Pension Plans and Postretirement Benefits

Pension Plans

Teledyne has a defined benefit pension plan covering substantially all U.S. employees hired before January 1, 2004, or approximately 18% of Teledyne’s active employees. As of January 1, 2004, new hires participate in a defined contribution plan. In connection with recent acquisitions, the Company assumed responsibility for a several defined benefit pension plans based in the United Kingdom, Switzerland and the Netherlands with approximately 520 participants in total.

Teledyne’s domestic pension income was $1.7 million in 2014, compared with pension expense of $16.6 million in 2013 and $6.6 million in 2012. In accordance with U.S. Government Cost Accounting Standards (“CAS”), $13.8 million, $14.5 million and $12.7 million was recoverable from certain government contracts, for 2014, 2013 and 2012, respectively. In 2014, Teledyne did not make any cash contributions to its domestic pension plan. In 2013, Teledyne made a voluntary pretax cash contribution to its domestic plan of $83.0 million, prior to any recovery from the U.S. Government. In 2015, we are not required, and are not planning, to make any cash contributions to the domestic qualified pension plan.

In 2014 and in 2012, the Company offered lump sum payments to certain plan participants whose employment with Teledyne had terminated and froze the non-qualified pension plan for top executives. In 2012, the Company amended the domestic pension plan to change the rate at which pension benefits accrue after February 29, 2012, and offered lump sum payments to certain participants in the plan whose employment with Teledyne had terminated. In 2014 and 2012, the Company made lump sum payments of approximately $32.4 million and $32.8 million, respectively, from the domestic plan assets to certain participants in the domestic plan as a result of these lump sum offers. Recently, the Society of Actuaries released revised mortality tables, which update life expectancy assumptions. In consideration of these tables, we modified the mortality assumptions used in determining our pension and post-retirement benefit obligations as of December 28, 2014. The impact of these new mortality assumptions has resulted in an increase to our pension obligation and an increase in future pension expense.

The Company’s contributions associated with 401(k) plans were $9.5 million, $9.1 million and $8.2 million, for 2014, 2013 and 2012, respectively.

The following tables set forth the components of net periodic pension benefit expense for the pension plans (in millions):



	Domestic									Foreign
	2014			2013			2012			2014			2013			2012
Service cost - benefits earned during the period	$	11.7		$	14.4		$	12.7		$	0.8		$	0.9		$	0.3
Interest cost on benefit obligation	40.3			36.3			39.6			2.2			1.9			1.7
Expected return on plan assets	(73.7		)	(70.1		)	(65.5		)	(2.6		)	(2.0		)	(1.7		)
Amortization of prior service cost	(4.6		)	(4.6		)	(4.6		)	—			—			—
Amortization of actuarial loss	24.6			40.6			24.4			—			0.1			0.1
Net periodic benefit (income) expense	$	(1.7	)	$	16.6		$	6.6		$	0.4		$	0.9		$	0.4

The expected long-term rate of return on plan assets is reviewed annually, taking into consideration the Company’s asset allocation, historical returns on the types of assets held, and the current economic environment. We determined the discount rate based on a model which matches the timing and amount of expected benefit payments to maturities of quality bonds priced as of the pension plan measurement date. The yields on the bonds are used to derive a discount rate for the liability.

The following assumptions were used to measure the net benefit income/cost within each respective year:



Pension Plan	Weighted average discount rate		Weighted average increase in future compensation levels		Expected weighted-average long-term rate of return

Domestic plan - 2014	5.40	%	2.75	%	8.25	%
Domestic plan - 2013	4.40	%	2.75	%	8.25	%
Domestic plan - 2012	5.50	%	2.75	%	8.25	%

Foreign plans 2014	2.10% - 4.30%		1.75% - 2.50%		3.00% - 6.40%
Foreign plans 2013	1.80% - 4.20%		1.75% - 2.50%		3.00% - 5.50%
Foreign plans 2012	2.00% - 4.70%		1.75	%	3.00% - 5.70%

For its domestic pension plans the Company is projecting a long-term rate of return on plan assets of 8.25% in 2015. For its foreign based pension plans the Company is projecting a long-term rate of return on plan assets will range from 1.80% to 6.4% in 2015.

