Teledyne Technologies Incorporated — Q2 2021 Form 10-Q
Reporting period: Second quarter and six months ended July 4, 2021; comparative periods ended June 28, 2020. Results include FLIR Systems from its May 14, 2021 acquisition date, so year-over-year comparisons are materially affected by the acquisition.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $1,121.0m | $743.3m | $1,926.7m | $1,527.9m |
| Operating income | $104.4m | $109.8m | $239.6m | $213.8m |
| Net income | $64.7m | $93.7m | $149.4m | $175.9m |
| Diluted EPS | $1.48 | $2.48 | $3.66 | $4.65 |
| Operating cash flow | Not stated separately for the quarter | $336.2m | $232.2m |
- Q2 sales rose 50.8%; six-month sales rose 26.1%. FLIR contributed $301.4m of incremental sales in both reported periods. Q2 operating income fell 4.9% and net income fell 30.9%; six-month operating income rose 12.1%, while net income fell 15.1%.
- Q2 gross margin was approximately 40.8% versus 38.0%; operating margin was approximately 9.3% versus 14.8%. Six-month operating margin was approximately 12.4% versus 14.0%. Higher acquisition-related costs weighed on operating profit despite improved cost-of-sales ratios.
- Q2 FLIR results contributed $23.8m operating income, including $70.2m of related transaction and purchase-accounting expenses. Total FLIR-related pretax charges were $140.7m in Q2 and $177.2m for the six months; the latter included $30.6m of bridge-loan and debt-extinguishment fees.
- Six-month operating cash flow increased by $104.0m year over year. Management cited working-capital improvement and FLIR cash flow, partly offset by $66.7m of after-tax FLIR acquisition costs and $33.6m of higher income-tax payments. Capital spending was $38.4m, implying approximately $297.8m of operating cash flow less capital expenditures.
Balance sheet, debt and liquidity
- At July 4, 2021, cash and equivalents were $695.1m; total debt was $4,742.0m, up from $778.5m at January 3, 2021, primarily to finance FLIR. Cash less debt was approximately negative $4.05bn.
- Current assets were $2,650.9m and current liabilities $1,053.3m. The company reported $743.5m available under its $1.15bn credit facility after borrowings and letters of credit. It reported compliance with credit covenants; actual net-debt/EBITDA was 3.7x against a 4.75x maximum, and EBITDA/interest was 8.5x against a 3.0x minimum.
- Financing included $3.0bn of investment-grade notes and a $1.0bn term loan, alongside assumed FLIR debt. Reported six-month financing cash inflow was $3,451.4m; investing cash outflow was $3,761.8m, including $3.7bn for FLIR, net of cash acquired.
Business changes, outlook and risks
- FLIR was acquired for approximately $8.1bn in cash, Teledyne shares and assumed debt and is included in Digital Imaging. The acquisition added imaging products and markets; its purchase-price allocation remained preliminary, including goodwill and intangible-asset valuations.
- Digital Imaging sales grew 143.9% in Q2, including FLIR; Instrumentation grew 10.6%, Aerospace and Defense Electronics 6.5%, and Engineered Systems declined 1.5%. Management cited organic growth and stronger margins in several legacy businesses, but commercial aerospace remained weak.
- Management expected approximately $132m of 2021 capital expenditures, with $38.4m spent in the first half. It expected a 23.9% full-year effective tax rate before discrete items. No specific revenue or earnings guidance was provided. Management said cash, operating cash flow and available credit were expected to meet requirements.
- Key uncertainties include COVID-19 impacts, supply-chain and semiconductor shortages, inflation, commercial-aerospace weakness, FLIR integration and synergy execution, and increased leverage and debt-service costs.
- FLIR faces a Swedish tax reassessment of approximately $357.8m, including penalties. It had received an adverse first-instance ruling, appealed, and had a September 15, 2021 appeal hearing scheduled. No liability was accrued; a $260m letter of credit supported the dispute, and an adverse outcome could materially affect cash flow. A separate Belgium tax review also remained unresolved.
- FLIR export-control matters could lead to fines, restrictions or loss of export privileges; potential exposure was not reasonably estimable. A DDTC consent agreement had $3.5m remaining to be paid, and its second external compliance audit was commencing. The filing also reported $6.4m of environmental remediation reserves.
Important facts for investors to verify
- How FLIR’s full-quarter results, integration progress, synergies and acquisition-related costs affect ongoing margins and earnings.
- Debt reduction plans, interest expense, covenant headroom and liquidity after the FLIR financing.
- Developments in the Swedish and Belgium tax matters, including the appeal outcome and potential cash exposure.
- Resolution and financial consequences of FLIR’s export-control matters and the second compliance audit.
- Whether organic growth, cash generation and the stated capital-spending and tax expectations are sustained; reported comparisons include partial-period FLIR results.