement Benefits Total

Balance as of June 28, 2020 $ ( 210.3 ) $ ( 4.3 ) $ ( 316.4 ) $ ( 531.0 )

Other comprehensive income (loss) before reclassifications 38.7 ( 5.4 ) — 33.3

Amounts reclassified from AOCI — 8.0 2.9 10.9

Net other comprehensive income 38.7 2.6 2.9 44.2

Balance as of September 27, 2020 $ ( 171.6 ) $ ( 1.7 ) $ ( 313.5 ) $ ( 486.8 )

Foreign Currency Translation Cash Flow Hedges and Other Pension and Postretirement Benefits Total

Balance as of January 3, 2021 $ ( 84.6 ) $ 2.3 $ ( 347.8 ) $ ( 430.1 )

Other comprehensive income (loss) before reclassifications ( 39.8 ) 13.7 — ( 26.1 )

Amounts reclassified from AOCI — ( 17.8 ) 13.2 ( 4.6 )

Net other comprehensive income (loss) ( 39.8 ) ( 4.1 ) 13.2 ( 30.7 )

Balance as of October 3, 2021 $ ( 124.4 ) $ ( 1.8 ) $ ( 334.6 ) $ ( 460.8 )

Foreign Currency Translation Cash Flow Hedges and Other Pension and Postretirement Benefits Total

Balance as of December 29, 2019 $ ( 150.4 ) $ ( 2.3 ) $ ( 323.1 ) $ ( 475.8 )

Other comprehensive loss before reclassifications ( 21.2 ) ( 9.2 ) — ( 30.4 )

Amounts reclassified from AOCI — 9.8 9.6 19.4

Net other comprehensive income (loss) ( 21.2 ) 0.6 9.6 ( 11.0 )

Balance as of September 27, 2020 $ ( 171.6 ) $ ( 1.7 ) $ ( 313.5 ) $ ( 486.8 )

The reclassifications out of AOCI to net income for the third quarter and nine months ended October 3, 2021 and September 27, 2020 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

October 3, 2021 September 27, 2020 Presentation

(Gain) loss on cash flow hedges:

Gain recognized in income on derivatives $ ( 8.7 ) $ 10.8 See Note 4

Income tax impact 2.2 ( 2.8 ) Provision for income taxes

Total $ ( 6.5 ) $ 8.0

Amortization of defined benefit pension and postretirement plan items:

Amortization of prior service cost $ ( 0.9 ) $ ( 1.5 ) Costs and expenses

Amortization of net actuarial loss 6.7 5.4 Costs and expenses

Total before tax 5.8 3.9

Income tax impact ( 1.4 ) ( 1.0 ) Provision for income taxes

Total $ 4.4 $ 2.9

Amount Reclassified from AOCI for the Nine Months Ended

Statement of Income

October 3, 2021 September 27, 2020 Presentation

(Gain) loss on cash flow hedges:

(Gain) loss recognized in income on derivatives $ ( 23.8 ) $ 13.2 See Note 4

Income tax impact 6.0 ( 3.4 ) Provision for income taxes

Total $ ( 17.8 ) $ 9.8

Amortization of defined benefit pension and postretirement plan items:

Amortization of prior service cost ( 2.7 ) ( 4.5 ) Costs and expenses

Amortization of net actuarial loss 20.1 17.1 Costs and expenses

Total before tax 17.4 12.6

Income tax impact ( 4.2 ) ( 3.0 ) Provision for income taxes

Derivative Instruments

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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 condensed consolidated statements of income, at which time the effective amount in AOCI is reclassified to revenue in our condensed consolidated statements of income.

Net deferred gains recorded in AOCI, net of tax, for the forward contracts that will mature in the next twelve months total $ 3.3 million.

Net deferred gains recorded in AOCI,

net of tax, for the forward contracts that will mature in the next twelve months total $ 0.7 million.

These gains are expected to be offset by anticipated losses in the value of the forecasted underlying hedged item.

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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 July 4, 2021, Teledyne had foreign currency forward contracts designated as cash flow hedges to buy Canadian dollars and to sell U.S.

As of October 3, 2021, Teledyne had foreign currency forward contracts designated as cash flow hedges to buy Canadian dollars and to sell U.S.

dollars totaling $ 115.9 million.

These foreign currency forward contracts have maturities ranging from September 2021 to May 2022.

These foreign currency forward contracts have maturities ranging from December 2021 to February 2023.

Teledyne had foreign currency forward contracts designated as cash flow hedges to buy British pounds and to sell U.S.

dollars totaling $ 19.2 million.

These foreign currency forward contracts have maturities ranging from September 2021 to August 2022.

The cross currency swaps have notional amounts of € 113.0 million and $ 125.0 million, and € 135.0 million and $ 150.0 million, and matures in March 2023 and October 2024, respectively.

These foreign currency forward contracts have maturities ranging from December 2021 to November 2022.

The cross currency swaps have notional amounts of € 113.0 million and $ 125.0 million, and € 135.0 million and $ 150.0 million, and mature in March 2023 and October 2024, respectively.

The interest rate swap has a notional amount of $ 125.0 million and matures in March 2023.

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The change in fair value of the hedged item attributable to the hedged risk is reported as an adjustment to its carrying value and also in other income or expense, net.

At July 4, 2021 Teledyne had forward contracts designated as fair value hedges to sell Swedish Krona and to buy U.S.

dollars totaling $ 170.0 million.

These foreign currency forward contracts have maturities ranging from September 2021 to December 2022.

The effect of derivative instruments designated as cash flow hedges in the condensed consolidated financial statements for the second quarter and six months ended July 4, 2021 and June 28, 2020 was as follows (in millions):

Second Quarter Six Months

At October 3, 2021 Teledyne had no forward contracts designated as fair value hedges.

The effect of derivative instruments designated as cash flow hedges in the condensed consolidated financial statements for the third quarter and nine months ended October 3, 2021 and September 27, 2020 was as follows (in millions):

Third Quarter Nine Months

2021 2020 2021 2020

Net gain (loss) recognized in AOCI - Foreign Exchange Contracts (a) $ ( 5.6 ) $ ( 7.2 ) $ 18.3 $ ( 7.6 )

Net gain (loss) reclassified from AOCI into COS - Foreign Exchange Contracts (a) $ 3.6 $ ( 1.6 ) $ 6.0 $ ( 1.8 )

Net gain (loss) recognized in AOCI - Interest Rate Contracts $ ( 0.1 ) $ ( 0.3 ) — $ ( 0.2 )

Net gain (loss) reclassified from AOCI into revenue - Foreign Exchange Contracts (a) $ 1.8 $ ( 0.2 ) $ 7.8 $ ( 1.9 )

Net loss recognized in AOCI - Interest Rate Contracts $ ( 0.1 ) $ ( 0.1 ) ( 0.1 ) $ ( 4.7 )

Net gain (loss) reclassified from AOCI into other income and expense, net - Foreign Exchange Contracts (b) $ 6.4 $ ( 11.2 ) $ 14.7 $ ( 14.2 )

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

The effect of derivative instruments designated as fair value hedges in the condensed financial statements for the second quarter and six months ended July 4, 2021 and June 28, 2020 was as follows (in millions):

Second Quarter Six Months

The effect of derivative instruments designated as fair value hedges in the condensed financial statements for the third quarter and nine months ended October 3, 2021 and September 27, 2020 was as follows (in millions):

Third Quarter Nine Months

2021 2020 2021 2020

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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 July 4, 2021, Teledyne had non-designated foreign currency contracts of this type, primarily in the following pairs (in millions):

As of October 3, 2021, Teledyne had non-designated foreign currency contracts of this type, primarily in the following pairs (in millions):

Contracts to Buy Contracts to Sell

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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 July 4, 2021 was expense of $ 4.6 million and expense of $ 4.8 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 June 28, 2020 was income of $ 1.8 million and expense of $ 8.6 million, respectively.

The effect of derivative instruments not designated as cash flow hedges recognized in other income and expense for the third quarter and nine months ended October 3, 2021 was expense of $ 11.7 million and expense of $ 16.5 million, respectively.

The effect of derivative instruments not designated as cash flow hedges in other income and expense for the third quarter and nine months ended September 27, 2020 was income of $ 3.0 million and expense of $ 5.5 million, respectively.

The income or expense was largely offset by losses or gains in the value of the underlying hedged item excluding the impact of forward points.

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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 July 4, 2021 January 3, 2021

Asset/(Liability) Derivatives Balance sheet location October 3, 2021 January 3, 2021

Derivatives designated as hedging instruments:

Cash flow forward contracts Other current assets $ 1.7 $ 7.3

Cash flow forward contracts Accrued liabilities ( 0.2 ) —

Fair value forward contracts Accrued liabilities ( 7.0 ) —

Fair value forward contracts Other long-term liabilities ( 3.1 ) —

Cash flow cross currency swap Other current assets 3.4 3.4

Cash flow forward contracts Accrued liabilities ( 0.8 ) —

Cash flow cross currency swap Other long-term liabilities ( 14.0 ) ( 29.2 )

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Earnings Per Share

For the second quarter and first six months of 2021, no stock options were excluded in the computation of diluted earnings per share because their inclusion would have been anti-dilutive.

For the second quarter and first six months of 2020, 241,931 and 244,192 stock options were excluded in the computation of earnings per share because they had exercise prices that were greater than the weighted average market price of the Company’s common stock price during the respective period.

As part of the consideration transferred for the acquisition of FLIR, the Company issued approximately 9.5 million shares on May 14, 2021 which increased the weighted average number of shares during the period.

Beginning in the third quarter, the full 9.5 million shares issued will be reflected as outstanding for the entire quarterly period.

For the third quarter and first nine months of 2021, no stock options were excluded in the computation of diluted earnings per share because their inclusion would have been anti-dilutive.

For the third quarter and first nine months of 2020, 239,422 and 242,602 stock options, respectively, were excluded in the computation of earnings per share because they had exercise prices that were greater than the weighted average market price of the Company’s common stock price during the respective period.

As part of the consideration transferred for the acquisition of FLIR, the Company issued approximately 9.5 million shares of common stock on May 14, 2021 which increased the weighted average number of shares 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

Third Quarter Nine Months

2021 2020 2021 2020

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Stock Incentive Plan

Stock option compensation expense was $ 3.6 million for the second quarter of 2021 and was $ 5.7 million for the second quarter of 2020.

Stock option compensation expense was $ 7.8 million for the first six months of 2021 and was $ 13.1 million for the first six months of 2020.

Employee stock option grants are charged to expense evenly over the three year vesting period except for stock options granted after 2018 to Teledyne’s Executive Chairman and Teledyne’s President and Chief Executive Officer which are expensed immediately.

For 2021, the Company currently expects approximately $ 20.8 million in stock option compensation expense based on stock options outstanding and stock options granted on July 27, 2021.

Stock option compensation expense was $ 5.8 million for the third quarter of 2021 and was $ 5.7 million for the third quarter of 2020.

Stock option compensation expense was $ 13.6 million for the first nine months of 2021 and was $ 18.8 million for the first nine months of 2020.

