Teledyne Technologies Incorporated — FY2022 Form 10-K
Business context and reporting period. Teledyne provides sensing, instrumentation, aerospace and defense electronics, and engineered systems through four segments: Digital Imaging, Instrumentation, Aerospace and Defense Electronics, and Engineered Systems. This filing covers the 52-week fiscal year ended January 1, 2023; comparisons are with the 52-week fiscal year ended January 2, 2022. The 2021 FLIR acquisition materially expanded Digital Imaging and affects year-over-year comparability.
Financial performance
| Metric (USD millions, except per-share amounts) | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | 5,458.6 | 4,614.3 | +18.3% |
| Operating income | 972.0 | 624.3 | +55.7% |
| Operating margin | 17.8% | 13.5% | +4.3 percentage points |
| Net income attributable to Teledyne | 788.6 | 445.3 | +77.1% |
| Diluted EPS | $16.53 | $10.05 | +64.5% |
| Cash provided by operating activities | 486.8 | 824.6 | Down |
| Capital expenditures | 92.6 | 101.6 | Down |
| Free cash flow | 394.2 | 723.0 | Down |
Cost of sales was 57.3% of sales versus 60.1% in 2021; the prior year included $106.4 million of FLIR acquired-inventory step-up expense. SG&A was 21.2% of sales versus 23.2%, with 2021 including FLIR-related transaction and purchase-accounting costs. Excluding discrete tax benefits, the effective tax rate was 22.7% in 2022 and 23.1% in 2021. Reported rates were 13.1% and 16.6%, respectively, after discrete tax benefits of $86.7 million and $34.7 million.
Operating cash flow fell principally because of the $296.4 million payment on a disputed pre-acquisition Swedish tax reassessment, higher inventory purchases to mitigate supply constraints, and higher income-tax payments. Management’s adjusted free cash flow, which adds back the Swedish tax payment, was $690.6 million; this is a non-GAAP measure.
Segment results
| Segment | 2022 sales | Sales change | 2022 operating income | Operating-income change |
|---|---|---|---|---|
| Digital Imaging | $3,110.9 million | +28.9% | $519.3 million | +59.5% |
| Instrumentation | $1,254.0 million | +7.5% | $295.3 million | +16.4% |
| Aerospace and Defense Electronics | $682.4 million | +8.5% | $184.1 million | +38.2% |
| Engineered Systems | $411.3 million | +1.4% | $39.2 million | −19.3% |
Digital Imaging included $593.7 million of incremental sales from current- and prior-year acquisitions, principally FLIR. Engineered Systems earnings declined amid unfavorable product mix and higher cost of sales.
Debt, liquidity and capital allocation
Cash and cash equivalents were $638.1 million at year-end, including $403.2 million held by foreign subsidiaries. Debt carrying value, net of issuance costs, was $3,920.6 million, including $300.1 million current debt; principal maturities totaled $3,947.1 million. Teledyne repaid $185.0 million of debt during 2022. It had $1,003.7 million of available capacity under its $1.15 billion credit facility and reported compliance with debt covenants. The company reported $38.6 million of outstanding letters of credit.
Management expects operating cash flow and available borrowing capacity to fund working capital, capital spending, taxes and debt service. Planned 2023 capital expenditures are approximately $100 million, principally for facilities and manufacturing equipment. The company does not anticipate cash dividends in the foreseeable future and reported no share repurchases since 2015.
Outlook, commentary and material risks
- Management expects supply-chain constraints and inflationary pressures—including component, labor and shipping costs—to continue in 2023. These factors delayed conversion of backlog to sales and pressured margins; the company said it was taking supplier and pricing actions to mitigate effects.
- Remaining performance obligations were $3,099.3 million at year-end; management expected approximately 76% to be recognized as revenue within the next 12 months. The filing provides no specific consolidated revenue or earnings guidance.
- U.S. Government contracts generated approximately 25% of 2022 sales. Funding, award and change-order delays affected 2022 revenue, particularly in Engineered Systems, and were continuing into 2023. The MO&I contract ended in December 2022 and was replaced by MOSSI II beginning in January 2023; future option years and some contract funding are not assured.
- Foreign customers represented approximately 47% of sales. The stronger U.S. dollar adversely affected 2022 sales, and trade restrictions, sanctions, geopolitical tensions, and economic weakness could further affect sales, costs and supply chains.
- FLIR export-compliance matters remain a contingency: a second audit-related voluntary disclosure and other disclosures were pending disposition. The company could not estimate the timing or potential loss; an adverse result could include significant penalties or loss or suspension of export privileges. The earlier Swedish tax reassessment was paid in 2022, and permission to appeal was denied.
- Goodwill was $7,873.0 million. The FLIR reporting unit’s estimated fair value exceeded carrying value by approximately 14% in the 2022 impairment test; a decline in projected results or other valuation assumptions could lead to impairment. No goodwill impairment was recorded.
- Other material exposures include variable-rate debt, customer and supplier concentration in specialized components, fixed-price contract cost risk, cybersecurity, environmental remediation, and natural or man-made disruptions. Environmental reserves were $5.8 million; management did not expect additional environmental costs to materially affect financial condition or liquidity based on current information.
Investor verification priorities
- Separate organic growth from acquisition contribution, especially the $593.7 million of acquisition-related incremental Digital Imaging sales and the full-year FLIR comparison.
- Assess the sustainability of earnings growth after the $86.7 million discrete tax benefit and the unusually large prior-year FLIR transaction, inventory step-up and integration charges.
- Track cash conversion, inventory growth, and the effects of supply-chain mitigation; reconcile reported free cash flow with management’s adjusted measure and its add-backs.
- Review upcoming debt maturities, refinancing needs and variable-rate exposure, including the $300.1 million due in 2023 and $601.0 million in 2024.
- Monitor Engineered Systems contract execution and MOSSI II funding/options, as well as the timing and resolution of FLIR export-control disclosures.
- Evaluate whether the FLIR reporting unit’s approximately 14% goodwill valuation cushion remains adequate as market conditions, interest rates and forecasts change.