corresp
December 8, 2010
Securities and Exchange Commission
Division of Corporation Finance
10 F Street NE
Washington, D.C. 20549-7010
Attention: John Cash, Accounting Branch Chief
|
|
|
Re: |
|
Teledyne Technologies Incorporated
Form 10-K for the fiscal year ended January 3, 2010
Filed March 2, 2010
File No. 1-15295 |
Dear Mr. Cash:
Teledyne Technologies Incorporated (the Company or Teledyne) hereby provides
additional information as requested by the SEC Staff during our teleconference call on
November 17, 2010, related to the above-referenced filing, which has been discussed with
Ernst & Young LLP, the Companys independent registered public accounting firm, including its
National Office, as follows regarding how we establish our reporting units for purposes of
evaluating goodwill in the Electronics and Communications (E&C) segment.
Identification of Reporting Units for Goodwill Impairment Testing
When establishing our reporting units for the purposes of evaluating goodwill we considered
the criteria under Financial Accounting Standards Board Accounting Standards Codification (ASC)
350, Intangibles Goodwill and Other and the relevant paragraphs of ASC 280 Segment Reporting.
The determination of reporting units under ASC 350-20-35-33 begins with the definition of an
operating segment in ASC 280-10-50-1. With respect to the E&C reportable segment, our reporting
units for goodwill impairment testing begins at the business unit level (component) subject to
aggregation as appropriate.
ASC 350-20-35-36 states that an operating segment shall be deemed to be a reporting unit if
all of its components are similar, if none of its components is a reporting unit, or if it
comprises only a single component. We have always defined our E&C operating segment as a reporting
unit because all of its components are similar under this interpretation of the guidance. ASC
350-20-35-35 states that two or more components of an operating segment shall be aggregated and
deemed a single reporting unit if the components have similar economic characteristics and ASC
350-20-55-7 states that every factor noted in ASC 280-10-50-11 need not be met in order for two
components to be considered economically similar. After consideration of the aggregation criteria,
we
Securities and Exchange Commission
Page 2
December 8, 2010
believe that the E&C operating segment represents a reporting unit for the purposes of assessing
goodwill for impairment.
We have performed an evaluation of the components under ASC 350-20-35-36. The following was
considered in our determination that the components of our operating segments should be aggregated
and are described below.
Each of our E&C business units represent a component of the E&C operating segment as it is a
business for which discrete financial information is available that is reviewed regularly by E&C
segment management. The business units have been aggregated for the E&C operating segment in
accordance with ASC 350-20-35-35, which states that two or more components of an operating segment
shall be aggregated and deemed a single reporting unit if the components have similar economic
characteristics. In accordance with ASC 350-20-55-06 evaluating whether two components have
similar economic characteristics is a matter of judgment that depends on specific facts and
circumstances. That assessment should be more qualitative than quantitative. Additionally, under
ASC 350-20-55-07, in determining whether the components of an operating segment have similar
economic characteristics, all of the factors in ASC 280-10-50-11 should be considered. However,
every factor need not be met in order for two components to be considered economically similar. ASC
350 allows aggregation of the business unit or component level using the criteria provided in ASC
280-1-50-11 for the operating segment., The aggregation criteria in ASC 280-10-50-11 permits two or
more operating segments (business units or components for the purposes of ASC 350 evaluation) to be
aggregated into a single operating segment if the segments have similar economic characteristics,
and if the segments are similar in all of the following areas:
|
a. |
|
The nature of the products and services |
|
|
b. |
|
The nature of the production processes |
|
|
c. |
|
The type or class of customer for their products and services |
|
|
d. |
|
The methods used to distribute their products or provide their services |
|
|
e. |
|
If applicable, the nature of the regulatory environment, for example, banking,
insurance, or public utilities. |
In addition, the determination of whether two components are economically similar need not be
limited to consideration of the factors described in the above paragraph. In determining whether
components should be combined into one reporting unit based on their economic similarities, factors
that should be considered in addition to those in that paragraph include but are not limited to,
the following:
|
a. |
|
The manner in which an entity operates its business and the nature of those operations |
|
|
b. |
|
Whether goodwill is recoverable from the separate operations of each component business or
from two or more component businesses working in concert (which might be the case if the components
are economically interdependent) |
Securities and Exchange Commission
Page 3
December 8, 2010
|
c. |
|
The extent to which the component businesses share assets and other resources, as might be
evidenced by extensive transfer pricing mechanisms |
|
|
d. |
|
Whether the components support and benefit from common research and development projects. |
The following discussion further expands on the characteristics mentioned above by each
segment and why the business units can be aggregated for goodwill impairment testing:
Electronics and Communications segment
This segment sells its products in three end-markets: namely, defense electronics,
electronic instrumentation and other commercial electronics. These are the three product lines
where we summarize limited financial information quarterly. There are approximately 31 business
units in the E&C segment. While most of our business units report their results into one of the
three end-markets (product lines) noted, certain business units results are split into two of the
three end-markets (product lines) noted above.
