Teledyne Technologies Incorporated provides enabling technologies for industrial growth markets. We have evolved from a company that was primarily focused on aerospace and defense to one that serves multiple markets that require advanced technology and high reliability. These markets include deepwater oil and gas exploration and production, oceanographic research, air and water quality environmental monitoring, factory automation and medical imaging. Our products include monitoring instrumentation for marine and environmental applications, harsh environment interconnects, electronic test and measurement equipment, digital imaging sensors and cameras, aircraft information management systems, and defense electronic and satellite communication subsystems. We also supply engineered systems for defense, space, environmental and energy applications. We differentiate ourselves from many of our direct competitors by having a customer and company sponsored applied research center that augments our product development expertise.

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 and through product development. 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. We continue to evaluate our businesses to ensure that they are aligned with our strategy.
Consistent with this strategy, we made five acquisitions in 2012 and three acquisitions in 2011, as well as one significant divestiture in 2011. Our largest acquisition in 2012, LeCroy Corporation ("LeCroy"), broadened our portfolio of analytical instrumentation with the addition of electronic test and measurement solutions. We acquired VariSystems Inc. ("VariSystems") to expand our portfolio of rugged interconnect solutions. We acquired BlueView Technologies, Inc. ("BlueView") principally to increase our instrumentation content on AUVs and ROVs used in oil and gas and marine survey applications. Through the acquisition of a majority interest in the parent company of Optech Incorporated ("Optech"), we added 3D imaging capability to our portfolio of visible, X-ray and ultraviolet sensors, cameras, Optech's bathymetric LIDAR systems used for coastal mapping and shallow water profiling also complement our marine survey sensors and systems. The acquisition of the parent company of PDM Neptec Limited ("PDM Neptec") expanded our line of harsh environmental marine connectors. In 2011, we focused on the expansion of our digital imaging capabilities first with the acquisition of DALSA Corporation ("DALSA"), followed by the acquisitions of a majority interest in Nova Sensors, Inc. ("Nova Sensors") and a minority interest investment in Optech. In

April 2011, we completed the sale of our general aviation piston engine businesses and consequently classified our Aerospace Engines and Components segment as a discontinued operation.
Given the strength of our commercial businesses, as well as our strategic acquisitions, we were able to achieve record sales and earnings in 2012. In 2012, sales and net income from continuing operations increased by 9.5% and 13.9%, respectively over 2011 results. Earnings per share from continuing operations in 2012 increased 13.6% over 2011. In 2012, sales totaled $2,127.3 million, compared with sales of $1,941.9 million in 2011. Net income for 2012, excluding our discontinued operations, was $161.8 million or $4.33 per diluted share, compared with $142.1 million or $3.81 per diluted share in 2011. The increase in revenue included incremental sales from acquisitions of $180.7 million. Our 2012 net income including discontinued operations totaled $164.1 million or $4.39 per diluted share, compared to $255.2 million or $6.84 per diluted share in 2011. In addition, each business segment experienced higher operating profit growth except for the Aerospace and Defense Electronics segment. The operating profit decrease for the Aerospace and Defense Electronics segment primarily reflected the impact of lower sales, as well as $1.7 million of severance and relocation costs, within certain electronic manufacturing service products businesses.
With the recent acquisition of LeCroy in 2012 and DALSA in 2011, as well as growth in our commercial markets, our business mix has continued to change, and for 2012, Teledyne's sales were approximately 68% to commercial customers and 32% to the U.S. Government. This has changed from about 56% commercial and 44% government in 2010. Our international sales also increased to 39% of total sales in 2012, compared to 29% in 2010. We have worked to transform our product portfolio into that of a high technology industrial company that is less dependent on U.S. Government business.
Recent Acquisitions
The Company spent $389.2 million, $366.7 million and $67.9 million on acquisitions in 2012, 2011 and 2010, respectively.
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. 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.
In 2011, the Company acquired the stock of DALSA for an aggregate purchase price of $339.5 million in cash. DALSA designs and manufactures digital imaging products, primarily consisting of high performance sensors, cameras and software for use in industrial, scientific, medical and professional applications products, as well as specialty semiconductors and micro electro mechanical systems ("MEMS"). In addition to the acquisition of DALSA in 2011, the Company completed the acquisition of a majority interest in Nova Sensors for total consideration of $5.1 million in cash and a minority interest in Optech for $18.9 million. Nova Sensors produces compact short-wave and mid-wave infrared cameras and operates within the Digital Imaging segment. Optech is a laser-based survey and digital imaging company. We also bought the remaining minority interest in Energy Systems for $3.2 million in 2011.
In 2010, Teledyne acquired Intelek plc ("Intelek") for $43.5 million in cash. Intelek primarily designs and manufactures electronic systems for satellite and microwave communications and aerospace manufacturing. In 2010, Teledyne also acquired Optimum Optical Systems Inc. ("Optimum"), a designer and manufacturer of custom optics and optomechanical assemblies and Hafmynd ehf. ("Gavia"), a designer and manufacturer of the Gavia™ autonomous underwater vehicle. See Note 3 to our Consolidated Financial Statements for additional information about our recent acquisitions. See also Note 17 to our Consolidated Financial Statements for information about our fiscal year 2013 pending acquisition of RESON A/S ("RESON").