Employee stock option grants are charged to expense evenly over the three year vesting period except for stock options granted after 2018 to Teledyne’s current Chairman, President and Chief Executive Officer and Teledyne’s former President and Chief Executive Officer, which are expensed immediately.

For 2021, the Company currently expects approximately $ 20.5 million in stock option compensation.

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.

Stock option transactions for the second quarter and first six months of 2021 are summarized as follows:

Second Quarter Six Months

The following assumptions were used in the valuation of the stock options granted in 2021:

Expected volatility 27.8 %

Risk-free interest rate range 0.09 % to 1.58 %

Expected life in years 5.2

Expected dividend yield —

Based on the assumptions used in the valuation of stock options, the weighted average grant date fair value of stock options granted in the first nine months of 2021 was $ 135.59 per share.

Stock option transactions for the third quarter and first nine months of 2021 are summarized as follows:

Third Quarter Nine Months

Shares Weighted

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Exercisable at end of period 1,366,280 $ 116.55 1,366,280 $ 116.55

On July 27, 2021, the Company granted 198,760 stock options at an exercise price of $ 441.51 per share and a weighted average fair value of $ 135.74 per share.

Performance Share Plan and Restricted Stock Award Program

Performance Share Plan

In the first quarter of 2018, the performance cycle for the three-year period ending December 31, 2020, was set.

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A total of 35,033 shares remain to be issued in two equal installments in 2022 and 2023.

The following table shows the restricted stock activity for the first six months of 2021:

Restricted Stock Award Program

The following table shows the restricted stock activity for the first nine months of 2021:

Shares Weighted average fair value per share

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Forfeited/Canceled ( 3,727 ) $ 384.80

Balance, July 4, 2021 92,441 $ 356.19

Balance, October 3, 2021 89,380 $ 354.37

As part of the acquisition of FLIR, the Company assumed certain unvested restricted stock units that were issued by FLIR in March 2021.

The unvested restricted stock units were converted to 62,974 Teledyne restricted stock units.

The post-acquisition expense for these restricted stock units was $ 4.5 million in the second quarter and first six months of 2021 and is expected to be $ 8.2 million for fiscal year 2021.

The post-acquisition expense for these restricted stock units was $ 1.8 million and $ 6.3 million in the third quarter and first nine months of 2021, respectively, and is expected to be $ 7.9 million for fiscal year 2021.

The expense related to these assumed restricted stock units is included in the Digital Imaging segment results.

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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 $ 843.1 million at July 4, 2021 and $ 324.8 million at January 3, 2021.

Inventories at cost determined on the average cost or the FIFO methods were $ 804.8 million at October 3, 2021 and $ 324.8 million at January 3, 2021.

The increase in the inventory balance in 2021 reflects the inventory acquired in connection with the FLIR acquisition.

The remainder of the inventories using the LIFO method is $ 30.6 million at July 4, 2021 and $ 29.2 million at January 3, 2021.

The remainder of the inventories using the LIFO method is $ 34.7 million at October 3, 2021 and $ 29.2 million at January 3, 2021.

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.

Because these estimates are subject to many factors beyond the Company’s control, interim results are subject to the final year-end LIFO inventory

Inventories (in millions):

July 4, 2021 January 3, 2021

October 3, 2021 January 3, 2021

Raw materials and supplies $ 487.7 $ 231.0

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The majority of revenue recognized over time uses an EAC process.

The net aggregate effects of changes in estimates on contracts accounted for under the cost-to-cost method in the first six months of 2021 was approximately $ 11.4 million of favorable operating income, primarily related to favorable changes in estimates that impacted revenue within the Digital Imaging segment.

The net aggregate effects of changes in estimates on contracts accounted for under the cost-to-cost method in the first six months of 2020 was approximately $ 10.2 million of favorable operating income, primarily related to favorable changes in estimates that impacted revenue within the Digital Imaging operating segment.

The net aggregate effects of changes in estimates on contracts accounted for under the cost-to-cost method in the first nine months of 2021 was approximately $ 16.9 million of favorable operating income, primarily related to favorable changes in estimates that impacted revenue within the Digital Imaging segment.

The net aggregate effects of changes in estimates on contracts accounted for under the cost-to-cost method in the first nine months of 2020 was approximately $ 16.6 million of favorable operating income, primarily related to favorable changes in estimates that impacted revenue within the Digital Imaging operating segment.

None of the effects of changes in estimates on any individual contract were material to the condensed consolidated statements of income for any period presented.

Contract Liabilities

We recognize a liability for interim and advance payments in excess of revenue recognized and present it as a contract liability which is included within accrued liabilities and other long-term liabilities on the condensed consolidated balance sheet, which represented $ 188.7 million and $ 25.9 million as of July 4, 2021, and $ 160.1 million and $ 14.0 million as of January 3, 2021, respectively.

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 $ 184.8 million and $ 25.4 million as of October 3, 2021, and $ 160.1 million and $ 14.0 million as of January 3, 2021, respectively.

The increase in contract liabilities from the beginning of the year primarily related to contract liabilities acquired as part of the acquisition of FLIR.

The Company recognized revenue of $ 84.1 million during the six months ended July 4, 2021 from contract liabilities that existed at the beginning of year.

The Company recognized revenue of $ 98.8 million during the nine months ended October 3, 2021 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.

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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 July 4, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 2,979.4 million.

As of October 3, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 3,105.4 million.

The Company expects approximately 80 % of remaining performance obligations to be recognized into revenue within the next twelve months , with the remaining 20 % recognized thereafter.

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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.

The warranty reserve is included in current and long-term accrued liabilities on the Condensed

Consolidated Balance Sheet.

Warranty Reserve (in millions):

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Accounts Receivable, net

Accounts receivable is presented net of an allowance for doubtful accounts of $ 11.6 million at July 4, 2021 and $ 12.3 million at January 3, 2021.

Accounts receivable is presented net of an allowance for doubtful accounts of $ 14.4 million at October 3, 2021 and $ 12.3 million at January 3, 2021.

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 2021 was 29.8 % and 22.8 %, respectively.

The Company ’ s effective income tax rate for the second quarter and first six months of 2020 was 13.2 % and 15.8 %, respectively.

The second quarter of 2021 includes net discrete income tax expense of $ 4.1 million and the and first six months of 2021 includes net discrete tax benefit of $ 2.2 million.

The second quarter and six months of 2021 net discrete income tax amounts include $ 2.1 million and $ 6.9 million, respectively, related to share-based accounting.

The second quarter and six months of 2021 net discrete income tax amounts also include $ 11.5 million expense related to foreign tax rate changes and a $ 5.3 million income tax benefit related to the release of a valuation allowance.

The Company’s effective income tax rate for the third quarter and first nine months of 2021 was 20.1 % and 21.5 %, respectively.

The Company’s effective income tax rate for the third quarter and first nine months of 2020 was 21.5 % and 17.9 %, respectively.

The third quarter of 2021 includes net discrete income tax benefits of $ 6.3 million and the first nine months of 2021 includes net discrete income tax benefit of $ 8.5 million.

The third quarter and nine months of 2021 net discrete income tax amounts include $ 3.0 million and $ 9.9 million, respectively, related to share-based accounting.

The third quarter and nine months of 2021 net discrete income tax amounts also include income tax benefits of $ 4.9 million primarily related to research and development and foreign tax credits.

The first nine months of 2021 include a $ 11.5 million expense related to foreign tax rate changes and a $ 5.3 million income tax benefit related to the release of a valuation allowance.

The foreign tax rate changes are a result of the United Kingdom Parliament enacting legislation to increase the corporate tax rate to 25% effective April 2023.

The second quarter and first six months of 2020 includes net discrete income tax benefits of $ 10.4 million and $ 14.6 million, respectively.

The second quarter and six months of 2020 net discrete tax benefits include $ 9.8 million and $ 14.5 million, respectively, related to share-based accounting.

Excluding the net discrete income tax items in both periods, the effective tax rates would have been 25.3 % for the second quarter of 2021 and 23.9 % for the first six months of 2021.

Excluding the net discrete income tax items in both periods, the effective tax rates would have been 22.8 % for both the second quarter and first six months of 2020.

During fiscal year 2018, the Swedish Tax Authority (“STA”) issued a reassessment of tax for the year ending December 31, 2012 to one of FLIR’s non-operating subsidiaries in Sweden.

On March 26, 2020, FLIR received an adverse judgment from the First Instance Court of Sweden (the “Court”) regarding the STA’s reassessment.

FLIR has appealed the decision to the Administrative Court of Appeal in Stockholm.

The Appellate Court hearing has been scheduled for September 15, 2021.

Historically, FLIR has not accrued a liability for this matter.

No adjustments have been made for this Swedish tax matter in Teledyne’s current preliminary estimates of the purchase price allocation.

An adverse resolution to this Swedish tax matter could materially impact cash flow.

In addition, during 2019, the European Commission announced the opening of a separate review to assess whether an excess profit tax ruling granted by Belgium to one of FLIR’s international subsidiaries is in breach of European Union state aid rules.

Historically FLIR believed that it had paid all taxes assessed by Belgium in this matter.

No adjustments have been made for this Belgium tax matter in Teledyne’s current preliminary estimates of the purchase price allocation.

The final acquisition accounting adjustments for this Belgium tax matter may be materially different, as Teledyne obtains additional information on this matter and as additional information is made known during the post-acquisition measurement period.

The third quarter and first nine months of 2020 includes net discrete income tax benefits of $ 1.2 million and $ 15.8 million, respectively.

The third quarter and nine months of 2020 net discrete tax benefits include $ 0.7 million and $ 15.2 million, respectively, related to share-based accounting.

Excluding the net discrete income tax items in both periods, the effective tax rates would have been 23.9 % for both the third quarter and first nine months of 2021.

Excluding the net discrete income tax items in both periods, the effective tax rates would have been 22.5 % for the third quarter of 2020 and 22.7 % for the first nine months of 2020.

See Note 2 to these Notes to Condensed Consolidated Financial Statements for information regarding FLIR historical tax matters that existed at the date of the acquisition, including the STA’s reassessment of tax for the year ending December 31, 2012 related to one of FLIR’s non-operating subsidiaries in Sweden.

Long-Term Debt and Letters of Credit

Long-Term Debt (in millions):

July 4, 2021 January 3, 2021

$ 1.15 billion credit facility due March 2026, weighted average variable rate of 1.19 % at July 4, 2021 and 1.05 % at January 3, 2021

October 3, 2021 January 3, 2021

$ 1.15 billion credit facility due March 2026, weighted average variable rate of 1.18 % at October 3, 2021 and 1.05 % at January 3, 2021

$ 125.0 $ 125.0

Term loan due October 2024, variable rate of 0.98 % at July 4, 2021 and 1.15 % at January 3, 2021, swapped to a Euro fixed rate of 0.6120 %

Term loan due October 2024, variable rate of 1.16 % at October 3, 2021 and 1.15 % at January 3, 2021, swapped to a Euro fixed rate of 0.6120 %

0.65 % Fixed Rate Senior Notes due April 2023

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2.75 % Fixed Rate Senior Notes due April 2031

Term loan due March 2026, variable rate of 1.32 % at July 4, 2021

Term loan due May 2026, variable rate of 1.33 % at October 3, 2021

3.09 % Fixed Rate Senior Notes repaid March 2021

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We may redeem the $ 450.0 million of 0.95 % Notes due 2024 at any time or from time to time, in whole or in part, at the Company’s option, from and after April 1, 2022, at a redemption price equal to 100 % of the principal amount of the Notes redeemed.

