Strategy/Overview
Our strategy continues to emphasize growth in our core markets of instrumentation, digital imaging, aerospace and defense electronics and engineered systems. Our core markets are characterized by high barriers to entry and include specialized products and services not likely to be commoditized. We intend to strengthen and expand our core businesses with targeted acquisitions. We aggressively pursue operational excellence to continually improve our margins and earnings. At Teledyne, operational excellence includes the rapid integration of the businesses we acquire. Using complementary technology across our businesses and internal research and development, we seek to create new products to grow our company and expand our addressable markets.
Consistent with this strategy, we made five acquisitions in 2012. We acquired VariSystems Inc. ("VariSystems") in the first quarter, a majority interest in the parent company of Optech Incorporated ("Optech") in the second quarter, and LeCroy Corporation ("LeCroy"), the parent company of PDM Neptec Limited ("PDM Neptec") and BlueView Technologies, Inc. ("BlueView") in the third quarter. In the first nine months of 2011, we acquired DALSA Corporation ("DALSA"), a majority interest in Nova Sensors, Inc. and a minority interest investment in Optech. We also continue to evaluate our businesses to ensure that they are aligned with our strategy. On April 19, 2011, we completed the sale of our general aviation piston engine businesses, which comprised the former Aerospace Engines and Components segment. Accordingly, our consolidated financial statements classify the Aerospace Engines and Components segment as a discontinued operation.
Our Recent Acquisitions
On August 3, 2012, Teledyne acquired the stock of LeCroy for $301.3 million, net of cash acquired. LeCroy, headquartered in Chestnut Ridge, New York is a leading supplier of oscilloscopes, protocol analyzers and signal integrity test solutions. LeCroy had sales of $178.1 million for its fiscal year ended June 30, 2011 and is part of the Instrumentation segment.
Also on August 3, 2012, a subsidiary of Teledyne acquired the parent company of PDM Neptec for $7.4 million in cash, net of cash acquired. Teledyne funded the purchase from cash on hand. PDM Neptec, located in Hampshire, United Kingdom, is part of the Instrumentation segment and operates as Teledyne Impulse-PDM Ltd. PDM Neptec had sales of GBP 5.5 million for its fiscal year ended March 31, 2012.
On July 2, 2012, a subsidiary of Teledyne acquired BlueView for $16.3 million in cash, net of cash acquired. BlueView, located in Seattle, Washington, is part of the Instrumentation segment and operates as Teledyne BlueView, Inc. BlueView had sales of $7.1 million for its fiscal year ended December 31, 2011.
On April 2, 2012, Teledyne acquired a majority interest in the parent company of Optech for $27.9 million, net of cash acquired. The purchase increased Teledyne's ownership percentage to 51 percent from the original 19 percent interest purchased in the first quarter of 2011. With the April 2012 purchase, we now consolidate Optech's financial results into Teledyne's results with an appropriate adjustment for the minority ownership. Optech had sales of CAD $54.7 million for its fiscal year ended March 30, 2012 and is reported as part of the Digital Imaging segment.
On February 25, 2012, Teledyne acquired VariSystems for $34.9 million, net of cash acquired. Teledyne paid a $1.4 million purchase price adjustment in the second quarter of 2012. VariSystems, headquartered in Calgary, Alberta, Canada, is a leading supplier of custom harsh environment interconnects used in energy exploration and production. VariSystems had sales of CAD $27.5 million for its fiscal year ended May 31, 2011 and is part of the Aerospace and Defense Electronics segment.
On February 12, 2011, the Company acquired the stock of DALSA for an aggregate purchase price of $339.5 million in cash. DALSA had sales of CAD $212.3 million for its fiscal year ended December 2010 and operates within the Digital Imaging segment.
Teledyne funded the purchases from borrowings under its credit facility and cash on hand.
For a further description of the Company's acquisition and divestiture activity for the year ended January 1, 2012, please refer to Notes 3 and 16 of our 2011 Form 10-K ("2011 Form 10-K").