Our fiscal year is determined based on a 52- or 53-week convention ending on the Sunday nearest to December 31. Fiscal years 2012, 2011 and 2010 each contained 52 weeks. The following is our financial information for 2012, 2011 and 2010 (in millions, except per-share amounts):

                                                             2012              2011          2010
Sales                                                   $    2,127.3       $  1,941.9     $ 1,644.2
Costs and Expenses
Cost of sales                                                1,379.1          1,290.7       1,148.1
Selling, general and administrative expenses                   505.1            424.0         317.6
Total costs and expenses                                     1,884.2          1,714.7       1,465.7

Income before other income and expense and income
taxes                                                          243.1            227.2         178.5
Interest and debt expense, net                                 (17.8 )          (16.2 )        (6.5 )
Other income, net                                                2.9              0.6           1.6
Income from continuing operations before income
taxes                                                          228.2            211.6         173.6
Provision for income taxes(a)                                   65.4             69.5          53.6

Net income from continuing operations including
noncontrolling interest                                        162.8            142.1         120.0
Discontinued operations, net of income taxes                     2.3            113.1           0.6
Net income                                                     165.1            255.2         120.6
Less: net income attributable to noncontrolling
interest                                                        (1.0 )              -          (0.1 )
Net income attributable to Teledyne                     $      164.1       $    255.2     $   120.5

Net income from continuing operations including
noncontrolling interest                                 $      162.8       $    142.1     $   120.0
Less: net income attributable to noncontrolling
interest                                                        (1.0 )              -          (0.1 )
Net income from continuing operations                          161.8            142.1         119.9
Discontinued operations, net of income taxes                     2.3            113.1           0.6
Net income attributable to Teledyne                     $      164.1       $    255.2     $   120.5

Basic earnings per common share:
 Continuing operations                                  $       4.41       $     3.88     $    3.31
 Discontinued operations                                        0.06             3.09          0.02
Basic earnings per common share:                        $       4.47       $     6.97     $    3.33

Diluted earnings per common share:
 Continuing operations                                  $       4.33       $     3.81     $    3.25
 Discontinued operations                                        0.06             3.03          0.02
Diluted earnings per common share                       $       4.39       $     6.84     $    3.27

Our businesses are divided into four business segments: Instrumentation, Digital Imaging, Aerospace and Defense Electronics and Engineered Systems. Our four business segments and their respective percentage contributions to our total sales in 2012, 2011 and 2010 are summarized in the following table:

                                        Percentage of Sales
Segment                               2012       2011     2010
Instrumentation                        35 %        32 %    35 %
Digital Imaging                        20          18       8
Aerospace and Defense Electronics      31          34      37
Engineered Systems                     14          16      20
                                      100 %       100 %   100 %

Results of Operations
2012 Compared with 2011

                                                                                           %
Sales                                                         2012          2011         Change
                                                                (in millions)
Instrumentation                                            $   749.4     $   616.6       21.5  %
Digital Imaging                                                415.9         349.9       18.9  %
Aerospace and Defense Electronics                              660.6         670.8       (1.5 )%
Engineered Systems                                             301.4         304.6       (1.1 )%
Total sales                                                $ 2,127.3     $ 1,941.9        9.5  %

                                                                                           %
Operating profit and other segment income                     2012          2011         Change
                                                                (in millions)
Instrumentation                                            $   136.2     $   122.8       10.9  %
Digital Imaging                                                 24.8          16.1       54.0  %
Aerospace and Defense Electronics                               90.3          93.9       (3.8 )%
Engineered Systems                                              28.5          28.1        1.4  %

Segment operating profit and other segment income              279.8         260.9        7.2  %
Corporate expense                                              (36.7 )       (33.7 )      8.9  %
Interest and debt expense, net                                 (17.8 )       (16.2 )      9.9  %
Other income, net                                                2.9           0.6         *

Income from continuing operations before income taxes          228.2         211.6        7.8  %
Provision for income taxes(a)                                   65.4          69.5       (5.9 )%

Net income from continuing operations including
noncontrolling interest                                        162.8         142.1       14.6  %
Discontinued operations, net of income taxes                     2.3         113.1         *