In addition, we guaranteed $ 500.0 million of FLIR’s 2.50 % Fixed Rate Senior Notes due August 2030.

Previously on March 4, 2021, Teledyne entered into a $ 1.0 billion Term Loan Credit Agreement and Amended and Restated Credit Agreement with capacity of $ 1.15 billion both maturing on March 4, 2026.

In addition, we guaranteed FLIR’s $ 500.0 million, 2.50 % Fixed Rate Senior Notes due August 2030.

Previously on March 4, 2021, Teledyne entered into a $ 1.0 billion Term Loan Credit Agreement (maturing May 2026) and an Amended and Restated Credit Agreement (maturing March 2026) with capacity of $ 1.15 billion.

The terms of the $ 1.0 billion Term Loan Credit Agreement allow for prepayments, at the Company’s option, at any time or from time to time, in whole or in part without premium or penalty.

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Teledyne used the proceeds from the Notes together with the proceeds from the $ 1.0 billion Term Loan Credit Agreement and cash on hand to pay the cash portion of the consideration for the FLIR acquisition and refinance certain existing debt.

At July 4, 2021, $ 743.5 million was available under the $ 1.150 billion credit facility, after reductions of $ 125.0 million in borrowings and $ 281.5 million in outstanding letters of credit.

The outstanding letters of credit include a $ 260.0 million letter of credit to the Swedish Tax Authority, related to a disputed 2018 tax reassessment issued to a FLIR subsidiary in Sweden.

In the third quarter of 2021, Teledyne repaid $ 300.0 million against the Term Loan Credit Agreement due May 2026.

In October 2021, Teledyne amended its Amended and Restated Credit Agreement and its 2019 Term Loan due October 2024 to adopt LIBOR replacement language and to refine pricing terms under the 2019 Term Loan.

At October 3, 2021, $ 751.1 million was available under the $ 1.15 billion credit facility, after reductions of $ 125.0 million in borrowings and $ 273.9 million in outstanding letters of credit.

The outstanding letters of credit include a $ 253.6 million letter of credit to the STA, related to a disputed 2018 tax reassessment issued to a FLIR subsidiary in Sweden.

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 July 4, 2021 and January 3, 2021, approximated the carrying value.

The estimated fair value of Teledyne’s long-term debt at October 3, 2021 and January 3, 2021, approximated the carrying value.

Lease Commitments

At July 4, 2021, Teledyne has right-of-use assets of $ 143.1 million and a total lease liability for operating leases of $ 165.0 million of which $ 134.5 million is included in long-term lease liabilities and $ 30.5 million is included in current accrued liabilities .

Operating lease expense was $ 7.9 million and $ 14.3 million for the second quarter and first six months of 2021.

Operating lease expense was $ 6.0 million and $ 12.1 million for the second quarter and first six months of 2020.

At October 3, 2021, Teledyne has right-of-use assets of $ 137.7 million and a total lease liability for operating leases of $ 159.3 million of which $ 130.1 million is included in long-term lease liabilities and $ 29.2 million is included in current accrued liabilities .

Operating lease expense was $ 10.0 million and $ 24.3 million for the third quarter and first nine months of 2021, respectively.

Operating lease expense was $ 6.7 million and $ 18.8 million for the third quarter and first nine months of 2020, respectively.

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 January 3, 2021, included in the 2020 Form 10-K.

At July 4, 2021, the Company’s reserves for environmental remediation obligations totaled $ 6.4 million, of which $ 1.7 million is included in current accrued liabilities.

At October 3, 2021, the Company’s reserves for environmental remediation obligations totaled $ 6.5 million, of which $ 1.8 million is included in current accrued liabilities.

At January 3, 2021, the Company’s reserves for environmental remediation obligations totaled $ 6.5 million.

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and (iv) continued implementation of ongoing remedial compliance measures and additional remedial compliance measures related to automated systems and ITAR compliance policies, procedures, and training.

While FLIR has enhanced its trade compliance program more broadly, implemented and continues to implement remedial measures and has undergone its first external audit, adverse findings in the second audit, currently commencing, of FLIR’s ITAR compliance program could materially cause incurrence of additional expenses in connection with implementation of remedial measures and result in a substantial adjustment to our revenue and net income.

As of July 4, 2021, FLIR has $ 3.5 million remaining to be paid under the Consent Agreement.

While FLIR has enhanced its trade compliance program more broadly, implemented and continues to implement remedial measures and has undergone its first external audit and just concluded its second external audit of FLIR’s ITAR compliance program, adverse disclosures and findings could materially cause incurrence of additional expenses in connection with implementation of remedial measures and result in a substantial adjustment to our revenue and net income.

As of October 3, 2021, FLIR has $ 3.5 million remaining to be paid under the Consent Agreement.

FLIR’s investments to date in remedial compliance measures have been more than sufficient to cover the $ 15.0 million suspension amount.

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FLIR has identified certain shipments that potentially violate these license requirements and voluntary disclosed this matter to BIS.

In April 2021, FLIR resolved allegations of misrepresentations made to BIS, between November 2012 and December 2013, in a commodity jurisdiction request relating to newly developed Lepton uncooled focal plane arrays by an administrative settlement and fine of $ 0.3 million and agreeing to perform two internal audits of its EAR export compliance programs.

The first internal audit has been completed and another voluntary disclosure has been filed to report potential violations.

FLIR has made other voluntary disclosures to the U.S.

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However, an unfavorable outcome could result in substantial fines and penalties or loss or suspension of export privileges or of particular authorizations that could be material to the Company’s financial position, results of operations or cash flows in and following the period in which such an outcome becomes estimable or known.

During fiscal year 2018, the Swedish Tax Authority (“STA”) issued a reassessment of tax for the year ending December 31, 2012 to one of FLIR’s non-operating subsidiaries in Sweden.

On March 26, 2020, FLIR received an adverse judgment from the First Instance Court of Sweden (the “Court”) regarding the

STA’s reassessment.

FLIR has appealed the decision to the Administrative Court of Appeal in Stockholm.

The Appellate Court hearing has been scheduled for September 15, 2021.

Historically, FLIR has not accrued a liability for this matter.

No adjustments have been made for this Swedish tax matter in Teledyne’s current preliminary estimates of the purchase price allocation.

An adverse resolution to this Swedish tax matter could materially impact cash flow.

Historically FLIR believed that it had paid all taxes assessed by Belgium in this matter.

No adjustments have been made for this Belgium tax matter in Teledyne’s current preliminary estimates of the purchase price allocation.

No adjustments have been made for the FLIR historical export compliance matters in Teledyne’s current preliminary estimates of its purchase price allocation.

The final acquisition accounting adjustments for these matters may be materially different, as Teledyne obtains additional information on these matters and as additional information is made known during the post-acquisition measurement period.

See Note 2 to these Notes to Condensed Consolidated Financial Statements for information regarding FLIR historical tax matters that existed at the date of the acquisition, including the Swedish Tax Authority's reassessment of tax for the year ending December 31, 2012 related to one of FLIR’s non-operating subsidiaries in Sweden.

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.

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Teledyne has not made any cash pension contributions to its domestic qualified pension plans since 2013 and no cash pension contributions are planned for 2021.

Second Quarter Six Months

Third Quarter Nine Months

2021 2020 2021 2020

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Segment Information

Teledyne is a leading provider of sophisticated instrumentation, digital imaging products and software, aerospace and defense electronics, and engineered systems.

Teledyne is a leading provider of sophisticated digital imaging products and software, instrumentation, 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;

Instrumentation;

Aerospace and Defense Electronics;

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As part of a continuing effort to reduce costs and improve operating performance, as well as to respond to the impact of COVID, beginning in 2020, the Company took actions to reduce headcount across various businesses, reducing our exposure to weak end markets, such as commercial aerospace.

Teledyne incurred $ 24.2 million and $ 25.1 million in expense related to these actions, including facility consolidation expense, for the second quarter and first six months of 2021 respectively, compared with $ 7.7 million and $ 11.4 million for the second quarter and first six months of 2020, respectively.

quarter and first six months of 2021 includes $ 23.2 million related to FLIR.

At July 4, 2021, Teledyne had a liability of approximately $ 1.0 million included in other current liabilities related to these actions.

Teledyne incurred $ 1.3 million and $ 26.4 million in expense related to these actions, including facility consolidation expense, for the third quarter and first nine months of 2021 respectively, compared with $ 3.3 million and $ 15.1 million for the third quarter and first nine months of 2020, respectively.

The third quarter and first nine months of 2021 includes $ 0.5 million and $ 23.7 million, respectively, related to FLIR.

At October 3, 2021, Teledyne had a liability of less than $ 1.0 million included in other current liabilities related to these actions.

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

Second Quarter % Six Months %

Third Quarter % Nine Months %

2021 2020 Change 2021 2020 Change

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Operating income $ 189.6 $ 122.5 54.8 % $ 429.2 $ 336.3 27.6 %

(a) Net sales excludes inter-segment sales of $ 5.1 million and $ 9.3 million for the second quarter and first six months of 2021, respectively, and $ 5.5 million and $ 12.4 million for the second quarter and first six months of 2020, respectively.

(a) Net sales excludes inter-segment sales of $ 5.4 million and $ 14.7 million for the third quarter and first nine months of 2021, respectively, and $ 5.6 million and $ 18.0 million for the third quarter and first nine months of 2020, respectively.

(b) On May 14, 2021, the Company completed the acquisition of FLIR, and the 2021 financial results of FLIR have been included since the date of the acquisition.

(c) Corporate expense for the second quarter and first six months of 2021 includes $ 70.5 million and $ 76.4 million, respectively, in acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

The third quarter and first nine months of 2021 include $ 473.6 million and $ 775.0 million, respectively in incremental net sales from FLIR.

The third quarter and first nine months of 2021 includes $ 82.3 million and $ 152.5 million, respectively, in acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

(c) Corporate expense for the third quarter and first nine months of 2021 includes $ 0.3 million and $ 76.7 million, respectively, in acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

Identifiable assets are those assets used in the operations of the segments.

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Identifiable assets:

July 4, 2021 January 3, 2021

October 3, 2021 January 3, 2021

Digital Imaging (a) $ 11,882.2 $ 2,000.8

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Total identifiable assets $ 14,447.5 $ 5,084.8

(a) The increase from January 3, 2021 was primarily due to assets acquired, including goodwill and acquired intangible assets, acquired in connection with the May 2021 FLIR acquisition.