Results of Operations
                                                             (in millions)
                                              Third Quarter                  Nine Months
                                           2012           2011           2012           2011
Net Sales                              $    547.4     $    496.4     $  1,559.9     $  1,467.4
Costs and expenses
Cost of sales                               349.0          331.3        1,020.1          975.0
Selling, general and administrative
expenses                                    138.1          108.3          364.3          319.0
Total costs and expenses                    487.1          439.6        1,384.4        1,294.0
Income before other income/(expense)
and income taxes                             60.3           56.8          175.5          173.4
Other income/(expense), net                   1.2           (3.8 )          2.2           (2.5 )
Interest and debt expense, net               (4.5 )         (3.7 )        (12.6 )        (12.4 )
Income from continuing operations
before income taxes                          57.0           49.3          165.1          158.5
Provision for income taxes                   13.9           15.2           46.8           53.1
Net income from continuing operations
including noncontrolling interest            43.1           34.1          118.3          105.4
Loss from discontinued operations, net
of income taxes                                 -              -              -           (0.7 )
Gain on sale of discontinued
operations, net of income taxes                 -              -              -          113.8
Net income                                   43.1           34.1          118.3          218.5
Less: Net income attributable to
noncontrolling interest                      (0.4 )            -           (0.4 )         (0.1 )
Net income attributable to Teledyne    $     42.7     $     34.1     $    117.9     $    218.4
Net income from continuing operations
including noncontrolling interest      $     43.1     $     34.1     $    118.3     $    105.4
Less: Net income attributable to
noncontrolling interest                      (0.4 )            -           (0.4 )         (0.1 )
Net income from continuing operations        42.7           34.1          117.9          105.3
Loss from discontinued operations, net
of income taxes                                 -              -              -           (0.7 )
Gain on sale of discontinued
operations, net of income taxes                 -              -              -          113.8
Net income attributable to Teledyne    $     42.7     $     34.1     $    117.9     $    218.4

Third quarter of 2012 compared with the third quarter of 2011 Our third quarter 2012 sales were $547.4 million, compared with sales of $496.4 million for the same period of 2011, an increase of 10.3%. Net income from continuing operations was $42.7 million ($1.14 per diluted share) for the third quarter of 2012, compared with $34.1 million ($0.91 per diluted share) for the third quarter of 2011, an increase of 25.2%.
The third quarter of 2012, compared with the same period in 2011, reflected higher sales in each business segment except Aerospace and Defense Electronics. Incremental revenue in the third quarter of 2012 from recent acquisitions was $58.3 million.
Segment earnings increased to $69.9 million for the third quarter of 2012, from $65.7 million for the same period of 2011. Segment earnings reflected $3.8 million of acquisition related transaction costs. The incremental operating profit included in the results for the third quarter of 2012 from recent acquisitions was $2.2 million and included acquisition related transaction costs.
The third quarter of 2012 included pension expense of $1.7 million, compared with pension expense of $1.5 million in the third quarter of 2011. Pension expense allocated to contracts pursuant to U.S. Government Cost Accounting Standards ("CAS") was $3.1 million in the third quarter of 2012, compared with $2.9 million in the third quarter of 2011.
In the third quarters of 2012 and 2011, we recorded a total of $2.3 million and $1.5 million, respectively, in stock option compensation expense. Employee stock option grants are expensed evenly over the three year vesting period. The lower amount in 2011 primarily reflected the absence of employee stock option grants in 2009.

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

                                    Third       Third
                                   Quarter     Quarter
(Dollars in millions)               2012        2011
Instrumentation
Sales                             $ 193.8     $ 157.1
Cost of sales                     $ 105.6     $  89.6
Cost of sales % of sales             54.5 %      57.0 %
Digital Imaging
Sales                             $ 108.1     $  95.0
Cost of sales                     $  69.3     $  65.8
Cost of sales % of sales             64.1 %      69.3 %
Aerospace and Defense Electronics
Sales                             $ 164.2     $ 171.2
Cost of Sales                     $ 108.5     $ 116.9
Cost of sales % of sales             66.1 %      68.3 %
Engineered Systems
Sales                             $  81.3     $  73.1
Costs of sales                    $  65.6     $  59.0
Cost of sales % of sales             80.7 %      80.7 %
Total Company
Sales                             $ 547.4     $ 496.4
Costs of sales                    $ 349.0     $ 331.3
Cost of sales % of sales             63.8 %      66.7 %