The following summarizes why the components of the E&C reportable segment are similar based on
the characteristics outlined in the guidance.
|
|
|
Similar economic characteristics: |
|
|
|
|
The business units have similar economic characteristics based on qualitative and
quantitative factors. The business units have similar cost structures as the electronic
products produced are similar. The electronic product cost structures are similar by
business unit as they rely on similar production processes, capital equipment, distribution
methods, sharing of resources and expertise as described further below. Our business units
are measured based on similar operations metrics and year over year performance. |
|
|
|
|
The nature of the products and services: |
|
|
|
|
The business units design, manufacture and sell technically complex and highly
engineered electronic products that are primarily sold to regulated markets. The business
units provide specialized electronic systems, instrumentation, components and services that
address niche market applications in defense, marine, environmental, industrial, commercial
aerospace, communications and scientific markets. Many of the products are either fully or
partially customized to meet specific requirements. |
Securities and Exchange Commission
Page 4
December 8, 2010
|
|
The nature of the production processes: |
|
|
|
The manufacturing processes at each business unit are very similar. We primarily
manufacture and assemble electronic components and products using similar production
processes, capital equipment and quality processes.
Our electronic products are produced in low volumes and highly modified to customer
specifications. Quality assurance procedures, major electronic cost components and
performance metrics are similar. The E&C segment business units develop and manufacture
electronic component, subsystem and system products. The primary production processes
across E&C business units are light electronics assembly using packaged semiconductors,
hybrid microelectronics assembly using bare-chip semiconductors, and electromechanical
assembly. A number of E&C electronic products use more than one of these processes. Light
electronics assembly typically consists of installing printed circuit board assemblies in a
product and, in many cases, adding specialized subassemblies such as sensors to the
product. |
|
|
|
The type or class of customer for their products and services: |
|
|
|
Most of the business units sell into regulated markets. For example, the defense
electronics markets are subject to regulation promulgated by the Department of Defense,
Department of State, Department of Commerce and similar agencies. The electronic
instrumentation and other commercial electronics markets are subject to regulation
promulgated by the Federal Aviation Administration (FAA), Environmental Protection Agency,
Food and Drug Administration, Nuclear Regulatory Agency and similar agencies.
Additionally, our business units have many common customers. |
|
|
|
The methods used to distribute their products or provide their services: |
|
|
|
All of business units sell to customers via a combination of manufacturer
representatives, distributors and direct sales representatives. We also exhibit in
industry specific trade shows and pursue customer specific sales initiatives where
employees from multiple business units participate. |
|
|
|
The nature of the regulatory environment, for example, banking, insurance, or public
utilities: |
|
|
|
Most of the business units sell into regulated markets as noted above. |
|
|
|
The manner in which an entity operates its business and the nature of those operations: |
|
|
|
Each business unit operates under the Teledyne umbrella and each has the name Teledyne
in their business name as well as many of their brand names. Additionally, the segment
shares expertise over manufacturing operational excellence programs, new product
development initiatives, purchasing programs, distribution channels and related research
and development, as well as common selling efforts such as customer trade shows. The E&C
segment sponsors
|
Securities and Exchange Commission
Page 5
December 8, 2010
|
|
|
customer-specific trade shows where employees from multiple business units participate. |
|
|
|
|
Whether goodwill is recoverable from the separate operations of each component business
or from two or more component businesses working in concert (which might be the case if
the components are economically interdependent): |
|
|
|
|
We do not believe that goodwill is recoverable from the separate operations of each
component business due to the significant integration of our business units as described
below. The balance of our goodwill in the E&C segment has increased from $297.1 million at
year end 2006 to $485.7 million at year end 2009 as we have made 10 acquisitions during
that period, as well as purchased the remaining interest in a majority owned company. As
noted in footnote 3 in our 2009 Annual Report on Form 10-K, we stated that the primary
