Teledyne Technologies Incorporated — Q2 2022 Form 10-Q
Reporting period: Second quarter and six months ended July 3, 2022; comparisons are to the periods ended July 4, 2021. Amounts are in U.S. dollars.
Business context
Teledyne supplies digital imaging, instrumentation, aerospace and defense electronics, and engineered systems. Results include FLIR, acquired in May 2021, within Digital Imaging. The acquisition materially affects year-over-year comparisons.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $1,355.8m | $1,121.0m | $2,676.8m | $1,926.7m |
| Operating income | $229.5m | $104.4m | $453.0m | $239.6m |
| Net income | $171.3m | $64.7m | $383.9m | $149.4m |
| Diluted EPS | $3.59 | $1.48 | $8.05 | $3.66 |
| Operating margin | 16.9% | 9.3% | 16.9% | 12.4% |
- Q2 sales increased 20.9%, operating income 119.8%, and net income 164.8%. First-half sales increased 38.9%, operating income 89.1%, and net income 157.0%.
- FLIR contributed incremental sales of $167.6m in Q2 and $620.2m in the first half. Management also reported organic growth in Digital Imaging and growth across the other segments except Engineered Systems in the first half.
- Q2 cost of sales was 58.2% of sales, down from 59.2%; first-half cost of sales was 57.6%, down from 60.0%. Management attributed the improvement mainly to FLIR’s lower cost-of-sales profile. Engineered Systems operating income fell 21.8% in Q2 and 30.5% in the first half, with weaker margins.
- First-half operating cash flow was negative $19.8m, versus positive $336.2m. Capital expenditures were $41.8m, making operating cash flow less capital expenditures negative $61.6m.
- Cash was $278.8m at July 3, 2022, down from $474.7m at year-end 2021. Current assets were $2,337.4m and current liabilities $1,403.0m. Total debt was $3,945.7m; $300m was classified as current. Net debt based on reported cash was approximately $3,666.9m.
Changes, unusual items and outlook
- First-half operating cash flow was pressured by the $296.4m Swedish tax payment, inventory investment, higher incentive compensation and income-tax payments, and other working-capital changes. Teledyne has sought permission to appeal the Swedish ruling.
- Q2 2021 included $117.9m of FLIR-related pretax acquisition, integration, employee-award and inventory step-up costs; the first half of 2021 included $154.4m of FLIR-related costs, including debt fees. These items make reported earnings growth less comparable.
- Q2 2022 included a $10.6m non-cash gain from retiring $75m of senior notes. First-half effective tax rate was 9.6%, including $57.5m in discrete tax benefits, primarily $49.4m related to resolution of FLIR tax reserves. Management reported an expected 2022 annual effective tax rate of 23.1% before discrete items.
- Debt declined from $4,099.4m at January 2, 2022. The credit facility had $1,004m available; leverage ratio was 2.5x, versus a maximum covenant of 4.5x at quarter-end (scheduled to tighten to 4.0x in Q4 2022 and 3.5x thereafter). The company reported covenant compliance.
- Management expected 2022 capital expenditures of approximately $100m and said cash, operating cash flow and available credit were expected to meet requirements. No full-year sales or earnings guidance is stated in the provided filing text.
- Remaining performance obligations were $3,075.7m; approximately 74% was expected to be recognized as revenue within 12 months.
- Management cited supply-chain constraints, longer lead times, cost inflation and labor shortages as pressures on margins and backlog conversion, expected to continue in the second half. COVID-related disruptions, a stronger U.S. dollar, rising interest rates, geopolitical volatility and Russia-Ukraine-related disruption were also identified as risks.
Contingencies and subsequent events
- FLIR-related export-compliance matters remain open. Management could not reasonably estimate timing or potential loss; an unfavorable outcome could involve fines, penalties or loss or suspension of export privileges. Certain past export matters were closed during the quarter, including the DDTC Consent Agreement after a $3.5m final penalty payment.
- In July 2022, the Canadian Revenue Agency notified Teledyne that it intended to challenge certain tax positions for 2013–2017. The company estimated any reassessment would be less than $20m and intends to appeal.
- In July 2022, Teledyne acquired a majority interest in NL Acoustics for an immaterial amount.
Important facts for investors to verify
- How much reported growth and margin improvement reflects FLIR, organic performance, and the absence of prior-year acquisition costs.
- Whether operating cash flow recovers after the Swedish tax payment and working-capital outflows, and whether inventory and receivables convert to cash.
- Progress on debt reduction and the impact of tighter leverage covenants, variable interest rates and currency movements.
- Resolution and potential financial or export-authorization consequences of FLIR tax and export-compliance matters, plus the Canadian tax challenge.
- Whether supply-chain, inflation and labor pressures affect backlog conversion, margins and the stated capital-spending outlook.