(a) The increase from January 3, 2021 was primarily due to assets acquired, including goodwill and acquired intangible assets, acquired in connection with the May 2021 FLIR acquisition which is part of the Digital Imaging segment.

Product Lines

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

Second Quarter Six Months

Third Quarter Nine Months

Instrumentation 2021 2020 2021 2020

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Net sales in the Engineered Systems segment is typically between 45 % and 55 % fixed price contracts in a given reporting period, with the balance of net sales derived from cost type contracts.

For the six months ended July 4, 2021, approximately 47 % of net sales in the Engineered Systems segment was derived from fixed price contracts.

Second Quarter Ended July 4, 2021

Six Months Ended July 4, 2021

For the nine months ended October 3, 2021, approximately 47 % of net sales in the Engineered Systems segment was derived from fixed price contracts.

Third Quarter Ended October 3, 2021

Nine Months Ended October 3, 2021

Customer Type Customer Type

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(a) Includes sales as a prime contractor or subcontractor.

Second Quarter Ended July 4, 2021

Six Months Ended July 4, 2021

Third Quarter Ended October 3, 2021

Nine Months Ended October 3, 2021

Geographic Region (a) Geographic Region (a)

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(a) Net sales by geographic region of origin.

Second Quarter Ended June 28, 2020

Six Months Ended June 28, 2020

Third Quarter Ended September 27, 2020

Nine Months Ended September 27, 2020

Customer Type Customer Type

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(a) Includes sales as a prime contractor or subcontractor.

Second Quarter Ended June 28, 2020 Six Months Ended June 28, 2020

Third Quarter Ended September 27, 2020 Nine Months Ended September 27, 2020

Geographic Region (a) Geographic Region (a)

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Strategy/Overview

Our strategy continues to emphasize growth in our core markets of instrumentation, digital imaging, aerospace and defense electronics and engineered systems.

Our strategy continues to emphasize growth in our core markets of digital imaging, instrumentation, aerospace and defense electronics and engineered systems.

Our core markets are characterized by high barriers to entry and include specialized products and services not likely to be commoditized.

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(“FLIR”), our largest acquisition to date, in a cash and stock transaction valued at approximately $8.1 billion, comprising of net cash payments of $3.7 billion, $3.9 billion of Teledyne shares issued to existing FLIR shareholders, and the assumption of FLIR debt of $0.5 billion.

As a combined company, we will uniquely provide a full spectrum of imaging technologies and products spanning X-ray through infrared and from components to complete imaging systems.

We will also provide a complete range of unmanned systems and imaging payload across all domains ranging from deep sea to deep space.

As a combined company, we uniquely provide a full spectrum of imaging technologies and products spanning X-ray through infrared and from components to complete imaging systems.

We also provide a complete range of unmanned systems and imaging payload across all domains ranging from deep sea to deep space.

FLIR is part of the Digital Imaging segment.

The results of the FLIR acquisition have been included in Teledyne’s results since the date of the acquisition.

FLIR Acquisition and Debt Activities

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Teledyne may redeem the $450.0 million of 0.95% Notes due 2024 at any time or from time to time, in whole or in part, at the Company’s option, from and after April 1, 2022, at a redemption price equal to 100% of the principal amount of the Notes redeemed.

In addition, we guaranteed $500.0 million of FLIR’s 2.50% Fixed Rate Senior Notes due August 2030.

Previously on March 4, 2021, Teledyne entered into a $1.0 billion Term Loan Credit Agreement and Amended and Restated Credit Agreement with capacity of $1.15 billion both maturing on March 4, 2026.

In addition, we guaranteed FLIR’s $500.0 million, 2.50% Fixed Rate Senior Notes due August 2030.

Previously on March 4, 2021, Teledyne entered into a $1.0 billion Term Loan Credit Agreement (maturing May 2026) and an Amended and Restated Credit Agreement (maturing March 2026) with capacity of $1.15 billion.

The terms of the $1.0 billion Term Loan Credit Agreement allow for prepayments, at the Company’s option, at any time or from time to time, in whole or in part without premium or penalty.

Teledyne used the proceeds from the Notes together with the proceeds from the $1.0 billion Term Loan Credit Agreement and cash on hand to pay the cash portion of the consideration for the FLIR acquisition and refinance certain existing debt.

The results of the FLIR acquisition have been included in Teledyne’s results since the date of the acquisition.

At July 4, 2021, total debt was $4,742.0 million, compared with total debt of $778.5 million at January 3, 2021.

The debt balance at July 4, 2021, includes the debt incurred to fund the cash portion of the consideration for the FLIR acquisition.

At July 4, 2021, $743.5 million was available under the $1.150 billion credit facility, after reductions of $125.0 million in borrowings and $281.5 million in outstanding letters of credit.

The outstanding letters of credit include a $260.0 million letter of credit to the Swedish Tax Authority, related to a disputed 2018 tax reassessment issued to a FLIR subsidiary in Sweden.

With regard to the COVID pandemic, our first priority remains the health and safety of our employees and their families.

Our manufacturing sites are deemed essential businesses and have remained operational during the pandemic.

While we continue enhanced cleaning protocols, we are following local requirements with respect to social distancing, usage of personal protective equipment and other prevention measures.

We are encouraging our employees to get vaccinated.

While no company is immune to global economic challenges, Teledyne's business portfolio is well-balanced across end markets and geographies, and includes a high degree of businesses serving critical infrastructure sectors such as the defense industrial base, water and wastewater, and healthcare and public health.

However, given the continuing dynamic nature of this situation, the Company may not fully estimate the impacts of COVID on its financial condition, results of operations or cash flows.

In the third quarter of 2021, Teledyne repaid $300.0 million against the Term Loan Credit Agreement due March 2026.

At October 3, 2021, total debt was $4,441.7 million, compared with total debt of $778.5 million at January 3, 2021.

The debt balance at October 3, 2021, includes the debt incurred to fund the cash portion of the consideration for the FLIR acquisition.

At October 3, 2021, $751.1 million was available under the $1.150 billion credit facility, after reductions of $125.0 million in borrowings and $273.9 million in outstanding letters of credit.

The outstanding letters of credit include a $253.6 million letter of credit to the Swedish Tax Authority (“STA”), related to a disputed 2018 tax reassessment issued to a FLIR subsidiary in Sweden.

COVID and Other Challenges

The safety and health of our employees is of utmost importance to Teledyne.

Since the COVID-19 vaccination was made available to the public, Teledyne has encouraged voluntary vaccination efforts for its U.S.

workforce by providing paid time off to receive the vaccine and, where possible, enlisting local healthcare providers to be onsite to administer the vaccine.

Some of our businesses hold U.S.

Government contracts subject to a new U.S.

Executive Order mandating COVID vaccinations for government contractor employees at certain covered sites.

We are taking steps to comply with this mandate at applicable workplaces.

However, the continuing dynamic nature of this situation, including on the global supply chain and workforces, as well as inflationary trends, the Company may not fully estimate the impacts of COVID on its financial condition, results of operations or cash flows.

We have experienced supply chain challenges, including increased lead times, as well as cost inflation for parts and components, logistics and labor due to availability constraints and high demand.

We expect the inflationary and supply chain constraint trends to continue throughout the remainder of 2021 and may continue thereafter.

2020 Acquisition of OakGate Technology, Inc.

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Results of Operations

Second Quarter Six Months

Third Quarter Nine Months

(in millions) 2021 2020 2021 2020

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Prior period amounts have been reclassified to conform to the current presentation.

Second Quarter % Six Months %

Third Quarter % Nine Months %

(dollars in millions) 2021 2020 Change 2021 2020 Change

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Total operating income $ 189.6 $ 122.5 54.8 % $ 429.2 $ 336.3 27.6 %

(a) Net sales excludes inter-segment sales of $5.1 million and $9.3 million for the second quarter and first six months of 2021, respectively, and $5.5 million and $12.4 million for the second quarter and six months of 2020, respectively.

(a) Net sales excludes inter-segment sales of $5.4 million and $14.7 million for the third quarter and first nine months of 2021, respectively, and $5.6 million and $18.0 million for the third quarter and nine months of 2020, respectively.

(b) On May 14, 2021, the Company completed the acquisition of FLIR, and the 2021 financial results of FLIR have been included since the date of the acquisition.

(c) Corporate expense for the second quarter and first six months of 2021 includes $70.5 million and $76.4 million, respectively, in acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

The third quarter and first nine months of 2021 include $473.6 million and $775.0 million, respectively in incremental net sales from FLIR.

The third quarter and first nine months of 2021 includes $82.3 million and $152.5 million, respectively, in acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

(c) Corporate expense for the third quarter and first nine months of 2021 includes $0.3 million and $76.7 million, respectively, in acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

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

Second Quarter Six Months

Third Quarter Nine Months

(dollars in millions) 2021 2020 2021 2020

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Cost of sales as a % of net sales 60.0 % 61.2 % 60.0 % 62.0 %

Second Quarter and First Six Months Results

The following is a discussion of our 2021 second quarter and first six months results compared with the 2020 second quarter and first six months results.

Third Quarter and First Nine Months Results

The following is a discussion of our 2021 third quarter and first nine months results compared with the third quarter and first nine months results of 2020.

Comparisons are with the corresponding reporting period of 2020, unless noted otherwise.

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Prior period amounts have been reclassified to conform to the current presentation.

Second quarter of 2021 compared with the second quarter of 2020

Our second quarter of 2021 net sales increased 50.8%.

Net income for the second quarter of 2021 decreased 30.9%.

Net income per diluted share was $1.48 for the second quarter of 2021, compared with net income per diluted share of $2.48.

The second quarter of 2021 net sales included $301.4 million in incremental net sales from the acquisition of FLIR.

In connection with the FLIR acquisition, Teledyne incurred pretax expenses of $140.7 million, which included $42.3 million of transaction and integration-related costs, $52.2 million for the settlement of FLIR employee and director stock awards, $22.8 million in acquired intangible asset amortization expense and $23.4 million in acquired inventory step-up expense.

The second quarter of 2021 also included $10.0 million of acquired intangible asset amortization expense for acquisitions completed in prior periods.

The second quarter of 2020 included pretax charges of $17.8 million which included $9.7 million in acquired intangible asset amortization expense and $8.1 million in severance, facility consolidation and acquisition costs.

The second quarter of 2021 reflected net discrete income tax expense of $4.1 million compared with net discrete income tax benefits of $10.4 million.

The second quarter of 2021 net sales, compared with the second quarter of 2020 net sales, reflected higher net sales in each segment except the Engineered Systems segment, which decreased slightly.

The second quarter of 2021 included $301.4 million in incremental net sales from the acquisition of FLIR in the Digital Imaging segment, as well as organic sales growth.

The second quarter of 2021 net sales reflected the historical uneven sales pattern for FLIR which resulted in higher sales in the second half of the quarter.

Third quarter of 2021 compared with the third quarter of 2020

Our third quarter of 2021 net sales increased 75.2%.

Net income for the third quarter of 2021 increased 42.8%.

