Teledyne Technologies 10-Q 2023-04-02

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended April 2, 2023

OR

For the transition period from to

Commission File Number: 1-15295

TELEDYNE TECHNOLOGIES INCORPORATED

(Exact name of registrant as specified in its charter)

805 373-4545

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes ☐ No ☒

There were 47,045,579 shares of common stock, $.01 par value per share, outstanding as of April 19, 2023.

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TELEDYNE TECHNOLOGIES INCORPORATED

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PART I FINANCIAL INFORMATION

TELEDYNE TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE FIRST QUARTER ENDED APRIL 2, 2023 AND APRIL 3, 2022

(Unaudited - Amounts in millions, except per-share amounts)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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TELEDYNE TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE FIRST QUARTER ENDED APRIL 2, 2023 AND APRIL 3, 2022

(Unaudited - Amounts in millions)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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TELEDYNE TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited - Amounts in millions, except share amounts)

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Overview

Teledyne provides enabling technologies for industrial growth markets that require advanced technology and high reliability. These markets include factory automation and condition monitoring, aerospace and defense, air and water quality environmental monitoring, electronics design and development, medical imaging and pharmaceutical research, oceanographic research, and deepwater energy exploration and production. Teledyne is a global sensing and decision-support technology company: providing specialty sensors, cameras, instrumentation, algorithms and software across the electromagnetic spectrum, as well as unmanned systems, in the subsea, land and air domains. We differentiate ourselves from many of our direct competitors by having a customer- and Company-sponsored applied research center that augments our product development expertise. We believe that technological capabilities and innovation and the ability to invest in the development of new and enhanced products are critical to obtaining and maintaining leadership in our markets and the industries in which we compete.

Strategy

Our strategy continues to emphasize growth in our four business segments: digital imaging, instrumentation, aerospace and defense electronics and engineered systems. The markets in which we sell our enabling technologies are characterized by high barriers to entry and include specialized products and services not likely to be commoditized. We intend to strengthen and expand our core businesses with targeted acquisitions and through product development. We continue to focus on balanced and disciplined capital deployment among capital expenditures, acquisitions and product development. We aggressively pursue operational excellence to continually improve our margins and earnings by emphasizing cost containment and cost reductions in all aspects of our business. At Teledyne, operational excellence includes the rapid integration of the businesses we acquire. Using complementary technology across our businesses and through targeted research and development, we seek to create new products to grow our Company and expand our addressable markets. We continue to evaluate our businesses to ensure that they are aligned with our strategy.

Consistent with our strategy, we completed one acquisition in the first quarter of 2023 and two acquisitions in 2022, which were all part of the Digital Imaging segment. The financial results of these acquisitions have been included since the respective date of each acquisition. See Note 2 for additional information about our recent acquisitions.

Trends Affecting Our Business

We have experienced supply chain challenges, including increased lead times, as well as cost inflation for parts and components, logistics and labor due to availability constraints and high demand. This has delayed our ability to convert backlog to revenue and negatively impacted our profit margins. Although perhaps to a lesser extent, we expect inflationary and supply chain constraint trends to continue in 2023.

Costs incurred and sales recorded by subsidiaries operating outside of the United States are translated into U.S. dollars using exchange rates effective during the respective period. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar. The strengthening of the U.S. dollar relative to other currencies adversely impacted our sales in 2022, the first quarter of 2023 and may continue to do so in future periods. The strengthening of the U.S. dollar may also increase the price and reduce the competitiveness of some of our products sold in markets outside the United States.

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Results of Operations

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First Quarter Results

The following is a discussion of our 2023 first quarter results compared with the first quarter results of 2022. Comparisons are with the corresponding reporting period of 2022, unless noted otherwise.

First quarter of 2023 compared with the first quarter of 2022

Our first quarter of 2023 net sales increased 4.7%. Net income for the first quarter of 2023 decreased 15.9%, primarily driven by higher income tax expense in the first quarter of 2023, as discussed below. Net income per diluted share was $3.73 for the first quarter of 2023, compared with net income per diluted share of $4.46.