Cost of sales increased by $17.7 million in the third quarter of 2012, compared with the third quarter of 2011, which primarily reflected the impact of higher sales. Cost of sales as a percentage of sales for the third quarter of 2012 decreased to 63.8% from 66.7% in the third quarter of 2011 and reflected the impact of the LeCroy and Optech acquisitions which carry a lower cost of sales percentage than the average for our other businesses.
Certain contracts are accounted for under the percentage of completion ("POC") method and related contract cost and revenue estimates for significant contracts are generally reviewed and reassessed quarterly. The aggregate effects of these changes in estimates on contracts accounted for under the POC accounting method, in the third quarters of 2012 and 2011, were $5.4 million and $2.0 million of favorable operating income and $6.0 million and $1.4 million of unfavorable operating income, respectively.
Selling, general and administrative expenses, including research and development and bid and proposal expense, increased by $29.8 million in the third quarter of 2012, compared with the third quarter of 2011, and reflected higher research and development expense due to our acquisitions, the impact of higher sales, $3.8 million in acquisition related expenses and higher acquired intangible asset amortization expense. Selling, general and administrative expenses for the third quarter of 2012, as a percentage of sales, increased to 25.2%, compared with 21.8% in the third quarter of 2011 and reflected the impact of acquisition related transaction costs, higher research and development expense and also reflected the impact of the LeCroy and Optech acquisitions which carry a higher selling, general and administrative expense percentage than the average for Teledyne's other businesses. Corporate expense was $9.6 million for the third quarter of 2012, compared with $8.9 million for the third quarter of 2011, and reflected higher employee related expenses.
Interest expense, net of interest income, was $4.5 million in the third quarter of 2012, compared with $3.7 million for the third quarter of 2011. The increase in interest expense primarily reflected the impact of higher outstanding debt levels. Other income and expense in the third quarter of 2011 included a $4.5 million pretax charge to write off a minority investment in a private company. The Company's effective income tax rate for the third quarter of 2012 was 24.5% compared with 30.9% for the third quarter of 2011. The decrease reflected a remeasurement of uncertain tax positions in the quarter, as well as a change in the proportion of domestic and international income. The third quarter of 2012 included tax benefits of $3.1 million related to the remeasurement of uncertain tax positions, including an expiration of the statute of limitations in the U.S. The third quarter of 2011 included tax benefits of $2.4 million related to the remeasurement of uncertain tax positions, including an expiration of

the statute of limitations in the U.S. Excluding the impact of the remeasurements, the effective tax rate would have been 30.0% for the third quarter of 2012, compared with 35.4% for the third quarter of 2011. First nine months of 2012 compared with the first nine months of 2011 Our first nine months 2012 sales were $1,559.9 million, compared with sales of $1,467.4 million for the same period of 2011, an increase of 6.3%. Net income from continuing operations was $117.9 million ($3.16 per diluted share) for the first nine months of 2012, compared with $105.3 million ($2.82 per diluted share) for the first nine months of 2011, an increase of 12.0%. Net income including discontinued operations was $117.9 million ($3.16 per diluted share) for the first nine months of 2012, compared with $218.4 million ($5.85 per diluted share) for the first nine months of 2011. The first nine months of 2011 includes income from discontinued operations of $113.1 million, which includes a gain on the sale of discontinued operations of $113.8 million.
The first nine months of 2012, compared with the same period in 2011, reflected higher sales in the Instrumentation and Digital Imaging segments and lower sales in the Aerospace and Defense Electronics and Engineered Systems segments. Incremental revenue in the first nine months of 2012 from recent acquisitions was $114.4 million.
Segment earnings increased to $202.3 million for the first nine months of 2012, from $200.8 million for the same period of 2011, and reflected higher results in each business segment except the Instrumentation segment. Segment earnings reflected expenses related to new product development and acquisition related transaction costs. The incremental operating profit included in the results for the first nine months of 2012 from recent acquisitions was $8.4 million and included $5.3 million in acquisition related transaction costs.
The first nine months of 2012 included pension expense of $5.0 million, compared with $5.2 million in the first nine months of 2011. Pension expense allocated to contracts pursuant to CAS was $9.0 million in the first nine months of 2012, compared with $8.9 million in the first nine months of 2011.
In the first nine months of 2012 and 2011, we recorded a total of $5.9 million and $4.3 million, respectively, in stock option compensation expense. The lower amount in 2011 primarily reflected the absence of employee stock option grants in 2009.
The table below presents sales and cost of sales by segment and total company:

                                     Nine          Nine
                                    Months        Months
(Dollars in millions)                2012          2011
Instrumentation
Sales                             $   516.8     $   467.7
Cost of sales                     $   297.8     $   267.5
Cost of sales % of sales               57.6 %        57.2 %
Digital Imaging
Sales                             $   313.2     $   257.4
Cost of sales                     $   203.5     $   170.2
Cost of sales % of sales               65.0 %        66.1 %
Aerospace and Defense Electronics
Sales                             $   497.8     $   507.7
Cost of Sales                     $   330.0     $   347.4
Cost of sales % of sales               66.3 %        68.4 %
Engineered Systems
Sales                             $   232.1     $   234.6
Costs of sales                    $   188.8     $   189.9
Cost of sales % of sales               81.3 %        80.9 %
Total Company
Sales                             $ 1,559.9     $ 1,467.4
Costs of sales                    $ 1,020.1     $   975.0
Cost of sales % of sales               65.4 %        66.4 %

