Teledyne Technologies Incorporated — Q1 2023 Form 10-Q
Reporting period: First quarter ended April 2, 2023; comparable quarter ended April 3, 2022. Amounts are in U.S. dollars unless otherwise noted.
Business context and performance
Teledyne supplies digital imaging, instrumentation, aerospace and defense electronics, and engineered systems. Net sales increased 4.7% to $1,383.3 million, with growth in all four segments. The company acquired ChartWorld, a digital marine navigation provider, for $52.5 million net of cash acquired; it is included in Digital Imaging.
Financial results
- Profit: Operating income rose 8.5% to $242.5 million. Net income attributable to Teledyne fell 15.9% to $178.7 million; diluted EPS was $3.73 versus $4.46.
- Margins: Operating margin was approximately 17.5%, up from 16.9%. Cost of sales was 57.2% of sales versus 57.0%; SG&A was 21.7% versus 22.1%.
- Taxes: The effective tax rate was 20.1%, compared with negative 4.7%. Prior-year earnings benefited from $56.5 million of discrete tax benefits, including a $50.0 million noncash benefit related primarily to resolution of FLIR tax reserves. Excluding discrete items, rates were 23.0% and 23.1%, respectively.
- Cash flow: Operating cash flow was $203.0 million versus cash used of $216.7 million. The prior-year period included a $296.4 million payment to the Swedish Tax Authority on a disputed pre-acquisition tax reassessment. Capital expenditures were $24.4 million; investing cash used was $76.9 million, including the acquisition. Financing cash used was $103.4 million, mainly reflecting $100.0 million of credit-facility repayments.
- Liquidity and debt: Cash and equivalents were $665.2 million at quarter-end. Total debt was $3,820.4 million, down from $3,920.6 million at January 1, 2023. $1,103.9 million was available under the $1.15 billion credit facility, and the company reported compliance with covenants. On April 3, it repaid $300.0 million of notes due April 2023.
- Orders: Remaining performance obligations were $3,198.8 million; approximately 82% was expected to be recognized as revenue within 12 months.
Material changes and management commentary
Revenue growth was broad-based: Digital Imaging +2.9%, Instrumentation +8.0%, Aerospace and Defense Electronics +4.2%, and Engineered Systems +9.1%. Segment operating income increased in each segment. Instrumentation had the strongest sales growth; Digital Imaging growth included $25.0 million of incremental acquisition sales.
Management said supply-chain constraints, longer lead times, and inflation in components, logistics, and labor had delayed backlog conversion and pressured margins. These trends were expected to continue in 2023, possibly to a lesser extent. A stronger U.S. dollar had adversely affected sales and could continue to do so. The company planned approximately $100 million of capital expenditures in 2023 and expected cash, operating cash flow, and available credit to meet anticipated requirements.
Risks, contingencies, and unusual items
- Teledyne disclosed voluntary export-compliance disclosures involving FLIR and related matters. The timing and potential loss, penalties, or government action could not be reasonably estimated; an adverse outcome could be material.
- Environmental remediation reserves were $5.7 million. Management did not believe other pending legal matters were likely to have a material adverse effect.
- Management identified risks including supply-chain shortages, inflation, labor availability, foreign exchange and rising interest rates, indebtedness, demand and government-program changes, geopolitical tensions, cybersecurity, and acquisition integration.
- On April 26, 2023, credit agreements were amended to replace LIBOR with a SOFR-based rate and revise leverage covenant terms, including a temporary higher leverage limit after qualifying acquisitions.
Investor facts to verify
- Whether sales growth and improved operating income persist, especially given supply-chain, inflation, and currency pressures.
- How much of the decline in reported net income and EPS reflects the prior-year discrete tax benefit rather than underlying operating performance.
- Debt and liquidity after the April 3 note repayment, including the effect of floating-rate borrowing costs and amended covenants.
- Progress converting the $3.2 billion remaining performance obligations into revenue and cash flow.
- Developments in FLIR-related export matters, including any eventual penalties or restrictions.