Net Sales

The first quarter of 2023 net sales, compared with the first quarter of 2022 net sales, reflected higher net sales in each segment.

Cost of Sales

Cost of sales increased $38.1 million in the first quarter of 2023. Cost of sales as a percentage of net sales increased slightly for the first quarter of 2023 to 57.2% from 57.0%.

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Selling, General and Administrative Expenses

SG&A expenses, including research and development expense, increased $9.1 million in the first quarter of 2023. SG&A expenses as a percentage of net sales for the first quarter of 2023 decreased slightly to 21.7% from 22.1%. Corporate expense, which is included in SG&A expenses, was $17.4 million for the first quarter of 2023, compared with $16.1 million, with the increase primarily related to higher professional fees during the period. Stock-based compensation expense was $7.9 million for the first quarter of 2023 compared with $9.0 million, with the decrease related primarily due to timing of grants in previous years.

Acquired Intangible Asset Amortization

Acquired intangible asset amortization for the first quarter of 2023 was $49.7 million compared with $53.6 million, with the decrease from the previous year related primarily to foreign currency translation impacts as well as finalization of FLIR purchase accounting in the second quarter of 2022.

Pension Service Expense

Pension service expense is included in both cost of sales and selling general and administrative expense. For the first quarter of 2023, pension service expense was $1.5 million, compared with $2.2 million. For 2023, the weighted-average discount rate used to determine the benefit obligation for the domestic qualified pension plans is 5.71% compared with 2.97% in 2022.

Operating Income

Operating income for the first quarter of 2023 increased 8.5%. The first quarter of 2023, compared with the first quarter of 2022, reflected higher operating income in each business segment.

Non-operating Income and Expenses

Interest and debt expense, net of interest income, was $21.0 million for the first quarter of 2023, compared with $22.3 million. Non-service retirement benefit income was $3.3 million for the first quarter of 2023 compared with $2.8 million for the first quarter of 2022. Other income and expense, net was expense of $1.1 million for the first quarter of 2023 compared with other expense of $1.0 million for the first quarter of 2022.

Income Taxes

The Company’s effective income tax rate for the first quarter of 2023 was a 20.1% compared with an effective income tax rate of negative 4.7% for the first quarter of 2022. The first quarter of 2023 includes net discrete income tax benefits of $6.6 million compared with net discrete income tax benefits of $56.5 million. The first quarter of 2023 net discrete tax benefits include $5.9 million related to stock-based accounting. The first quarter of 2022 net discrete income tax amounts include a non-cash income tax benefit of $50.0 million primarily related to the resolution of certain FLIR tax reserves and $6.7 million related to stock-based accounting. Excluding the net discrete income tax items in both periods, the effective tax rates would have been 23.0% for the first quarter of 2023 and 23.1% for the first quarter of 2022.

Segment Results

Segment results include net sales and operating income by segment but exclude corporate office expenses. Corporate expense primarily includes various administrative expenses relating to the corporate office not allocated to our segments. See Note 3 to these condensed consolidated financial statements for additional segment information.

Digital Imaging

First quarter of 2023 compared with the first quarter of 2022

Net sales increased primarily due to $25.0 million of incremental sales from acquisitions as well as greater sales of industrial and scientific cameras and x-ray detectors, partially offset by lower sales of unmanned ground systems for defense applications.

Cost of sales increased primarily due to increased net sales, and the cost of sales percentage increased slightly during the period. SG&A increased primarily due to the impact of higher net sales, and SG&A as a percentage of net sales decreased slightly

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during the period. Acquired intangible asset amortization expense decreased primarily due to foreign currency translation impacts as well as finalization of FLIR purchase accounting in the second quarter of 2022.

Operating income increased primarily due to increased net sales and lower acquired intangible asset amortization expense during the period, and operating income as a percentage of net sales increased slightly during the period.

Instrumentation

First quarter of 2023 compared with the first quarter of 2022

Net sales increased due to higher sales across all product lines. Sales of marine instrumentation increased $16.3 million, sales of test and measurement instrumentation increased $4.4 million and sales of environmental instrumentation increased $3.9 million, respectively.