Net income per diluted share was $2.81 for the third quarter of 2021, compared with net income per diluted share of $2.48.

The third quarter of 2021 net sales included $473.6 million in incremental net sales from the acquisition of FLIR.

In connection with the FLIR acquisition, Teledyne incurred pretax expenses of $82.6 million, which included $45.6 million in acquired intangible asset amortization expense, $35.2 million in acquired inventory step-up expense and $1.8 million of transaction and integration-related costs.

The third quarter of 2021 also included $9.7 million of acquired intangible asset amortization expense for acquisitions completed in prior periods.

The third quarter of 2020 included pretax charges of $13.8 million which included $9.9 million in acquired intangible asset amortization expense and $3.9 million in severance, facility consolidation and other costs.

The third quarter of 2021 reflected net discrete income tax benefits of $6.3 million compared with net discrete income tax benefits of $1.2 million.

The third quarter of 2021 net sales, compared with the third quarter of 2020 net sales, reflected higher net sales in each segment.

The third quarter of 2021 included $473.6 million in incremental net sales from the acquisition of FLIR in the Digital Imaging segment, as well as organic sales growth.

Cost of Sales

Cost of sales increased $202.5 million in the second quarter of 2021 and primarily reflect the increase in net sales.

Cost of sales as a percentage of net sales decreased for the second quarter of 2021 to 59.2%, from 62.0%.

Cost of sales increased $329.2 million in the third quarter of 2021 and primarily reflected the increase in net sales.

Cost of sales as a percentage of net sales decreased for the third quarter of 2021 to 60.0%, from 61.2%.

The lower cost of sales percentage in 2021, primarily reflects the impact of the FLIR acquisition which carries a lower cost of sales percentage than the other Teledyne businesses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, including research and development expense, increased $157.5 million in the second quarter of 2021 and primarily reflected the impact of higher net sales, as well as acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

Selling, general and administrative expenses for the second quarter of 2021, as a percentage of net sales increased to 28.6% from 22.0%.

The higher percentage in 2021 primarily reflected the impact of acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

Corporate expense, which is included in selling, general and administrative expenses, was $84.2 million for the second quarter of 2021, compared with $13.8 million and reflected $70.5 million in acquisition-related transaction and purchase accounting expenses.

Stock option compensation expense was $3.6 million for the second quarter of 2021 compared with $5.7 million.

The decrease in stock option expense in the second quarter of 2021, reflects the absence of stock option grants in the first six months of 2021.

Selling, general and administrative expenses, including research and development expense, increased $121.2 million in the third quarter of 2021 and primarily reflected the impact of higher net sales.

Selling, general and administrative expenses for the third quarter of 2021, as a percentage of net sales increased slightly to 21.3% from 21.1%.

Corporate expense, which is included in selling, general and administrative expenses, was $15.7 million for the third quarter of 2021, compared with $12.9 million and reflected higher compensation and professional fees expense.

Stock option compensation expense was $5.8 million for the third quarter of 2021 compared with $5.7 million.

Acquired Intangible Asset Amortization

Acquired intangible asset amortization for the second quarter of 2021 was $32.8 million, compared with $9.7 million.

The second quarter of 2021 includes $22.8 million in acquired intangible asset amortization from the FLIR acquisition.

Acquired intangible asset amortization for the third quarter of 2021 was $55.3 million, compared with $9.9 million.

The third quarter of 2021 includes $45.6 million in acquired intangible asset amortization from the FLIR acquisition.

Pension Service Expense

Pension service expense is included in both cost of sales and selling general and administrative expense.

For the second quarter of 2021, pension service expense was $2.7 million compared with $2.6 million.

For both the third quarter of 2021 and 2020, pension service expense was $2.6 million.

For 2021, the weighted-average discount rate used to determine the benefit obligation for the domestic qualified pension plans was 2.64% compared with 3.41% in 2020.

Operating Income

Operating income for the second quarter of 2021 decreased 4.9%.

The second quarter of 2021, compared with the second quarter of 2020, reflected higher operating income in each business segment, offset by higher corporate expense.

Operating income in the second quarter of 2021 included $70.5 million in corporate expense and $70.2 million of expense in the Digital Imaging segment for acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

The incremental operating income included in the results for the second quarter of 2021 from the FLIR acquisition was $23.8 million, which included $70.2 million of acquisition-related transaction and purchase accounting expenses.

Operating income for the third quarter of 2021 increased 54.8%.

The third quarter of 2021, compared with the third quarter of 2020, reflected higher operating income in each business segment, except the Engineered Systems segment.

Operating income in the third quarter of 2021 included $82.3 million of expense in the Digital Imaging segment for acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

The incremental operating income included in the results for the third quarter of 2021 from the FLIR acquisition was $35.2 million, which included $82.3 million of acquisition-related transaction and purchase accounting expenses.

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

Interest and debt expense, net of interest income, was $21.2 million for the second quarter of 2021, compared with $3.7 million, and primarily reflected interest and debt expense on the debt incurred to fund the cash portion of the FLIR acquisition.

Non-service retirement benefit income was $2.8 million for the second quarter of 2021, compared with $3.2 million.

Other income and expense was income of $6.1 million for the second quarter of 2021, compared with expense of $1.4 million.

The second quarter 2021 amount included $4.0 million in foreign currency income, compared with $2.5 million in foreign currency expense in the second quarter of 2020.

Interest and debt expense, net of interest income, was $23.8 million for the third quarter of 2021, compared with $4.1 million.

The 2021 amount primarily reflected interest and debt expense on the debt incurred to fund the cash portion of the FLIR acquisition.

Non-service retirement benefit income was $2.8 million for the third quarter of 2021, compared with $3.2 million.

Other income and expense was expense of $0.7 million for the third quarter of 2021, compared with expense of $1.9 million.

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

The Company’s effective income tax rate for the second quarter of 2021 was 29.8%, compared with 13.2%.

The second quarter of 2021 reflected net discrete income tax expense of $4.1 million, which included $11.5 million expense related to foreign tax rate changes, partially offset by a $5.3 million income tax benefit related to the release of a valuation allowance and a $2.1 million income tax benefit related to share-based accounting.

The foreign tax rate changes are a result of the United Kingdom Parliament enacting legislation to increase the corporate tax rate to 25% effective April 2023.

The second quarter of 2020 included net discrete tax benefits of $10.4 million, which included a $9.8 million income tax benefit related to share-based accounting.

Excluding the net discrete income tax items in both periods, the effective tax rates would have been 25.3% for the second quarter of 2021 and 22.8% for the second quarter of 2020.

The Company’s effective income tax rate for the third quarter of 2021 was 20.1%, compared with 21.5%.

The third quarter of 2021 included net discrete income tax benefits of $6.3 million, which included $3.0 million income tax benefit related to share-based accounting and an income tax benefit of $4.9 million primarily related to research and development and foreign tax credits.

The third quarter of 2020 included net discrete tax benefits of $1.2 million, which included a $0.7 million income tax benefit related to share-based accounting.

Excluding the net discrete income tax items in both periods, the effective tax rates would have been 23.9% for the third quarter of 2021 and 22.5% for the third quarter of 2020.

The Company’s annual effective tax rate for fiscal year 2021 is expected to be 23.9% before discrete tax items.

In addition, we currently expect less discrete tax items in 2021 compared with 2020.

First six months of 2021 compared with the first six months of 2020

Our first six months of 2021 net sales increased 26.1% and included $301.4 million in incremental net sales from the acquisition FLIR.

Net income for the first six months of 2021 decreased 15.1%.

Net income per diluted share was $3.66 for the first six months of 2021 compared with net income per diluted share of $4.65.

In connection with the FLIR acquisition, in the first six months of 2021, Teledyne incurred pretax expenses of $177.2 million, which included $48.2 million of transaction and integration-related costs, $52.2 million for the settlement of FLIR employee and director stock awards, $22.8 million in acquired intangible asset amortization expense, $23.4 million in acquired inventory step-up expense and $30.6 million in bridge loan and debt extinguishment fees.

The first six months of 2021 also included $19.8 million of acquired intangible asset amortization expense for acquisitions completed in prior periods.

The first six months of 2020 included pretax charges of $31.1 million which included $19.3 million in acquired intangible asset amortization expense and $11.8 million in severance, facility consolidation, acquisition and certain changes in contract cost estimates.

The first six months of 2021 included net discrete income tax benefits of $2.2 million, compared with $14.6 million.

The first six months of 2021 net sales, compared with the first six months of 2020 net sales, reflected higher net sales in each segment.

The first six months of 2021 included $301.4 million in incremental net sales from the acquisition of FLIR in the Digital Imaging segment, as well as organic sales growth.

The first six months of 2021 net sales reflected the historical uneven sales pattern for FLIR which resulted in higher sales in the last month of the quarter.

First nine months of 2021 compared with the first nine months of 2020

Our first nine months of 2021 net sales increased 42.2% and included $775.0 million in incremental net sales from the acquisition FLIR.

Net income for the first nine months of 2021 increased 5.1%.

Net income per diluted share was $6.58 for the first nine months of 2021 compared with net income per diluted share of $7.14.

In connection with the FLIR acquisition, in the first nine months of 2021, Teledyne incurred pretax expenses of $259.8 million, which included $51.2 million of transaction and integration-related costs, $51.0 million for the settlement of FLIR employee and director stock awards, $68.4 million in acquired intangible asset amortization expense, $58.6 million in acquired inventory step-up expense and $30.6 million in bridge loan and debt extinguishment fees.

The first nine months of 2021 also included $29.5 million of acquired intangible asset amortization expense for acquisitions completed in prior periods.

The first nine months of 2020 included pretax charges of $52.1 million which included $29.2 million in acquired intangible asset amortization expense and $22.9 million in severance, facility consolidation, acquisition and certain changes in contract cost estimates and other costs.

The first nine months of 2021 included net discrete income tax benefits of $8.5 million, compared with $15.8 million.

The first nine months of 2021 net sales, compared with the first nine months of 2020 net sales, reflected higher net sales in each segment.

The first nine months of 2021 included $775.0 million in incremental net sales from the acquisition of FLIR in the Digital Imaging segment, as well as organic sales growth.

Cost of Sales

Cost of sales increased $202.4 million in the first six months of 2021 and primarily reflected the impact of higher net sales.

Cost of sales as a percentage of net sales for the six months of 2021 decreased to 60.0%, compared with 62.4%.

Cost of sales increased $531.6 million in the first nine months of 2021 and primarily reflected the impact of higher net sales.

Cost of sales as a percentage of net sales for the nine months of 2021 decreased to 60.0%, compared with 62.0%.

The lower cost of sales percentage in 2021, primarily reflects the impact of the FLIR acquisition which carries a lower cost of sales percentage than the other Teledyne businesses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, including research and development, increased by $147.3 million in the first six months of 2021 and primarily reflected the impact of higher net sales, as well as $122.9 million in acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

Selling, general and administrative expenses for the first six months of 2021, as a percentage of net sales, increased to 25.4% compared with 22.4%.