The following table sets forth the reconciliation of the beginning and ending balances of the benefit obligation of the pension plans (in millions):



	Domestic						Foreign
	2014			2013			2014			2013
Changes in benefit obligation:
Benefit obligation - beginning of year	$	768.9		$	846.9		$	60.3		$	50.6
Service cost - benefits earned during the year	11.7			14.4			0.8			0.9
Interest cost on projected benefit obligation	40.3			36.3			2.2			1.9
Actuarial (gain) loss	134.5			(78.4		)	11.4			1.4
Benefits paid(a)	(78.6		)	(50.3		)	(2.4		)	(2.8		)
Plan amendments(b)	1.6			—			(0.1		)	(0.1		)
Other - including foreign currency	—			—			(11.1		)	1.6
Business combinations	—			—			—			6.8
Benefit obligation - end of year	$	878.4		$	768.9		$	61.1		$	60.3

Accumulated benefit obligation - end of year	$	875.5		$	767.6		$	59.2		$	58.7



(a)	The 2014 amount includes $32.4 million of lump sum payments to certain participants.
(b)	Impact of a new executive agreement.

The key assumptions used to measure the benefit obligation at each respective year-end were:



	Domestic Plan						Foreign Plans
	2014		2013		2012		2014	2013	2012
Discount rate	4.50	%	5.40	%	4.40	%	1.20% - 3.50%	2.10% - 4.30%	1.80% - 4.20%
Salary growth rate	2.75	%	2.75	%	4.14	%	1.70% - 2.40%	1.75% - 2.50%	1.75% - 2.50%

The following table sets forth the reconciliation of the beginning and ending balances of the fair value of plan assets for the pension plans (in millions):



	Domestic						Foreign
	2014			2013			2014			2013
Changes in plan assets:
Fair value of plan assets - beginning of year	$	986.3		$	793.3		$	52.1		$	42.3
Actual return on plan assets	47.5			158.3			4.7			5.2
Employer contribution - defined benefit plan	—			83.0			—			—
Employer contribution - other benefit plan	2.3			2.0			3.3			1.1
Foreign currency changes	—			—			(3.5		)	0.4
Benefits paid	(78.6		)	(50.3		)	(2.4		)	(2.8		)
Other	—			—			(6.6		)	1.1
Business combination	—			—			—			4.8
Fair value of net plan assets - end of year	$	957.5		$	986.3		$	47.6		$	52.1

The measurement date for the Company’s pension plans is December 31.

The following table sets forth the funded status of the pension plans and amounts recognized in the consolidated balance sheets at year end 2014 and 2013 (in millions):



	Domestic						Foreign
	2014			2013			2014			2013
Funded status	$	79.1		$	217.4		$	(13.5	)	$	(8.2	)

Amounts recognized in the consolidated balance sheets:
Prepaid pension asset/(accrued pension obligation) (long-term)	$	86.1		$	222.0		$	(13.5	)	$	(8.2	)
Accrued pension obligation (short-term)	(1.8		)	(1.5		)	—			—
Other liabilities	(5.2		)	(3.1		)	—			—
Net amount recognized	$	79.1		$	217.4		$	(13.5	)	$	(8.2	)

Amounts recognized in accumulated other comprehensive loss:
Unrecognized prior service credit	$	(27.0	)	$	(33.1	)	$	(0.1	)	$	(0.1	)
Unrecognized net loss	379.6			243.5			12.9			3.7
Net amount recognized, before tax effect	$	352.6		$	210.4		$	12.8		$	3.6

At year-end 2014 and 2013 the Company had a non-cash reduction to stockholders’ equity of $227.3 million and $129.8 million, respectively, related to its pension and postretirement plans. The non-cash reductions to stockholders’ equity did not affect net income and were recorded net of deferred taxes of $135.0 million in 2014 and $78.8 million in 2013.

At December 28, 2014, the estimated amounts of the minimum liability adjustment that are expected to be recognized as components of net periodic benefit cost during 2014 for the pension plans are: net loss $32.2 million and net prior service credit $4.2 million.