Cost of sales increased primarily due to higher net sales. The cost of sales percentage increased due to change in product mix. SG&A expense increased slightly due to higher net sales partially offset by $0.6 million of lower research and development expense during the period. SG&A expense as a percentage of net sales decreased primarily due to increased net sales and lower research and development spending in the period.

Operating income and operating income as a percentage of net sales increased primarily due to increased net sales and decreased research and development expense during the period.

Aerospace and Defense Electronics

First quarter of 2023 compared with the first quarter of 2022

Net sales increased due to a $4.0 million increase for defense electronics and a $3.0 million increase for aerospace electronics.

Cost of sales increased slightly, primarily due to higher net sales partially offset by the impact of improved product margins across certain product categories, and the cost of sales percentage decreased due to these improved product margins. SG&A expense as well as the SG&A expense percentage increased primarily due higher personnel costs as well as increased research and development expenses.

Operating income and operating income as a percent of net sales increased primarily due to increased net sales and higher product margins during the period.

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Engineered Systems

First quarter of 2023 compared with the first quarter of 2022

Net sales increased due primarily to higher sales of $4.8 million for engineered products and higher sales of $3.9 million for energy systems.

Cost of sales increased primarily due to higher net sales. The cost of sales percentage decreased slightly. SG&A expense as well as SG&A expense as a percentage of net sales increased primarily due to higher research and development expense of $0.8 million during the period.

Operating income increased primarily due to increased net sales. Operating income as a percentage of net sales decreased slightly primarily due to higher research and development expense, including higher bid and proposal costs.

Financial Condition, Liquidity and Capital Resources

Our principal cash and capital requirements are to fund working capital needs, capital expenditures, income tax payments, and debt service requirements, as well as acquisitions. It is anticipated that cash on hand, operating cash flow, together with available borrowings under our $1.15 billion credit facility, will be sufficient to meet these requirements. To support acquisitions, we may need to raise additional capital. No cash pension contributions have been made since 2013 or are planned for the remainder of 2023 for the domestic qualified pension plans.

Cash and Cash Equivalents

Cash and cash equivalents totaled $665.2 million at April 2, 2023 compared with $638.1 million at January 1, 2023. Cash equivalents consist of highly liquid money-market mutual funds and bank deposits with maturities of three months or less when purchased.

Long-term Debt

Total debt at April 2, 2023 was $3,820.4 million compared with $3,920.6 million at January 1, 2023. Subsequent to the end of the first quarter, on April 3, 2023, the Company repaid $300.0 million of its senior fixed rate notes.

At April 2, 2023, $1,103.9 million was available under the $1.15 billion credit facility, after reductions of $25.0 million in borrowings and $21.1 million in outstanding letters of credit.

Our bank credit agreements, which includes our $1.15 billion Credit Facility expiring March 2026, our $245.0 million term loan due May 2026 and our $150.0 million term loan due October 2024, require us to comply with various financial and operating covenants. At April 2, 2023, we were in compliance with these covenants.

Our liquidity is not dependent upon the use of off-balance sheet financial arrangements. We have no off-balance sheet financing arrangements that incorporate the use of special purpose entities or unconsolidated entities.

We may, at any time and from time to time, seek to retire or purchase our outstanding debt through cash purchases, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Cash Flows:

Net cash provided by operating activities was $203.0 million for the first three months of 2023 compared with net cash used in operating activities of $216.7 million. The first three months of 2023 reflected higher accounts receivable collections compared with the first quarter of 2022. The first three months of 2022 included a payment of $296.4 million to the Swedish Tax Authority related to a disputed pre-acquisition 2018 tax reassessment issued to a FLIR subsidiary.

Net cash used in investing activities was $76.9 million for the first three months of 2023 compared with $19.6 million. During the first three months of 2023, we spent $52.5 million on acquisitions. Capital expenditures for the first three months of 2023 and 2022 were $24.4 million and $21.0 million, respectively. We currently plan to invest approximately $100 million for capital expenditures in 2023.