Selling, general and administrative expenses, including research and development, increased by $268.5 million in the first nine months of 2021 and primarily reflected the impact of higher net sales, as well as $101.9 million in acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

Selling, general and administrative expenses for the first nine months of 2021, as a percentage of net sales, increased to 23.7% compared with 21.9%.

The higher percentage in 2021 primarily reflected the impact of acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

In the first six months of 2021 and 2020, we recorded a total of $7.8 million and $13.1 million, respectively, in stock option compensation expense.

The decrease in stock option expense in the first six months of 2021, reflects the absence of stock option grants in the first six months of 2021.

In the first nine months of 2021 and 2020, we recorded a total of $13.6 million and $18.8 million, respectively, in stock option compensation expense.

The decrease in stock option expense in the first nine months of 2021, reflects the absence of stock option grants in the first six months of 2021.

Acquired Intangible Asset Amortization

Acquired intangible asset amortization for the first six months of 2021 was $42.6 million, compared with $19.3 million.

The first six months of 2021 includes $22.8 million in acquired intangible asset amortization from the 2021 FLIR acquisition.

Acquired intangible asset amortization for the first nine months of 2021 was $97.9 million, compared with $29.2 million.

The first nine months of 2021 includes $68.4 million in acquired intangible asset amortization from the FLIR acquisition.

Pension Service Expense

Pension service expense for the first six months of 2021 was $5.4 million compared with $5.2 million.

Pension service expense for the first nine months of 2021 was $8.0 million compared with $7.8 million.

Operating Income

Operating income for the first six months of 2021 increased 12.1%.

The first six months of 2021 compared with the first six months of 2020, reflected higher operating income in each segment.

Corporate expense was $103.6 million in the first six months of 2021 compared with $29.2 million and reflected $76.4 million in acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition in 2021.

The incremental operating income included in the results for the first six months of 2021 from the FLIR acquisition was $23.8 million, which included $70.2 million of acquisition-related transaction and purchase accounting expenses.

Operating income for the first nine months of 2021 increased 27.6%.

The first nine months of 2021 compared with the first nine months of 2020, reflected higher operating income in each segment.

Corporate expense was $119.3 million in the first nine months of 2021 compared with $42.1 million and included $76.7 million in acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition in 2021.

The incremental operating income included in the results for the first nine months of 2021 from the FLIR acquisition was $56.6 million, which included $152.5 million of acquisition-related transaction and purchase accounting expenses.

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

Interest expense, net of interest income, was $56.9 million for the first six months of 2021, compared with $7.8 million and primarily reflected interest and debt expense on the debt incurred to fund the cash portion of the FLIR acquisition.

Other income and expense was income of $5.1 million for the first six months of 2021 compared with expense of $2.8 million.

The first six months of 2021 amount included $2.4 million in foreign currency income, compared with $2.7 million in foreign currency expense in the first six months of 2020.

The Company’s effective income tax rate for the first six months of 2021 was 22.8% compared with 15.8%.

The first six months of 2021 reflected $2.2 million in net discrete income tax benefits, which included a $6.9 million income benefit related to share-based accounting and a $5.3 million income tax benefit related to the release of a valuation allowance partially offset by $11.5 million expense related to foreign tax rate changes.

Interest expense, net of interest income, was $80.7 million for the first nine months of 2021, compared with $11.9 million.

The 2021 amount primarily reflected interest and debt expense on the debt incurred to fund the cash portion of the FLIR acquisition.

Other income and expense was income of $4.4 million for the first nine months of 2021 compared with expense of $4.7 million.

The first nine months of 2021 amount included $3.3 million in foreign currency income, compared with $4.6 million in foreign currency expense in the first nine months of 2020.

The Company’s effective income tax rate for the first nine months of 2021 was 21.5% compared with 17.9%.

The first nine months of 2021 reflected $8.5 million in net discrete income tax benefits, which included a $9.9 million income benefit related to share-based accounting, a $5.3 million income tax benefit related to the release of a valuation allowance and an income tax benefit of $4.9 million primarily related to research and development and foreign tax credits, partially offset by $11.5 million expense related to foreign tax rate changes.

The foreign tax rate changes are a result of the United Kingdom Parliament enacting legislation to increase the corporate tax rate to 25% effective April 2023.

The first six months of 2020 reflected $14.6 million in net discrete income tax benefits, which included a $14.5 million income benefit related to share-based accounting.

Excluding the net discrete income tax items in both periods, the effective tax rates would have been 23.9% for the first six months of 2021 and 22.8% for the first six months of 2020.

The first nine months of 2020 reflected $15.8 million in net discrete income tax benefits, which included a $15.2 million income benefit related to share-based accounting.

Excluding the net discrete income tax items in both periods, the effective tax rates would have been 23.9% for the first nine months of 2021 and 22.7% for the first nine months of 2020.

Segment Results

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Digital Imaging

Second Quarter Six Months

Third Quarter Nine Months

(dollars in millions) 2021 (a) 2020 2021 (a) 2020

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(a) On May 14, 2021, the Company completed the acquisition of FLIR, and the 2021 financial results of FLIR have been included since the date of the acquisition.

Second quarter of 2021 compared with the second quarter of 2020

The Digital Imaging segment’s second quarter of 2021 net sales increased 143.9%.

Operating income for the second quarter of 2021 increased 80.8%.

The second quarter of 2021 net sales increase included $301.4 million of incremental net sales from the FLIR acquisition as well as organic sales growth from industrial and scientific sensors and cameras, micro-electro-mechanical systems (“MEMS”) and geospatial imaging software.

The second quarter of 2021 net sales reflected the historical concentration of FLIR net sales in the second half of the quarter.

The increase in operating income in the second quarter of 2021 reflected the historical concentration of FLIR net sales which were disproportionately higher than the operating expenses, partially offset by $70.2 million of FLIR acquisition related transaction and purchase accounting expenses, which included $24.0 million of integration-related costs, $22.8 million in acquired intangible asset amortization expense and $23.4 million in inventory step-up expense.

Third quarter of 2021 compared with the third quarter of 2020

The Digital Imaging segment’s third quarter of 2021 net sales increased 217.3%.

Operating income for the third quarter of 2021 increased 108.6%.

The third quarter of 2021 net sales increase included $473.6 million of incremental net sales from the FLIR acquisition as well as organic sales growth from industrial and scientific sensors and cameras, x-ray products and micro-electro-mechanical systems (“MEMS”), partially offset by lower sales for geospatial imaging systems.

The increase in operating income in the third quarter of 2021 reflected the contribution from FLIR, partially offset by $82.3 million of FLIR acquisition-related transaction and purchase accounting expenses, which included $45.6 million in acquired intangible asset amortization expense, $35.2 million in inventory step-up expense and $1.5 million of integration-related costs.

The increase in operating income also reflected the impact of organic sales growth.

The second quarter of 2021 cost of sales increased $192.9 million and primarily reflected the impact of higher net sales.

Cost of sales as a percentage of net sales for the second quarter of 2021 decreased slightly to 56.7% from 57.1%.

Second quarter 2021 selling, general and administrative expenses increased $88.2 million and reflected the impact of higher net sales, as well as the acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

The selling, general and administrative expense percentage increased to 24.0% in the second quarter of 2021 from 21.3%.

The increase was primarily due to the impact of acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

First six months of 2021 compared with the first six months of 2020

The Digital Imaging segment’s first six months of 2021 net sales increased 74.0%.

Operating income for the first six months of 2021 increased 50.8%.

The first six months of 2021 net sales included $301.4 million incremental net sales from the FLIR acquisition as well as organic sales growth from industrial and scientific sensors and cameras, MEMS detectors for space imaging applications and geospatial imaging systems.

The second quarter of 2021 net sales reflected the historical uneven sales pattern for FLIR which resulted in higher sales in the second half of the quarter.

The increase in operating income in the second quarter of 2021 reflected the net sales contribution from FLIR, along with a disproportionately lower level of operating expenses, partially offset by $70.2 million of acquisition-related transaction and purchase accounting expenses related to FLIR which included $24.0 million of integration-related costs, $22.8 million in acquired intangible asset amortization expense and $23.4 million in inventory step-up expense.

The third quarter of 2021 cost of sales increased $310.3 million and primarily reflected the impact of higher net sales.

The cost of sales percentage increased to 59.1% in the third quarter of 2021 from 58.0%.

Third quarter 2021 selling, general and administrative expenses increased $115.8 million and reflected the impact of higher net sales, as well as the acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

The selling, general and administrative expense percentage increased slightly to 21.9% in the third quarter of 2021 from 21.1%.

Acquired intangible asset amortization expense

for the third quarter of 2021 was $50.1 million, compared with $4.5 million.

The third quarter 2021 amount included $45.6 million in acquired intangible asset amortization expense related to the FLIR acquisition.

First nine months of 2021 compared with the first nine months of 2020

The Digital Imaging segment’s first nine months of 2021 net sales increased 121.5%.

Operating income for the first nine months of 2021 increased 70.1%.

The first nine months of 2021 net sales included $775.0 million incremental net sales from the FLIR acquisition as well as organic sales growth from industrial and scientific sensors and cameras, x-ray products, MEMS and detectors for space imaging applications.

The increase in operating income in the first nine months of 2021 reflected the net sales contribution from FLIR partially offset by $152.5 million of acquisition-related transaction and purchase accounting expenses related to FLIR which included $25.5 million of integration-related costs, $68.4 million in acquired intangible asset amortization expense and $58.6 million in inventory step-up expense.

The increase in operating income also reflected the impact of organic sales growth.

The first six months of 2021 cost of sales increased $201.2 million and reflected the impact of higher sales.

The cost of sales percentage in 2021 decreased to 57.3%, compared with 58.1%.

Selling, general and administrative expenses, increased $88.3 million in the first six months of 2021 and reflected the impact of higher net sales, as well as the acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

The selling, general and administrative expense percentage increased to 22.7%% in the first six months of 2021 from 21.4%.

The first nine months of 2021 cost of sales increased $511.5 million and reflected the impact of higher sales.

The cost of sales percentage increased slightly to 58.2% in the first nine months of 2021, from 58.0%.

Selling, general and administrative expenses, increased $204.1 million in the first nine months of 2021 and reflected the impact of higher net sales, as well as the acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

The selling, general and administrative expense percentage increased to 22.3% in the first nine months of 2021 from 21.3%.

The increase was primarily due to the impact of acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition.

Acquired intangible asset amortization expense for the first nine months of 2021 was $82.1 million, compared with $13.5 million.

The first nine months of 2021 included $68.4 million in acquired intangible asset amortization expense related to the FLIR acquisition.

Instrumentation

Second Quarter Six Months

Third Quarter Nine Months

(dollars in millions) 2021 2020 2021 2020

8 unchanged sentences

Operating income as a % of net sales 21.9 % 19.2 % 21.6 % 18.5 %

Second quarter of 2021 compared with the second quarter of 2020

The Instrumentation segment’s second quarter of 2021 net sales increased 10.6%.