The following table presents the estimated future benefit payments for the pension plans (in millions):



	Domestic		Foreign
2015	$	47.6	$	2.5
2016	49.2		2.5
2017	50.6		2.5
2018	51.6		2.6
2019	52.7		2.4
2020-2024	278.6		13.7
Total	$	530.3	$	26.2

The following table sets forth the percentage of year-end market value by asset class for the pension plans:



	Domestic Plan Assets % to Total				Foreign Plan Assets % to Total
	2014		2013		2014		2013
Equity instruments	59	%	61	%	62	%	61	%
Fixed income instruments	30		29		11		10
Alternates and other	11		10		27		29
Total	100	%	100	%	100	%	100	%

The Company has an active management policy for a portion of the pension assets in the domestic pension plan. The long term asset allocation target for the domestic plan consists of 70% in equity instruments including a portion in alternatives and 30% in fixed income instruments. The balance in equity instruments for the domestic plan can range from 45% to 75% before rebalancing is required under the Company’s policy. The investment policy for the plan based in the United Kingdom is set by the Company along with the trustees of the foreign plan. The current long-term asset allocation target for the plan based in the United Kingdom includes a target of 60% in equity instruments including a portion in alternatives and 40% in fixed income instruments and other.

The pension plan’s investments are stated at fair value. At year-end 2014, a total of $464.6 million in plan investments are considered a level 1 fair value hierarchy and are valued at quoted market prices in active markets. A total of $536.7 million in plan investments are considered a level 2 fair value hierarchy and are valued based on observable market data. The pension plan has $3.8 million in investments that would be considered a level 3 fair value hierarchy.

The fair values of the Company’s net pension assets, by fair value hierarchy, for both the U.S and non-U.S. pension plans as of December 31, 2014, by asset category are as follows (in millions):



Asset category	Level 1			Level 2		Level 3		Total
Cash and cash equivalents (a)	$	—		$	57.2	$	—	$	57.2
Equity securities:
U.S. equity	183.5			98.6		—		282.1
International equity	37.0			101.9		1.9		140.8
Alternatives	—			115.2		1.9		117.1
Mutual funds (b)	166.8			8.0		—		174.8
U.S. government securities	77.6			—		—		77.6
U.S. government futures	(0.3		)	—		—		(0.3		)
Corporate bonds	—			107.3		—		107.3
Senior secured loans	—			4.1		—		4.1
Mortgage-backed securities	—			15.6		—		15.6
High yield bonds	—			12.9		—		12.9
Insurance contracts related to foreign plans	—			15.9		—		15.9
Fair value of net plan assets at the end of the year	$	464.6		$	536.7	$	3.8	$	1,005.1

(a) Reflects cash and cash equivalents held in overnight cash investments.

(b) 25% of mutual funds invest in fixed income types of securities; 75% invest in equity securities.

The fair values of the Company’s net pension assets, by fair value hierarchy, for both the U.S and non-U.S. pension plans as of December 31, 2013, by asset category are as follows (in millions):



Asset category	Level 1		Level 2		Level 3		Total
Cash and cash equivalents (a)	$	—	$	19.0	$	—	$	19.0
Equity securities:
U.S. equity	246.7		129.8		—		376.5
International equity	37.6		92.4		1.3		131.3
Alternatives	—		106.1		3.0		109.1
Mutual funds (b)	181.4		7.3		—		188.7
U.S. government securities	68.9		—		—		68.9
U.S. government futures	0.6		—		—		0.6
Corporate bonds	—		92.0		—		92.0
Senior secured loans	—		4.0		—		4.0
Mortgage-backed securities	—		14.6		—		14.6
High yield bonds	—		12.7		—		12.7
Insurance contracts related to foreign pans	—		21.0		—		21.0
Fair value of net plan assets at the end of the year	$	535.2	$	498.9	$	4.3	$	1,038.4

(a) Reflects cash and cash equivalents held in overnight cash investments.

(b) 44% of mutual funds invest in fixed income types of securities; 56% invest in equity securities.

