TELEDYNE TECHNOLOGIES INCORPORATED — Q2 2023 Form 10-Q
Reporting period: Second quarter and six months ended July 2, 2023; comparisons are to the periods ended July 3, 2022. Amounts are in U.S. dollars unless noted.
Business context and results
Teledyne supplies digital imaging, instrumentation, aerospace and defense electronics, and engineered systems. It reported growth in sales and operating income in each segment in Q2 and the first half of 2023.
- Q2: Sales were $1.425 billion, up 5.1%; operating income was $256.1 million, up 11.6%; net income attributable to Teledyne was $185.3 million, up 8.2%. Diluted EPS was $3.87 versus $3.59. Operating margin was approximately 18.0%, compared with 16.9%.
- First six months: Sales were $2.808 billion, up 4.9%; operating income was $498.6 million, up 10.1%. Net income attributable to Teledyne fell 5.2% to $364.0 million and diluted EPS declined to $7.60 from $8.05, primarily reflecting higher income tax expense. Operating margin was approximately 17.8%, compared with 16.9%.
- Q2 sales growth by segment: Digital Imaging 2.3%; Instrumentation 5.1%; Aerospace and Defense Electronics 10.2%; Engineered Systems 18.5%. The strongest Q2 operating-income growth was in Engineered Systems (33.7%) and Aerospace and Defense Electronics (20.6%).
Cash flow, financial position and liquidity
- Six-month operating cash flow was $393.5 million, versus cash use of $19.8 million in 2022. The prior-year period included a $296.4 million payment to the Swedish Tax Authority related to a disputed pre-acquisition tax reassessment.
- Investing cash use was $104.5 million, including $53.5 million for the ChartWorld acquisition and $51.7 million of capital expenditures. The company plans approximately $100 million of 2023 capital expenditures.
- Financing cash use was $567.8 million, primarily reflecting debt repayments. Cash and equivalents were $364.2 million at July 2, down from $638.1 million at January 1, 2023.
- Total debt, net of discounts and issuance costs, was $3.353 billion, down from $3.921 billion at year-end; cash-adjusted net debt was approximately $2.989 billion. A further $50 million term-loan repayment after quarter-end reduced that loan balance to $60 million.
- $1.131 billion was available under the $1.15 billion credit facility, net of letters of credit. Teledyne reported compliance with debt covenants and expects cash, operating cash flow and available borrowings to meet its requirements.
- Current assets were $2.641 billion and current liabilities were $1.634 billion. Inventory rose to $970.6 million from $890.7 million at January 1.
Material changes, outlook and risks
- Cost of sales as a share of sales improved: 56.6% versus 58.2% in Q2 and 56.9% versus 57.6% for the first half. SG&A as a share of sales increased to 22.0% from 21.1% in Q2 and to 21.8% from 21.6% for the first half.
- The first-half effective tax rate was 20.6%, versus 9.6% a year earlier. The prior-year rate benefited from $49.4 million of discrete tax benefits, primarily from resolution of certain FLIR tax reserves. Excluding discrete items, the rates were 22.3% and 23.1%, respectively.
- Management expects inflation and supply-chain constraints to continue, though perhaps to a lesser extent, in the second half of 2023; these pressures have delayed backlog conversion and weighed on margins. It expects $10–$12 million of pretax FLIR integration-related facility consolidation, lease impairment and employee separation costs in the second half. No full-year sales or EPS guidance is stated in the provided filing text.
- Remaining performance obligations were $3.237 billion; approximately 83% were expected to be recognized as revenue within 12 months. Approximately 70% of company sales are recognized at a point in time and 30% over time.
- Approximately $102 million of Q2 federal tax payments were postponed until October 2023 due to IRS relief related to California floods; management expects to defer an additional approximately $37 million from Q3. The company expects Q4 cash tax payments to rise significantly as deferred payments come due.
- Risks include supply and labor constraints, inflation, foreign-exchange and interest-rate movements, market and government-program demand, and acquisition integration. Export-control disclosures and related trade-compliance matters remain unresolved; potential loss or penalties cannot currently be reasonably estimated and could be material. Environmental remediation reserves were $5.6 million; management expects payments over many years.
Important facts for investors to verify
- Whether sales growth, segment margins and backlog conversion persist as supply-chain and inflation pressures evolve.
- How the higher Q4 tax payments and planned consolidation costs affect second-half cash flow and earnings.
- Debt reduction and cash generation after the disclosed repayments, including the use of available credit capacity.
- Developments, potential financial exposure and export-privilege implications from the unresolved trade-compliance matters.
- Whether ChartWorld and other acquisitions deliver expected growth and integration benefits.