Net income                                                     165.1         255.2      (35.3 )%
Less: net income attributable to noncontrolling interest        (1.0 )           -         *

Net income attributable to Teledyne                        $   164.1     $   255.2      (35.7 )%

We reported 2012 sales of $2,127.3 million, compared with sales of $1,941.9 million for 2011, an increase of 9.5%. Net income from continuing operations was $161.8 million ($4.33 per diluted share) for 2012, compared with net income from continuing operations of $142.1 million ($3.81 per diluted share) for 2011, an increase of 13.9%. Net income for 2012 and 2011 also included net tax credits of $5.4 million and $2.4 million, respectively. Net income attributable to Teledyne, including discontinued operations, was $164.1 million ($4.39 per diluted share) for 2012, compared with $255.2 million ($6.84 per diluted share) for 2011. On April 19, 2011, Teledyne completed the sale of its piston engines businesses and recorded a gain on the sale of $113.8 million.
The increase in sales in 2012, compared with 2011, reflected substantially higher sales in both the Instrumentation and Digital Imaging segments, partially offset by slightly lower sales in both the Engineered Systems and Aerospace and Defense Electronics segments. Sales in the Instrumentation segment reflected $80.8 million from the acquisition of LeCroy, as well as, higher sales of both marine and environmental instrumentation products. Sales of marine products increased by $45.6 million or 12.2% and included incremental sales of $8.0 million from the acquisitions of PDM and BlueView. The increase in the Digital Imaging segment reflected $66.9 million in incremental revenue from recent acquisitions, primarily Optech, Nova Sensors and DALSA. Sales in the Aerospace and Defense Electronics segment reflected lower sales for electronic manufacturing service products partially offset by higher sales of $12.4 million from avionics products and electronic relays, as well as greater sales of $15.3 million from microwave devices and interconnects. Microwave devices and interconnects sales in 2012 included $25.0 million in revenue from the February 2012 acquisition of VariSystems. The decrease in the Engineered Systems segment revenue reflected lower sales of space and defense programs as well as nuclear programs, partially offset by higher sales of energy systems and turbine engines.

The incremental increase in revenue in 2012 from businesses acquired in 2012 and in 2011 was $180.7 million.
The increase in segment operating profit and other segment income for 2012, compared with 2011, reflected improved results in each operating segment except for the Aerospace and Defense Electronics segment. The increase in operating profit primarily reflected the impact of acquisitions. The increase in operating profit also reflected the impact of higher sales for the Instrumentation segment. The decrease in operating profit in the Aerospace and Defense Electronics segment reflected the impact of lower sales, reduced margins, as well as $1.7 million of severance and relocation costs, within certain electronic manufacturing service products businesses. Operating profit included incremental operating profit from acquisitions of $9.4 million, which included acquisition expenses of $7.1 million and intangible amortization of $5.3 million. LIFO income was less than $0.1 million in 2012 compared with LIFO expense of $0.9 million in 2011.

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

(Dollars in millions)                2012          2011        Change
Instrumentation
Sales                             $   749.4     $   616.6     $ 132.8
Cost of sales                     $   422.3     $   354.2     $  68.1
Cost of sales % of sales               56.4 %        57.4 %

Digital Imaging
Sales                             $   415.9     $   349.9     $  66.0
Cost of sales                     $   266.9     $   231.5     $  35.4
Cost of sales % of sales               64.2 %        66.2 %

Aerospace and Defense Electronics
Sales                             $   660.6     $   670.8     $ (10.2 )
Cost of sales                     $   442.6     $   458.0     $ (15.4 )
Cost of sales % of sales               67.0 %        68.3 %

Engineered Systems
Sales                             $   301.4     $   304.6     $  (3.2 )
Cost of sales                     $   247.3     $   247.0     $   0.3
Cost of sales % of sales               82.1 %        81.1 %

Total Company
Sales                             $ 2,127.3     $ 1,941.9     $ 185.4
Cost of sales                     $ 1,379.1     $ 1,290.7     $  88.4
Cost of sales % of sales               64.8 %        66.5 %