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Net cash used in financing activities was $103.4 million for the first three months of 2023 compared with net cash provided by financing activities of $42.6 million. During the first three months of 2023, we made $100.0 million of floating rate debt payments which reduced borrowings outstanding on our credit facility. Proceeds from the exercise of stock options were $10.2 million for the first three months of 2023 compared with $12.7 million for the first three months of 2022.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are those that are reflective of significant judgments and uncertainties and may potentially result in materially different results under different assumptions and conditions. Our critical accounting policies are the following: accounting for revenue recognition; accounting for business combinations, goodwill, and acquired intangible assets; accounting for income taxes; and accounting for pension plans.

For additional discussion of the application of the critical accounting policies and other accounting policies, see Note 1 to these condensed consolidated Financial Statements and also Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Note 2 of the Notes to Consolidated Financial Statements included in Teledyne’s 2022 Form 10-K.

Safe Harbor Cautionary Statement Regarding Forward-Looking Information

From time to time we make, and this report contains, forward looking statements, as defined in the Private Securities Litigation Reform Act of 1995, directly or indirectly relating to sales, earnings, operating margin, growth opportunities, acquisitions, including the acquisition of FLIR, product sales, capital expenditures, pension matters, stock-based compensation expense, the credit facility, interest expense, severance, relocation and facility consolidation costs, environmental remediation costs, taxes, exchange rate fluctuations and strategic plans. Forward-looking statements are generally accompanied by words such as “estimate”, “project”, “predict”, “believe” or “expect”, that convey the uncertainty of future events or outcomes. All statements made in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in other sections of this Form 10-Q that are not historical in nature should be considered forward-looking. Actual results could differ materially from these forward-looking statements.

Many factors could change the anticipated results, including: ongoing challenges and uncertainties posed by the COVID pandemic for businesses and governments around the world, including production, supply, contractual and other disruptions, such as COVID-related lockdowns, facility closures, furloughs and travel restrictions; changes in relevant tax and other laws; foreign currency exchange risks; rising interest rates; risks associated with indebtedness, as well as our ability to reduce indebtedness and the timing thereof; the impact of semiconductor and other supply chain shortages, higher inflation, including wage competition and higher shipping costs; labor shortages and competition for skilled personnel; the inability to develop and market new competitive products; inherent uncertainties involved in the estimates and judgments used in the preparation of financial statements and the providing of estimates of financial measures, in accordance with U.S. GAAP and related standards; disruptions in the global economy; the ongoing conflict between Russia and Ukraine, including the impact to energy prices and availability, especially in Europe; customer and supplier bankruptcies; changes in demand for products sold to the defense electronics, instrumentation, digital imaging, energy exploration and production, commercial aviation, semiconductor and communications markets; funding, continuation and award of government programs; cuts to defense spending resulting from existing and future deficit reduction measures or changes to U.S. and foreign government spending and budget priorities triggered by the COVID pandemic; impacts from the United Kingdom’s exit from the European Union; uncertainties related to the policies of the U.S. Presidential Administration; the imposition and expansion of, and responses to, trade sanctions and tariffs; the continuing review and resolution of FLIR’s export and tax matters; escalating economic and diplomatic tension between China and the United States; threats to the security of our confidential and proprietary information, including cybersecurity threats; natural and man-made disasters, including those related to or intensified by climate change; and our ability to achieve emission reduction targets and decrease our carbon footprint. Lower oil and natural gas prices, as well as instability in the Middle East or other oil producing regions, and new regulations or restrictions relating to energy production, including those implemented in response to climate change, could further negatively affect our businesses that supply the oil and gas industry. Weakness in the commercial aerospace industry negatively affects the markets of our commercial aviation businesses. In addition, financial market fluctuations affect the value of the Company’s pension assets. Changes in the policies of U.S. and foreign governments, including economic sanctions, could result, over time, in reductions or realignment in defense or other government spending and further changes in programs in which the Company participates.

While our growth strategy includes possible acquisitions, we cannot provide any assurance as to when, if or on what terms any acquisitions will be made. Acquisitions, including the recent acquisition of ChartWorld, involve various inherent risks, such as, among others, our ability to integrate acquired businesses, retain key management and customers and achieve identified financial and operating synergies. There are additional risks associated with acquiring, owning and operating businesses internationally, including those arising from U.S. and foreign government policy changes or actions and exchange rate fluctuations.

