Teledyne Technologies Incorporated — Q3 2022 Form 10-Q
Business context and period: The quarter ended October 2, 2022; comparisons are with the quarter ended October 3, 2021. Teledyne operates in Digital Imaging, Instrumentation, Aerospace and Defense Electronics, and Engineered Systems. Results include FLIR, acquired in May 2021.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1,363.6 million | $1,311.9 million | $4,040.4 million | $3,238.6 million |
| Operating income | $245.2 million | $189.6 million | $698.2 million | $429.2 million |
| Net income attributable to Teledyne | $178.3 million | $134.1 million | $562.2 million | $283.5 million |
| Diluted EPS | $3.74 | $2.81 | $11.79 | $6.58 |
| Operating margin | 18.0% | 14.5% | 17.3% | 13.3% |
- Quarterly sales rose 3.9%; operating income rose 29.3% and net income rose 33.0%. Nine-month sales increased 24.8%, operating income 62.7%, and net income 98.3%. Nine-month sales included $620.2 million of incremental FLIR revenue; comparisons also reflect prior-year FLIR acquisition costs and inventory step-up charges.
- Nine-month diluted EPS included a lower effective tax rate: 14.3% versus 21.5%, principally reflecting $57.8 million of discrete tax benefits, including $49.1 million related primarily to resolution of FLIR tax reserves. Excluding discrete items, the filing gives effective rates of 23.1% for 2022 and 23.9% for 2021.
- Net cash from operations was $249.1 million for nine months, down from $529.0 million. The period included a $296.4 million payment to the Swedish Tax Authority, inventory investment, and higher cash tax payments. Capital expenditures were $58.5 million.
- Cash and equivalents were $479.3 million at October 2, 2022, versus $474.7 million at January 2, 2022. Total debt was $3,918.4 million, down from $4,099.4 million; $300 million of debt was classified as current. The company had $1,004.0 million available under its credit facility and reported covenant compliance.
- Working capital included $834.1 million of inventory, up from $752.9 million at year-end. Current assets were $2,519.4 million and current liabilities $1,418.5 million.
Material changes and segment trends
- Q3 sales grew in all four segments. Operating income improved in all four; Digital Imaging operating income rose 40.9%, Aerospace and Defense Electronics 23.4%, Instrumentation 12.9%, and Engineered Systems 3.5%.
- For the first nine months, Engineered Systems sales declined 0.4% and operating income fell 20.1%, reflecting lower sales, including no higher-margin cruise missile turbine engine sales, and lower margins in electronic manufacturing services. Other segments reported higher sales and operating income.
- Foreign currency translation drove a $544.5 million nine-month other comprehensive loss; accumulated other comprehensive loss widened to $964.2 million. This reduced reported comprehensive income despite higher net income.
- Teledyne repaid $185 million of debt during the first nine months, including $110 million of term-loan payments and $75 million of senior-note repurchases. The latter generated a $10.6 million non-cash extinguishment gain.
Outlook, commentary, risks and unusual items
- Management expected approximately $90 million of 2022 capital expenditures and an annual effective tax rate of 23.1% before discrete items. The filing does not provide a specific sales or earnings forecast.
- Management cited supply-chain constraints, longer lead times, inflation in components, logistics and labor, and labor shortages as pressures on margins and the conversion of backlog to revenue; it expected these trends to continue through the rest of 2022 and likely into 2023. A stronger U.S. dollar also weighed on sales.
- Remaining performance obligations were $3,188.5 million; approximately 73% were expected to be recognized as revenue within twelve months.
- FLIR’s disputed Swedish tax reassessment was paid in February 2022; the Swedish appellate court had affirmed the assessment, and the filing reports that permission for a further appeal was denied in Q4 2022. The company also recorded $187.6 million of purchase-accounting adjustments for other acquired FLIR uncertain tax positions.
- Open export-compliance matters could result in fines, penalties, or restrictions on export privileges; management said it could not reasonably estimate their resolution timing or potential loss. The FLIR export-trade consent agreement was closed in April 2022 after the final $3.5 million penalty installment was paid.
- After quarter-end, Teledyne acquired ETM-Electromatic for approximately $85 million in cash. It also acquired an approximate 80% interest in NL Acoustics during Q3 for $11.9 million; the minority interest has a put option exercisable beginning in 2025.
Important facts for investors to verify
- How much future operating cash flow is affected by inventory growth, accrued-liability movements, and the timing of tax and other payments.
- Whether supply constraints, inflation, foreign exchange, and labor availability continue to delay backlog conversion or pressure margins, especially in Engineered Systems.
- The durability of earnings growth after separating organic growth from FLIR acquisition effects, prior-year transaction costs, inventory step-up charges, and discrete tax benefits.
- Debt repayment and refinancing needs, including the $300 million senior notes due April 2023, variable-rate exposure, and continued compliance with credit covenants.
- Potential financial and operating consequences of remaining FLIR tax and export-compliance matters, and the terms and future obligations associated with recent acquisitions and NL Acoustics’ put option.