Consolidated cost of sales in total dollars increased by $88.4 million in 2012, compared with 2011, and primarily reflected $94.2 million in cost of sales from recent acquisitions and organic sales increases, partially offset by sales mix differences. Cost of sales from recent acquisitions totaled $37.7 million for the Instrumentation segment, $39.9 million for the Digital Imaging segment and $16.6 million for the Aerospace and Defense Electronics segment. The Instrumentation segment cost of sales increase reflected the impact of higher organic sales. The Aerospace and Defense Electronics segment reflected the impact of lower organic sales. Cost of sales as a percentage of sales for 2012 was 64.8%, compared with 66.5% for 2011. The lower cost of sales percentage reflected the impact of the LeCroy and DALSA cost structure which has a lower cost of sales percentage than the overall Teledyne cost of sales percentage. Excluding the impact of recent acquisitions, cost of sales as a percentage of sales for 2012 would have been 66.7%.
Selling, general and administrative expenses, including research and development and bid and proposal expense, in total dollars were higher in 2012 compared with 2011. The increase reflected the impact of higher sales, higher acquired intangible asset amortization of $3.7 million and higher research and development costs of $28.8 million. Corporate administrative expense in 2012 was higher by $3.0 million compared with 2011 and reflected higher employee compensation and professional fee expenses. For 2012, we recorded a total of $8.0 million in stock option expense, of which $2.4 million was recorded as corporate expense and $5.6 million was recorded in segment results. For 2011, we recorded a total of $5.8 million in stock option expense, of which $2.1 million was recorded as corporate expense and $3.7 million was recorded in segment results. Selling, general and administrative expenses for 2012, as a percentage of sales, increased to 23.7%, compared with 21.8% for 2011 and reflected the impact of acquisition related expenses, higher research and development costs and the LeCroy and DALSA cost structures which have a higher selling, general and

administrative expense percentage than the overall Teledyne selling, general and administrative expense percentage.
Included in operating profit in 2012 was domestic pension expense of $6.6 million. In accordance with U.S. Government Cost Accounting Standards ("CAS"), $12.7 million was recoverable from certain government contracts. Included in operating profit in 2011 was domestic pension expense of $6.7 million. In accordance with CAS, $12.6 million was recoverable from certain government contracts. Pension expense determined under CAS can generally be recovered through the pricing of products and services sold to the U.S. Government.
The Company's effective tax rate for 2012 was 28.7%, compared with 32.9% for 2011. The decrease reflected a remeasurement of uncertain tax positions in 2012, as well as a change in the proportion of domestic and international income. Fiscal year 2012 included tax benefits of $5.4 million primarily related to the remeasurement of uncertain tax positions and an expiration of the statute of limitations in the United States. Fiscal year 2011 included tax benefits of $2.4 million related to research and development tax credits. Excluding the impact of the $5.4 million for 2012 and $2.4 million for 2011 the effective tax rates would have been 31.0% for 2012, compared with 34.0% for 2011.
During the next twelve months, it is reasonably possible that tax audit resolutions and expirations of the statutes of limitations could reduce unrecognized tax benefits by $13.7 million, either because our tax positions are sustained on audit, because the Company agrees to their disallowance, or because of the expiration of the statutes of limitations. Of the $13.7 million, $0.4 million would not impact tax expense as it would be offset by the reversal of deferred tax assets.
Sales under contracts with the U.S. Government were approximately 32% of sales in 2012 and 36% of sales in 2011. Sales to international customers represented approximately 39% of sales in 2012 and 36% of sales in 2011.
Total interest expense, including credit facility fees and other bank charges, was $18.2 million in 2012 and $16.7 million in 2011. Interest income was $0.4 million in 2012 and $0.5 million in 2011. The increase in interest expense primarily reflected the impact of higher outstanding debt levels partially offset by lower overall average interest rates.
Other income and expense in 2012 included foreign currency translation gains of $0.8 million, compared with $2.0 million for 2011 and a $0.6 million gain on the purchase of the majority interest in Optech. Other income and expense in 2011 also included $2.3 million related to the reduction of an environmental reserve determined to be no longer needed and a $4.5 million pretax charge to write off a minority investment in a private company.

2011 Compared with 2010
                                                                                            %
Sales                                                          2011          2010         Change
                                                                  (in millions)
Instrumentation                                             $   616.6     $   573.2        7.6  %
Digital Imaging                                                 349.9         122.5      185.6  %
Aerospace and Defense Electronics                               670.8         614.7        9.1  %
Engineered Systems                                              304.6         333.8       (8.7 )%
Total sales                                                 $ 1,941.9     $ 1,644.2       18.1  %

                                                                                            %
Operating profit and other segment income                      2011          2010         Change
                                                                  (in millions)
Instrumentation                                             $   122.8     $   113.9        7.8  %
Digital Imaging                                                  16.1           5.2      209.6  %
Aerospace and Defense Electronics                                93.9          57.8       62.5  %
Engineered Systems                                               28.1          30.4       (7.6 )%
Segment operating profit and other segment income               260.9         207.3       25.9  %
Corporate expense                                               (33.7 )       (28.8 )     17.0  %
Interest and debt expense, net                                  (16.2 )        (6.5 )    149.2  %
. . .