Cost of sales increased by $45.1 million in the first nine months of 2012, compared with the first nine months of 2011, which primarily reflected the impact of higher sales. Cost of sales as a percentage of sales for the first nine months of 2012, was

65.4%, compared with 66.4% for the first nine months of 2011 and largely reflected favorable product mix differences in the Aerospace and Defense Electronics segment and also reflected the impact of the Optech acquisition which carries a lower cost of sales percentage than the average for our other businesses.
Certain contracts are accounted for under the POC method and related contract cost and revenue estimates for significant contracts are generally reviewed and reassessed quarterly. The aggregate effects of changes in estimates on contracts accounted for under the percentage-of-completion accounting method, in the first nine months of 2012 and 2011, were $12.0 million and $4.1 million of favorable operating income and $14.1 million and $3.2 million of unfavorable operating income, respectively.
Selling, general and administrative expenses, including research and development and bid and proposal expense, in total dollars were higher by $45.3 million in the first nine months of 2012, compared with the first nine months of 2011, and reflected higher research and development expense due to our acquisitions, the impact of higher sales and higher acquired intangible asset amortization. Selling, general and administrative expenses for the first nine months of 2012, as a percentage of sales, increased to 23.4%, compared with 21.7% in the first nine months of 2011 and reflected higher acquired intangible asset amortization and higher research and development expense due to acquisitions. Corporate expense was $26.8 million for the first nine months of 2012, compared with $27.4 million for the first nine months of 2011.
Interest expense, net of interest income, was $12.6 million in the first nine months of 2012, compared with $12.4 million for the first nine months of 2011. Other income and expense in the first nine months of 2012 included foreign currency translation gains of $0.4 million, compared with $1.3 million for the first nine months of 2011 and a $0.6 million gain on the purchase of the majority interest in Optech. Other income and expense in the first nine months of 2011 also included a $4.5 million pretax charge to write off a minority investment in a private company.
The Company's effective income tax rate for the first nine months of 2012 was 28.4% compared with 33.5% for the first nine months of 2011. The decrease reflected a remeasurement of uncertain tax positions in the first nine months of 2012, as well as a change in the proportion of domestic and international income. The first nine months of 2012 included tax benefits of $4.3 million related to the remeasurement of uncertain tax positions, including an expiration of the statute of limitations in the U.S. The first nine months of 2011 included tax benefits of $2.4 million related to the remeasurement of uncertain tax positions, including an expiration of the statute of limitations in the U.S. Excluding the impact of the remeasurement, the effective tax rate would have been 31.0% for the first nine months of 2012, compared with 35.0% for the first nine months of 2011.

Segment Results:
The following table sets forth the sales and operating profit for each segment
(amounts in millions):
                               Third        Third                      Nine          Nine
                              Quarter      Quarter         %          Months        Months          %
                                2012         2011        Change        2012          2011         Change
Net sales:
Instrumentation              $  193.8     $  157.1        23.4  %   $   516.8     $   467.7        10.5  %
Digital Imaging                 108.1         95.0        13.8  %       313.2         257.4        21.7  %
Aerospace and Defense
Electronics                     164.2        171.2        (4.1 )%       497.8         507.7        (1.9 )%
Engineered Systems               81.3         73.1        11.2  %       232.1         234.6        (1.1 )%
Total net sales              $  547.4     $  496.4        10.3  %   $ 1,559.9     $ 1,467.4         6.3  %
Segment operating profit:
Instrumentation              $   29.9     $   32.2        (7.1 )%   $    89.5     $    94.6        (5.4 )%
Digital Imaging                   7.6          2.3       230.4  %        19.4          13.8        40.6  %
Aerospace and Defense
Electronics                      24.1         24.8        (2.8 )%        71.5          70.8         1.0  %
Engineered Systems                8.3          6.4        29.7  %        21.9          21.6         1.4  %
Total segment operating
profit                           69.9         65.7         6.4  %       202.3         200.8         0.7  %
Corporate expense                (9.6 )       (8.9 )       7.9  %       (26.8 )       (27.4 )      (2.2 )%
Other income/(expense), net       1.2         (3.8 )       *              2.2          (2.5 )       *
Interest expense, net            (4.5 )       (3.7 )      21.6  %       (12.6 )       (12.4 )       1.6  %
Income from continuing
operations before income
taxes                            57.0         49.3        15.6  %       165.1         158.5         4.2  %
Provision for income taxes       13.9         15.2        (8.6 )%        46.8          53.1       (11.9 )%
Net income from continuing
operations including
noncontrolling interest          43.1         34.1        26.4  %       118.3         105.4        12.2  %
Loss from discontinued
operations                          -            -         *                -          (0.7 )       *
Gain on sale of discontinued
operations                          -            -         *                -         113.8         *
Net income                       43.1         34.1        26.4  %       118.3         218.5       (45.9 )%
Less: Net income
attributable to
noncontrolling interest          (0.4 )          -         *             (0.4 )        (0.1 )       *
Net income attributable to
Teledyne                     $   42.7     $   34.1        25.2  %   $   117.9     $   218.4       (46.0 )%