reasons for the acquisitions was to strengthen and expand our core businesses through
adding complementary product and service offerings, allowing greater integration of
products and services and providing single-source customer solutions, enhancing our
technical capabilities or increasing our addressable markets. The significant factors that
resulted in recognition of goodwill were: (a) the purchase price was based on cash flow and
return on capital projections assuming integration with our businesses and (b) the
calculation of the fair value of tangible and intangible assets acquired that qualified for
recognition. We believe that the inherent value of the acquisitions we made were not as
standalone business units but as part of an overall strategy to expand our product and
service offerings. Therefore, goodwill is recoverable from the E&C segment. |
|
|
|
|
The extent to which the component businesses share assets and other resources, as might
be evidenced by extensive transfer pricing mechanisms: |
|
|
|
|
We are awarded customer contracts in many cases because of the complementary products
our business units offer to the market. We have many overlapping customers between
business units. Sometimes the products are sold via intercompany sales between business
units and then to the end customer and sometimes we are awarded individual contracts by a
customer by business unit. The strategy of our acquisitions has been to fill gaps in
product offerings and allowing greater integrated products and services. The business
units share expertise to solve technical issues, whether they are related to product
development or production processes to accomplish the strategy described above. |
|
|
|
|
Whether the components support and benefit from common research and development
projects: |
|
|
|
|
The business units in the segment share expertise over manufacturing operational
excellence programs, new product development initiatives and related research and
development. Common research and development projects in E&C take multiple forms. These
include vertical integration, lateral integration, technology transfer and joint pursuit
and conduct of customer sponsored research and development programs. For vertical
integration, it is common that an E&C |
Securities and Exchange Commission
Page 6
December 8, 2010
|
|
|
business unit that typically supplies specialized components will develop or adapt a
component-level product for use in a system-level product being developed by another E&C
business unit. In projects involving lateral integration, there is typically an
opportunity to combine two or more system-level products into a more highly integrated
multifunction system that would otherwise be beyond the technical capabilities of an
individual business unit. In most of the projects of the types described above, each
business unit would support the investment in the project with its own research and
development resources and funds. Technology transfer projects typically involve cooperation
between our contract research and development center, and one or more additional E&C
business units. In these cases the goal is to advance technology from the relatively low
technology readiness level typical of our contract research and development centers
programs to a level where it can be commercialized by the partner business units. Finally,
there are opportunities to bid on externally sponsored research and development programs
where an individual business unit may not have the technical depth or breadth to conduct
the program on its own; however, the combination of two or more E&C business units offer
the required capabilities. If a proposal is successful one of the business units is
typically the prime contractor and the other business units are subcontractors. |
The segment president monitors the E&C activities via daily communications, weekly conference
calls, regular on-site facility visits and quarterly business reviews. The revenue generation,
manufacturing expertise, product development and selling efforts of these business units are
tightly linked and are impacted by each others efforts. There is no separate president or manager
by product line as this information is accumulated to facilitate the investors understanding of
our end markets.
Based on the above, the business units in the E&C segment are similar and can be aggregated
for purposes of goodwill impairment testing under ASC 350. We did not include our analysis of our
other three Segments (Engineered Systems, Aerospace Engines and Components and Energy and Power
Systems) as they were not the focus of the Staffs questions and they do not have significant
amounts of goodwill (less than 5% of the Teledynes total goodwill at fiscal year-end 2009 and
2008).
Conclusion
Based on these factors, we believe that our E&C operating segment constitutes a reporting unit
for purposes of testing goodwill for impairment. We will expand our disclosure in future filings to
discuss the determination of our reporting units as well as our methodology for determining the
fair value of each reporting unit.