U.S. equities are valued at the closing price reported in an active market on which the individual securities are traded. U.S. equities and non-U.S. equities are also valued at the net asset value provided by the independent administrator or custodian of the commingled fund. The net asset value is based on the value of the underlying equities, which are traded on an active market. Corporate bonds are valued using inputs such as the closing price reported, if traded on an active market, values derived from comparable securities of issuers with similar credit ratings, or under a discounted cash flow approach that utilizes observable inputs, such as current yields of similar instruments. Fixed income investments are also valued at the net asset value provided by the independent administrator or custodian of the fund. The net asset value is based on the underlying assets, which are valued using inputs such as the closing price reported, if traded on an active market, values derived from comparable securities of issuers with similar credit ratings, or under a discounted cash flow approach that utilizes observable inputs, such as current yields of similar instruments. Alternative investments are primarily valued at the net asset value as determined by the independent administrator or custodian of the fund. The net asset value is based on the underlying investments, which are valued using inputs such as quoted market prices of identical instruments or values derived from comparable securities of issuers with similar credit ratings, or under a discounted cash flow approach that utilizes observable inputs, such as current yields of similar instruments.

Postretirement Plans

The Company sponsors several postretirement defined benefit plans covering certain salaried and hourly employees. The plans provide health care and life insurance benefits for certain eligible retirees.

The following table sets forth the components of net period postretirement benefit income for the postretirement benefit plans for 2014, 2013 and 2012 (in millions):



	Postretirement Benefits
	2014			2013			2012
Service cost - benefits earned during the period	$	—		$	—		$	—
Interest cost on benefit obligation	0.6			0.6			0.8
Amortization of prior service cost	(0.2		)	(0.5		)	(0.5		)
Amortization of actuarial gain	(0.5		)	(0.3		)	(0.4		)
Net periodic benefit income	$	(0.1	)	$	(0.2	)	$	(0.1	)

The following table sets forth the reconciliation of the beginning and ending balances of the benefit obligation of the postretirement benefit plans (in millions):



	Postretirement Benefits
	2014			2013
Changes in benefit obligation:
Benefit obligation - beginning of year	$	11.9		$	14.3
Interest cost on projected benefit obligation	0.6			0.6
Actuarial (gain) loss	1.6			(1.7		)
Benefits paid	(1.3		)	(1.3		)
Benefit obligation - end of year	$	12.8		$	11.9

The measurement date for the Company’s postretirement plans is December 31. The following table presents the estimated future benefit payments for the Company’s postretirement plans (in millions):



	Postretirement Benefit Plans
2015	$	1.3
2016	1.2
2017	1.2
2018	1.1
2019	1.1
2020-2024	4.5
Total	$	10.4

The following table sets forth the funded status and amounts recognized in Teledyne’s consolidated balance sheets for the postretirement plans at year-end 2014 and 2013 (in millions):



	Postretirement Benefits
	2014			2013
Funded status	$	(12.8	)	$	(11.9	)
Unrecognized prior service cost	—			(0.2		)
Unrecognized net gain	(3.1		)	(5.2		)
Accrued benefit cost	$	(15.9	)	$	(17.3	)

Accrued postretirement benefits (long-term)	$	(11.6	)	$	(10.3	)
Accrued postretirement benefits (short-term)	(1.2		)	(1.6		)
Accumulated other comprehensive income	(3.1		)	(5.4		)
Net amount recognized	$	(15.9	)	$	(17.3	)

At December 28, 2014, the amounts in the AOCI that have not yet been recognized as components of net periodic benefit income for the retiree medical plans are: net gain $3.1 million and net prior service credit of less than $0.1 million. At December 28, 2014, the estimated amortization from AOCI expected to be recognized as components of net periodic benefit income during 2015 for the retiree medical plans are: net gain $0.2 million and net prior service cost of less than $0.1 million.

The annual assumed rate of increase in the per capita cost of covered benefits (the health care cost trend rate) for health care plans is 6.5% in 2014 and was assumed to decrease to 5.0% by the year 2018 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point increase in the assumed health care cost trend rates would result in an increase in the annual service and interest costs by less than $0.1 million for 2014 and would result in an increase in the postretirement benefit obligation by $0.5 million at December 28, 2014. A one percentage point decrease in the assumed health care cost trend rates would result in a decrease in the annual service and interest costs by less than $0.1 million for 2014 and would result in a decrease in the postretirement benefit obligation by $0.4 million at December 28, 2014.