*  percentage change not meaningful
Instrumentation
                                        Third          Third           Nine           Nine
                                       Quarter        Quarter         Months         Months
(Dollars in millions)                    2012           2011           2012           2011
Sales                                $    193.8     $    157.1     $    516.8     $    467.7
Cost of sales                        $    105.6     $     89.6     $    297.8     $    267.5
Selling, general and administrative
expenses                             $     58.3     $     35.3     $    129.5     $    105.6
Operating profit                     $     29.9     $     32.2     $     89.5     $     94.6
Cost of sales % of sales                   54.5 %         57.0 %         57.6 %         57.2 %
Selling, general and administrative
expenses % of sales                        30.1 %         22.5 %         25.1 %         22.6 %
Operating profit % of sales                15.4 %         20.5 %         17.3 %         20.2 %

Third quarter of 2012 compared with the third quarter of 2011 The Instrumentation segment's third quarter 2012 sales were $193.8 million, compared with $157.1 million in the third quarter of 2011, an increase of 23.4%. Third quarter 2012 operating profit was $29.9 million, compared with operating profit of $32.2 million in the third quarter of 2011, a decrease of 7.1%. The third quarter 2012 sales increase resulted from higher sales of both marine and test and measurement instrumentation,

partially offset by reduced sales of environmental instrumentation. The higher sales of $6.9 million for marine instrumentation products reflected increased sales of interconnect systems used in offshore energy production and also included a total of $3.4 million in revenue from the August 3, 2012 acquisition of PDM Neptec and the July 2, 2012 acquisition of BlueView. Increased sales of $34.2 million for test and measurement instrumentation resulted from the acquisition of LeCroy on August 3, 2012. The decrease in sales of $4.4 million for environmental instrumentation primarily reflected lower domestic sales. The decrease in operating profit reflected $3.8 million in acquisition related transaction costs and $1.4 million in additional intangible asset amortization related to the LeCroy, PDM Neptec and BlueView transactions, partially offset by the impact of higher sales. The incremental operating profit included in the results for the third quarter of 2012 from recent acquisitions was $0.5 million. Third quarter cost of sales in total dollars increased by $16.0 million, compared with the third quarter of 2011, and reflected the impact of higher sales and product mix differences. The decrease in the cost of sales percentage largely reflected the impact of the LeCroy acquisition which carries a lower cost of sales percentage than the average for our other businesses in this segment.
First nine months of 2012 compared with the first nine months of 2011 The Instrumentation segment's first nine months 2012 sales were $516.8 million, compared with $467.7 million, an increase of 10.5%. Operating profit for the first nine months of 2012 was $89.5 million, compared with operating profit of $94.6 million for the first nine months of 2011, a decrease of 5.4%. The first nine months 2012 sales increase resulted from higher sales of marine instrumentation and test and measurement instrumentation, as well as environmental instrumentation. The higher sales of $10.3 million for marine instrumentation products reflected increased sales of interconnect systems used in offshore energy production and also included a total of $3.4 million in revenue from the acquisition of PDM Neptec and BlueView. Increased sales of $34.2 million for test and measurement instrumentation resulted from the acquisition of LeCroy. The increase in sales of $4.6 million for environmental instrumentation primarily reflected higher domestic sales. The decrease in operating profit reflected $4.6 million in acquisition expenses and $1.4 million in additional intangible asset amortization related to the LeCroy, PDM Neptec and BlueView transactions, partially offset by the impact of higher sales. The incremental operating profit included in the results for the first nine months of 2012 from recent acquisitions was $1.3 million.
The first nine months of 2012 cost of sales in total dollars increased by $30.3 million, compared with the first nine months of 2011, and reflected the impact . . .