In recognition of the Staffs concern regarding goodwill impairment, we have performed a
goodwill impairment test at a lower level for the E&C segment. For this test we performed the
analysis by assuming that the three product lines, defense electronics, electronic instruments and
other commercial electronics were the reporting units. Please
Securities and Exchange Commission
Page 7
December 8, 2010
note that the product lines used in the test are slightly different from the product lines referred
to in the SEC filings as revenue for four of the business units are divided between the product
lines and for this analysis we identified them to a single product line. We do not believe these
differences have an impact on the test. We performed the test for 2008 and 2009. The percentage
of the 2008 goodwill balance of $485.7 million allocated to the defense electronics, electronic
instruments and other commercial electronics product lines was 40%, 59% and 1%, respectively. The
percentage of the 2009 goodwill balance of $485.6 million allocated to the defense electronics,
electronic instruments and other commercial electronics product lines was 41%, 58% and 1%
respectively. The results of the tests determined that there was no indication of impairment for
the 2008 or 2009 period as the estimated fair values of the reporting units substantially exceeded
the carrying values. The percentage the estimated fair value exceeded the carrying value as of the
fourth quarter of 2008 for the defense electronics, electronic instruments and other commercial
electronics product lines was 126%, 199% and 490%, respectively. The percentage the estimated fair
value exceeded the carrying value as of the fourth quarter of 2008 for the E&C segment was 178%.
The percentage the estimated fair value exceeded the carrying value as of the fourth quarter of
2009 for the defense electronics, electronic instruments and other commercial electronics product
lines was 42%, 124% and 63%, respectively. The percentage the estimated fair value exceeded the
carrying value as of the fourth quarter of 2009 for the E&C segment was 100%.
Quarterly Operations Review Charts
In response to the Staffs request from our telephone conversation of November 17,
2010, we have provided the Staff with the following document under separate cover for confidential
treatment:
|
|
|
The E&C quarterly operations review presentations for the October/November 2010
meeting. Also included is the meeting agenda schedule for the meetings. |
A binder is prepared for each meeting day containing the segment presentations. The binders
are provided to the CODM, Segment Manager and other corporate executives. The format of the
presentations for each segment is generally the same. The contents of the binders are presented in
electronic form at the meeting by projection on a large theater screen. Only certain pages of the
binder are presented, discussed and displayed on the screen. Generally, a single page with orders,
sales, income before taxes, and cash flow is presented to get an understanding of the outlook for
the year. The focus of the review centers on business risks and opportunities, manufacturing
metrics and potential improvements to the business. Using the Analytical Instruments business unit
presented on November 2, 2010 as a representative example, we have annotated in the binder which
charts are generally presented during the meeting for each business unit. Most of the charts are
prepared for reference purposes and are only reviewed if needed. The intent of the meeting is
business oriented, not a detailed report of each page. Much of the information provided in the
binder that is financial in nature is used by the
Securities and Exchange Commission
Page 8
December 8, 2010
Corporate Finance staff to ensure that the charts and information presented is based on accurate
and complete information. Additionally, the Corporate Finance staff, from information provided,
identifies and quantifies risks and opportunities for forecasting purposes as well as discussions
with the investment community.
Due to time and space limitations, the meeting generally lasts four or five business days each
quarter. For the October/November meeting the Aerospace Engines and Components segment and the
Energy and Power Systems segment presented on the same day. The Engineered Systems segment
presented the next day. The E&C segment presented over the next three days. Business unit
management is generally present for the entire day that they present their information. The CODM is
in attendance at most but not all of the presentations during the four or five days. The principal
purpose of the meetings is to assist segment managers in understanding the business and provide an
opportunity for business unit managers to see developments at sister companies in the segment.
As mentioned under separate cover we have provided the E&C operations review binders and not
the binders for the other three segments as we believe the E&C segment is representative of the
meeting contents. The Company is requesting confidential treatment for the materials included
with this response pursuant to Rule 83 promulgated by the SEC (71 C.F.R. Section 200.83).
If you have any questions regarding this response letter, please contact the undersigned at
(805) 373-4611 or, in my absence, Susan L. Main, Vice President and Controller of the Company, at
(805) 373-4720. Additionally, we are available to discuss our response in a telephone
conversation, at your convenience, if you believe it would be beneficial to do so.
|
|
|
|
|
|
Sincerely,
|
|
|
/s/
Dale A. Schnittjer
|
|
|
Dale A. Schnittjer |
|
|
Senior Vice President and Chief Financial Officer |
|
|
|
|
|
cc: |
|
F.V. Cahouet Director and Chairman of the Audit Committee, Teledyne Technologies
Incorporated
R. Mehrabian Chairman, President and Chief Executive Officer, Teledyne Technologies
Incorporated
J. T. Kuelbs Executive Vice President, General Counsel and Secretary, Teledyne
Technologies Incorporated
G. Birkenbeuel Ernst & Young LLP |