Operating income for the second quarter of 2021 increased 33.2%.

The second quarter of 2021 net sales increase resulted from higher sales of environmental instrumentation and test and measurement instrumentation, partially offset by lower sales of marine instrumentation.

Sales of environmental instrumentation and test and measurement instrumentation increased $18.5 million and $14.5 million, respectively.

Sales of marine instrumentation decreased $5.0 million.

Third quarter of 2021 compared with the third quarter of 2020

The Instrumentation segment’s third quarter of 2021 net sales increased 9.0%.

Operating income for the third quarter of 2021 increased 24.3%.

The third quarter of 2021 net sales increase resulted from higher sales of test and measurement instrumentation, environmental instrumentation and marine instrumentation.

Sales of test and measurement instrumentation increased $12.8 million, environmental instrumentation increased $7.6 million and marine instrumentation increased $3.2 million.

The increase in operating income reflected the impact of higher sales and improved margins across most product categories resulting from ongoing margin improvement initiatives.

The second quarter of 2021 cost of sales increased $5.9 million.

Cost of sales as a percentage of net sales for the second quarter of 2021 decreased to 52.7% from 56.1%.

Second quarter 2021 selling, general and administrative expenses increased $5.9 million, primarily as a result of higher net sales.

The selling, general and administrative expense percentage decreased slightly to 23.3% in the second quarter of 2021 from 23.6%.

First six months of 2021 compared with the first six months of 2020

The Instrumentation segment’s first six months 2021 net sales increased 5.4%.

Operating income for the first six months of 2021 increased of 24.9%.

The first six months of 2021 net sales increase resulted from higher sales of environmental instrumentation and test and measurement instrumentation, partially offset by lower sales of marine instrumentation.

The third quarter of 2021 cost of sales increased $3.7 million.

The cost of sales percentage decreased to 52.5% in the third quarter of 2021 from 55.8%.

Third quarter 2021 selling, general and administrative expenses increased $7.7 million, primarily as a result of higher net sales.

The selling, general and administrative expense percentage increased slightly to 23.8% in the third quarter of 2021 from 23.1%.

First nine months of 2021 compared with the first nine months of 2020

The Instrumentation segment’s first nine months 2021 net sales increased 6.5%.

Operating income for the first nine months of 2021 increased of 24.7%.

The first nine months of 2021 net sales increase resulted from higher sales of environmental instrumentation and test and measurement instrumentation, partially offset by lower sales of marine instrumentation.

Sales of environmental instrumentation and test and measurement instrumentation increased $31.6 million and $30.5 million, respectively.

Sales of marine instrumentation decreased $9.1 million.

The increase in operating income the first six months of 2021 reflected the impact of higher sales and improved margins across most product categories resulting from ongoing margin improvement initiatives.

The first six months of 2021 cost of sales increased by $4.0 million and primarily reflected the impact of higher sales.

The cost of sales percentage decreased to 53.5% from 55.7%.

The first six months of 2021 selling, general and administrative expenses increased by $0.4 million.

The selling, general and administrative expense percentage decreased to 23.2% in the first six months of 2021 from 24.4%.

The increase in operating income the first nine months of

2021 reflected the impact of higher sales and improved margins across most product categories resulting from ongoing margin improvement initiatives.

The first nine months of 2021 cost of sales increased by $7.7 million and primarily reflected the impact of higher sales.

The cost of sales percentage decreased to 53.2% in the first nine months of 2021 from 55.7%.

The first nine months of 2021 selling, general and administrative expenses increased by $8.1 million.

The selling, general and administrative expense percentage decreased slightly to 23.4% in the first nine months of 2021 from 24.0%.

Aerospace and Defense Electronics

Second Quarter Six Months

Third Quarter Nine Months

(dollars in millions) 2021 2020 2021 2020

8 unchanged sentences

Operating income as a % of net sales 22.2 % 18.4 % 19.9 % 13.0 %

Second quarter of 2021 compared with the second quarter of 2020

The Aerospace and Defense Electronics segment’s second quarter of 2021 net sales increased 6.5%.

Operating income for the second quarter of 2021 increased 62.3%.

The second quarter of 2021 net sales reflected $9.4 million of higher sales for defense and space electronics, partially offset by slightly lower sales of aerospace electronics of $0.1 million.

Operating income in the second quarter of 2021 reflected the impact of higher sales and a lower cost structure due to actions taken in 2020, lower severance, facility consolidation and lower research and development costs.

Operating income in the second quarter of 2021 included $0.1 million in severance and facility consolidation costs, compared with $5.2 million in severance and facility consolidation costs.

Research and development expense was lower by $3.1 million in the second quarter of 2021, and primarily reflected lower spending for aerospace electronics.

The second quarter of 2021 cost of sales increased $3.5 million and reflected the impact of higher sales, partially offset by lower severance and facility consolidation expense.

Cost of sales as a percentage of net sales for the second quarter of 2021 decreased to 65.6% from 67.4% and reflected impact of lower severance and facility consolidation expense.

Selling, general and administrative expenses, including research and development expense, decreased to $23.9 million in the second quarter of 2021 from $29.0 million and reflected the impact of impact of lower severance, facility consolidation and lower research and development expense, partially offset by the impact of higher net sales.

The selling, general and administrative expense percentage decreased to 15.7% in the second quarter of 2021 from 20.3% and reflected the impact of lower severance, facility consolidation and lower research and development expense.

First six months of 2021 compared with the first six months of 2020

The Aerospace and Defense Electronics segment’s first six months of 2021 net sales increased 1.4%.

Operating income for the first six months of 2021 increased 83.5%.

The first six months of 2021 net sales reflected $15.0 million of higher sales for defense and space electronics, partially offset by lower sales of $10.8 million for aerospace electronics.

Third quarter of 2021 compared with the third quarter of 2020

The Aerospace and Defense Electronics segment’s third quarter of 2021 net sales increased 11.7%.

Operating income for the third quarter of 2021 increased 34.5%.

The third quarter of 2021 net sales reflected $9.9 million of higher sales for defense and space electronics and $7.1 million for aerospace electronics.

Operating income in the third quarter of 2021 reflected the impact of higher sales and a lower cost structure due to actions taken in 2020, lower research and development costs.

Research and development expense was lower by $2.8 million in the third quarter of 2021, and primarily reflected lower spending for aerospace electronics.

The third quarter of 2021 cost of sales increased $12.5 million and reflected the impact of higher sales.

The cost of sales percentage increased to 63.7% for the third quarter of 2021, from 62.6%.

Selling, general and administrative expenses, including research and development expense, decreased to $22.6 million in the third quarter of 2021 from $27.2 million and reflected the impact lower research and development expense, partially offset by the impact of higher net sales.

The selling, general and administrative expense percentage decreased to 14.0% in the third quarter of 2021 from 18.8% and reflected the impact of lower research and development expense.

First nine months of 2021 compared with the first nine months of 2020

The Aerospace and Defense Electronics segment’s first nine months of 2021 net sales increased 4.8%.

Operating income for the first nine months of 2021 increased 60.8%.

The first nine months of 2021 net sales reflected $24.9 million of higher sales for defense and space electronics, partially offset by lower sales of $3.7 million for aerospace electronics.

The weakness in the commercial aerospace industry, due to COVID, has negatively affected sales of aerospace electronics.

The increase in operating income in the first six months of 2021 primarily reflected the impact of higher sales and $8.2 million of lower severance, facility consolidation cost.

Research and development expense was lower by $7.8 million in the first six months of 2021, and primarily reflected lower spending for aerospace electronics.

The first six months of 20211 cost of sales decreased by $7.7 million and reflected the impact of lower severance and facility consolidation costs, partially offset by higher sales.

Cost of sales as a percentage of sales for the first six months of 2021 decreased to 65.7%% from 69.2% in the first six months of 2021 and reflected impact of lower severance and facility consolidation costs.

Selling, general and administrative expenses, including research and development expense, decreased to $47.0 million in the first six months of 2021, compared with $60.9 million for the first six months of 2020 and impact of lower severance, facility consolidation and lower research and development expense.

The selling, general and administrative expense percentage decreased to 15.5% in the first six months of 2021, compared with 20.4% and reflected impact of lower severance, facility consolidation and lower research and development expense.

The increase in operating income in the first nine months of 2021 primarily reflected the impact of higher sales and $7.5 million of lower severance, facility consolidation cost.

Research and development expense was lower by $10.7 million in the first nine months of 2021, and primarily reflected lower spending for aerospace electronics.

The first nine months of 2021 cost of sales increased by $4.8 million and reflected the impact of higher sales, partially offset by the impact of lower severance and facility consolidation costs.

The cost of sales percentage decreased to 65.0% in the first nine months of 2021, from 67.0% and reflected impact of lower severance and facility consolidation costs.

Selling, general and administrative expenses, including research and development expense, decreased to $69.6 million in the first nine months of 2021, compared with $88.1 million for the first nine months of 2020 and impact of lower severance, facility consolidation and lower research and development expense.

The selling, general and administrative expense percentage decreased to 15.0% in the first nine months of 2021, compared with 19.8% and reflected impact of lower severance, facility consolidation and lower research and development expense.

Engineered Systems

Second Quarter Six Months

Third Quarter Nine Months

(dollars in millions) 2021 2020 2021 2020

6 unchanged sentences

Operating income as a % of net sales 11.2 % 12.4 % 12.3 % 11.7 %

Second quarter of 2021 compared with the second quarter of 2020

The Engineered Systems segment’s second quarter of 2021 net sales decreased 1.5%.

Operating income for the second quarter of 2020 increased 1.9%.

The second quarter of 2021 net sales reflected higher sales of $3.0 million of engineered products and $0.7 million for energy systems, more than offset by lower sales of $5.2 million of turbine engines.

The higher sales for engineered products primarily reflected increased sales from missile defense and marine manufacturing programs.

Third quarter of 2021 compared with the third quarter of 2020

The Engineered Systems segment’s third quarter of 2021 net sales increased 1.4%.

Operating income for the third quarter of 2020 decreased 8.0%.

The third quarter of 2021 net sales primarily reflected higher sales of $7.8 million of engineered products, partially offset by lower sales of $6.3 million of turbine engines.

The higher sales for engineered products primarily reflected increased sales from medical modeling and analysis, missile defense and marine manufacturing programs.

Teledyne exited the turbine engine business in the first quarter of 2021.

The second quarter of 2021 cost of sales increased $0.2 million.

Cost of sales as a percentage of net sales for the second quarter of 2021 increased to 82.8% from 81.3%.

Selling, general and administrative expense was $5.9 million for the second quarter of 2021, compared with $7.8 million.

The selling, general and administrative expense percentage was 6.0% for the second quarter of 2021 compared with 7.8%.

First six months of 2021 compared with the first six months of 2020

The Engineered Systems segment’s first six months of 2021 net sales increased 3.4%.

Operating income for the first six months of 2021 increased 16.7%.

The first six months of 2021 net sales reflected higher sales of $11.7 million of engineered products and services, partially offset by lower net sales of $4.9 for turbine engines and $0.1 million of lower sales of energy systems products.