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We continue to take action to assure compliance with the internal controls, disclosure controls and other requirements of the Sarbanes-Oxley Act of 2002. While we believe our control systems are effective, there are inherent limitations in all control systems, and misstatements due to error or fraud may occur and may not be detected.

Readers are urged to read our periodic reports filed with the Securities and Exchange Commission for a more complete description of our company, its businesses, its strategies and the various risks that we face. Various risks are identified in our 2022 Form 10-K.

All forward-looking statements speak only as of the date they are made and are based on information available at that time. We assume no obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.

There were no material changes to the information provided under “Item 7A, Quantitative and Qualitative Disclosure About Market Risk” included in our 2022 Form 10-K.

Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934, are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to provide reasonable assurance that information required to be disclosed by us in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Our Chairman, President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, with the participation and assistance of other members of management, have reviewed the effectiveness of our disclosure controls and procedures and have concluded that the disclosure controls and procedures, as of April 2, 2023, are effective at the reasonable assurance level.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

See Item 1 of Part 1, “Financial Statements -- Note 14 -- Commitments and Contingencies.”

There are no material changes to the risk factors previously disclosed in our 2022 Form 10-K in response to Item 1A to Part 1 of Form 10-K. See also Part I Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding supply chain and foreign currency exchange rate risks.

Effective April 26, 2023, the Company entered into the following:

a.Second Amendment to Amended and Restated Credit Agreement dated as of March 4, 2021 (as amended, modified, extended, restated, replaced, or supplemented from time to time, the “Credit Agreement”);

b.Fourth Amendment to Amended and Restated Term Loan Credit Agreement dated as of October 30, 2019 (as amended, modified, extended, restated, replaced, or supplemented from time to time, the “2019 Term Loan Credit Agreement”); and

c.First Amendment to the Term Loan Credit Agreement dated as of March 4, 2021 (as amended, modified, extended, restated, replaced, or supplemented from time to time, “2021 Term Loan Credit Agreement,” and together with the Credit Agreement and 2019 Term Loan Credit Agreement, the “Credit Agreements”).

Capitalized terms used herein without definition have the meanings provided in the amendments to the Credit Agreements. Each Credit Agreement was amended as follows:

a.to replace the interest rate for Dollar denominated Loans thereunder that was previously determined as the sum of the London interbank offered rate (LIBOR) for an applicable interest period plus an Applicable Margin (determined by reference to the Company’s long-term, unsecured, senior, non-credit enhanced indebtedness ratings), with a successor rate determined by reference to the secured overnight financing rate administered by the Federal Reserve Bank of New York (SOFR) for interest periods of one, three or six months (or other period as may be agreed up to twelve months), but not less than a floor of zero, plus 0.10%, plus such Applicable Margin;

b.to modify the required leverage ratio that previously required the Company as of the end of each fiscal quarter not to permit the ratio of its Consolidated Funded Indebtedness net of unencumbered cash and Cash Equivalents of the Company and its Domestic Subsidiaries in excess of $50 million to Consolidated EBITDA for the period of four

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quarters then ended to exceed 3.50:1, (i) to provide that such Consolidated Funded Indebtedness may be net of all cash and Cash Equivalents of the Company and its Domestic Subsidiaries; and (ii) to permit such ratio to increase to not more than 4.00:1 for each of the four quarter ends following an Acquisition by the Company and its Subsidiaries involving consideration in an aggregate amount exceeding $100 million (compared to $50 million in the prior Credit Agreement) (and thereafter such ratio shall again revert to not greater than 3.50:1 for each quarter end following such fourth quarter end); and

c.to further modify the confirmation of the parties to the Credit Agreement that the Amendment and other Loan Documents to be executed and delivered thereunder may be executed by each such party by an electronic signature.

The amendments to the Credit Agreements are being filed as exhibits to this Quarterly Report on Form 10-Q and the summary above is qualified in all respects by the full language of the amendments as set forth in the exhibits.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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Teledyne Technologies Incorporated

Index to Exhibits