The higher sales for engineered products primarily reflected increased sales from missile defense and other marine manufacturing programs, as well as electronic manufacturing services products.

Operating income in the first six months of 2021 reflected the impact of higher sales.

The first six months of 2021 cost of sales increased by $4.9 million and primarily reflected the impact of higher sales.

Cost of sales as a percentage of sales for the first six months of 2021 decreased slightly to 81.1% from 81.3%.

Selling, general and administrative expenses, including research and development expense, decreased to $12.5 million for the first six months of 2021, compared with $14.4 million for the first six months of 2020.

The selling, general and administrative expense percentage decreased to 6.1% for the first six months of 2021 compared with 7.4%.

The third quarter of 2021 cost of sales increased $2.7 million.

The cost of sales percentage increased to 82.6% for the third quarter of 2021,from 81.1%.

Selling, general and administrative expense was $6.3 million for the third quarter of 2021, compared with $6.6 million.

The selling, general and administrative expense percentage decreased slightly to 6.2% for the third quarter of 2021 from 6.5%.

First nine months of 2021 compared with the first nine months of 2020

The Engineered Systems segment’s first nine months of 2021 net sales increased 2.7%.

Operating income for the first nine months of 2021 increased 7.8%.

The first nine months of 2021 net sales primarily reflected higher sales of $19.5 million of engineered products and services, partially offset by lower net sales of $11.2 million for turbine engines.

The higher sales for engineered products primarily reflected increased sales from missile defense, medical modeling and analysis, and marine and other manufacturing programs.

Operating income in the first nine months of 2021 reflected the impact of higher sales.

The first nine months of 2021 cost of sales increased by $7.6 million and primarily reflected the impact of higher sales.

The cost of sales as a percentage increased slightly to 81.6% for the first nine months of 2021,from 81.2%.

Selling, general and administrative expenses, including research and development expense, decreased to $18.8 million for the first nine months of 2021, compared with $21.0 million for the first nine months of 2020.

The selling, general and administrative expense percentage decreased to 6.1% for the first nine months of 2021, compared with 7.1%.

Financial Condition, Liquidity and Capital Resources

Our net cash provided by operating activities was $336.2 million for the first six months of 2021, compared with net cash provided by operating activities of $232.2 million.

The higher cash provided by operating activities in the first six months of 2021 reflects improved working capital management, which included a focus on inventory reduction initiatives, and the cash flow contribution from FLIR, partially offset by after tax payments of $66.7 million for expenses related to the FLIR acquisition and $33.6 million in higher income tax payments.

Our net cash used by investing activities was $3,761.8 million for the first six months of 2021, compared with net cash used by investing activities of $65.7 million.

Our net cash provided by operating activities was $529.0 million for the first nine months of 2021, compared with net cash provided by operating activities of $382.5 million.

The higher cash provided by operating activities in the first nine months of 2021 reflects improved working capital management, which included a focus on inventory reduction initiatives, and the cash flow contribution from FLIR, partially offset by after tax payments of $68.8 million for expenses related to the FLIR acquisition, $15.1 million in higher income tax payments and higher interest payments.

Our net cash used by investing activities was $3,790.4 million for the first nine months of 2021, compared with net cash used by investing activities of $80.9 million.

The 2021 amount includes the cash portion of the purchase price for the FLIR acquisition of $3.7 billion, net of cash acquired.

The first six months of 2020 included $29.0 million for the OakGate acquisition acquired on January 5, 2020.

Capital expenditures for the first six months of 2021 and 2020 were $38.4 million and $36.8 million, respectively.

Our goodwill was $7,515.9 million at July 4, 2021 and $2,150.0 million at January 3, 2021.

The first nine months of 2020 included $29.0 million for the OakGate acquisition acquired on January 5, 2020.

Capital expenditures for the first nine months of 2021 and 2020 were $67.6 million and $52.0 million, respectively.

Our goodwill was $7,899.5 million at October 3, 2021 and $2,150.0 million at January 3, 2021.

The increase in goodwill primarily reflected preliminary amounts recorded for the FLIR acquisition.

Teledyne’s net acquired intangible assets were $2,765.8 million at July 4, 2021 and $409.7 million at January 3, 2021.

Teledyne’s net acquired intangible assets were $2,705.2 million at October 3, 2021 and $409.7 million at January 3, 2021.

The increase in the balance of net acquired intangible assets reflected preliminary amounts recorded for the FLIR acquisition.

The Company is in the process of specifically identifying the amount assigned to certain assets, including acquired intangible assets, and liabilities and the related impact on taxes and goodwill for the FLIR acquisition.

The amounts recorded as of July 4, 2021 are preliminary since there was insufficient time between the acquisition date and the end of the period to finalize the analysis.

Financing activities provided cash of $3,451.4 million for the first six months of 2021, compared with cash provided by financing activities of $27.8 million.

The higher cash provided by financing activities in the first six months of 2021 included the proceeds of debt incurred to fund the cash portion of the FLIR acquisition.

Proceeds from the exercise of stock options were $15.9 million for the first six months of 2021 compared with $28.2 million for the first six months of 2020.

Total debt at July 4, 2021 was $4,742.0 million compared with $778.5 million at January 3, 2021.

The debt balance at July 4, 2021, includes the debt incurred in 2021 for the cash portion of the consideration for the FLIR acquisition.

At July 4, 2021, Teledyne had $298.3 million in outstanding letters of credit.

At July 4, 2021, $743.5 million was available under the $1.150 billion credit facility, after reductions of $125.0 million in borrowings and $281.5 million in outstanding letters of credit.

The outstanding letters of credit include a $260.0 million letter of credit to the Swedish Tax Authority (“STA”), related to a disputed 2018 tax reassessment issued to a FLIR subsidiary in Sweden.

The disputed tax reassessment concerns the use of tax credits applied against capital gains pursuant to European Union Council Directive 2009/133/EC, commonly referred to as the EU Merger Directive, and assesses taxes and penalties totaling approximately $357.8 million (Swedish kroner 3.1 billion) as of July 4, 2021.

On March 26, 2020, FLIR received an adverse judgment from the First Instance Court of Sweden (the “Court”) regarding the STA’s reassessment.

FLIR has appealed the decision to the Administrative Court of Appeal in Stockholm.

The Appellate Court hearing has been scheduled for September 15, 2021.

Historically, FLIR has not accrued a liability for this matter.

No adjustments have been made for this Swedish tax matter in Teledyne’s current preliminary estimates of the purchase price allocation.

An adverse resolution to this Swedish tax matter could materially impact cash flow.

The amounts recorded as of October 3, 2021 are preliminary since there was insufficient time between the acquisition date and the end of the period to finalize the analysis.

Financing activities provided cash of $3,147.3 million for the first nine months of 2021, compared with cash used by financing activities of $45.9 million.

The higher cash provided by financing activities in the first nine months of 2021 included the proceeds of debt incurred to fund the cash portion of the FLIR acquisition.

Proceeds from the exercise of stock options were $21.4 million for the first nine months of 2021 compared with $29.5 million for the first nine months of 2020.

Total debt at October 3, 2021 was $4,441.7 million compared with $778.5 million at January 3, 2021.

The debt balance at October 3, 2021, includes the debt incurred in 2021 for the cash portion of the consideration for the FLIR acquisition.

At October 3, 2021, Teledyne had $288.9 million in outstanding letters of credit.

At October 3, 2021, $751.1 million was available under the $1.150 billion credit facility, after reductions of $125.0 million in borrowings and $273.9 million in outstanding letters of credit.

The outstanding letters of credit include a $253.6 million letter of credit to the STA related to a disputed 2018 tax reassessment issued to a FLIR subsidiary in Sweden.

See Note 2 to these Notes to Condensed Consolidated Financial Statements for information regarding the STA’s reassessment of tax for the year ending December 31, 2012 related to one of FLIR’s non-operating subsidiaries in Sweden.

Our principal cash and capital requirements are to fund working capital needs, capital expenditures, income tax payments, and debt service requirements, as well as acquisitions.

1 unchanged sentence

To support acquisitions, we may raise additional capital.

We currently expect to spend approximately $132.0 million for capital expenditures in 2021, of which $38.4 million has been spent in the first six months of 2021.

We currently expect to spend approximately $115.0 million for capital expenditures in 2021, of which $67.6 million has been spent in the first nine months of 2021.

No cash pension contributions have been made since 2013 or are planned for the remainder of 2021 for the domestic qualified pension plans.

Our credit agreements require Teledyne to comply with various financial and operating covenants and at July 4, 2021, the Company was in compliance with these covenants.

As of July 4, 2021, the Company had an adequate amount of margin between required financial covenant ratios (as required by applicable credit agreements) and our actual ratios.

At July 4, 2021, the required financial ratios and the actual ratios were as follows:

$1.150 billion Credit Facility expires March 2026 and $150.0 million term loan due October 2024 (issued October 2019)

Our credit agreements require Teledyne to comply with various financial and operating covenants and at October 3, 2021, the Company was in compliance with these covenants.

As of October 3, 2021, the Company had an adequate amount of margin between required financial covenant ratios (as required by applicable credit agreements) and our actual ratios.

At October 3, 2021, the required financial ratios and the actual ratios were as follows:

$1.15 billion Credit Facility expires March 2026, $1.0 billion term loan due May 2026 and $150.0 million term loan due October 2024 (issued October 2019)

Financial Covenants Requirement Actual Measure

2 unchanged sentences

a) The Consolidated Leverage Ratio is equal to Net Debt/EBITDA as defined in our $1.150 billion credit agreement.

Requirement changes to 4.5 to 1 for the second and third quarter of 2022 and to 4.0 to 1 for the fourth quarter of 2022 and 3.5 to 1 thereafter.

b) The Consolidated Interest Coverage Ratio is equal to EBITDA/Interest as defined in our $1.150 billion credit agreement.

15 unchanged sentences

Many factors could change anticipated results, including ongoing challenges and uncertainties posed by the COVID pandemic for businesses and governments around the world, including production, supply, contractual and other disruptions, including facility closures and furloughs and travel restrictions;

the inability to integrate FLIR successfully, to retain customers and key employees and to achieve operating synergies, including the possibility that the anticipated benefits of the transaction are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where Teledyne and FLIR do business;

strength of the economy and competitive factors in the areas where Teledyne and FLIR do business;

changes in relevant tax and other laws;

14 unchanged sentences

the imposition and expansion of, and responses to, trade sanctions and tariffs;

the continuing review and resolution of FLIR’s export matters;

the continuing review and resolution of FLIR’s tax and export matters;

escalating economic and diplomatic tension between China and the United States;

7 unchanged sentences

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

An adverse tax ruling by the Swedish Appellate Court related to a pre-acquisition assessment by the Swedish Tax Authority against a FLIR subsidiary would materially impact our cash flow.

While the Company’s growth strategy includes possible acquisitions, we cannot provide any assurance as to when, if or on what terms any acquisitions will be made.

7 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements