filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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. As part of our continuing FLIR acquisition integration efforts, and as we accelerate the relocation of select Teledyne FLIR operations to existing sites, we expect to record $10.0 million to $12.0 million of pretax costs in the second half of 2023 related to facility consolidation costs, facility lease impairments and employee separation costs.
Consistent with our strategy, we completed one acquisition in the first half 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 also delayed our ability to convert backlog to revenue and negatively impacted our profit margins. Although perhaps to a lesser extent compared to recent quarters, we expect inflationary and supply chain constraint trends to continue in the second half of 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. See Note 13 for additional discussion around our derivative instruments and hedging activities.
Results of Operations
| Second Quarter | % | Six Months | % | ||||||||||||||||||||||||||||||||
| (in millions) | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||||||
| Net sales | $ | 1,424.7 | $ | 1,355.8 | 5.1 | % | $ | 2,808.0 | $ | 2,676.8 | 4.9 | % | |||||||||||||||||||||||
| Costs and expenses | |||||||||||||||||||||||||||||||||||
| Cost of sales | 806.3 | 788.6 | 2.2 | % | 1,597.0 | 1,541.2 | 3.6 | % | |||||||||||||||||||||||||||
| Selling, general and administrative ("SG&A") | 313.0 | 286.4 | 9.3 | % | 613.4 | 577.7 | 6.2 | % | |||||||||||||||||||||||||||
| Acquired intangible asset amortization | 49.3 | 51.3 | (3.9) | % | 99.0 | 104.9 | (5.6) | % | |||||||||||||||||||||||||||
| Total costs and expenses | 1,168.6 | 1,126.3 | 3.8 | % | 2,309.4 | 2,223.8 | 3.8 | % | |||||||||||||||||||||||||||
| Operating income (loss) | 256.1 | 229.5 | 11.6 | % | 498.6 | 453.0 | 10.1 | % | |||||||||||||||||||||||||||
| Interest and debt income (expense), net | (22.3) | (22.5) | (0.9) | % | (43.3) | (44.8) | (3.3) | % | |||||||||||||||||||||||||||
| Gain (loss) on debt extinguishment | 1.6 | 10.6 | (84.9) | % | 1.6 | 10.6 | (84.9) | % | |||||||||||||||||||||||||||
| Non-service retirement benefit income (expense) | 2.9 | 2.9 | — | % | 6.2 | 5.7 | 8.8 | % | |||||||||||||||||||||||||||
| Other income (expense), net | (3.4) | 1.0 | * | (4.5) | — | * | |||||||||||||||||||||||||||||
| Income before income taxes | 234.9 | 221.5 | 6.0 | % | 458.6 | 424.5 | 8.0 | % | |||||||||||||||||||||||||||
| Provision (benefit) for income taxes | 49.4 | 50.2 | (1.6) | % | 94.3 | 40.6 | 132.3 | % | |||||||||||||||||||||||||||
| Net income (loss) including noncontrolling interest | 185.5 | 171.3 | 8.3 | % | 364.3 | 383.9 | (5.1) | % | |||||||||||||||||||||||||||
| Less: net income (loss) attributable to noncontrolling interest | 0.2 | — | * | 0.3 | — | * | |||||||||||||||||||||||||||||
| Net income (loss) attributable to Teledyne | $ | 185.3 | $ | 171.3 | 8.2 | % | $ | 364.0 | $ | 383.9 | (5.2) | % | |||||||||||||||||||||||
- not meaningful
| Second Quarter | % | Six Months | % | ||||||||||||||||||||||||||||||||
| (dollars in millions) | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||||||
| Net sales (a): | |||||||||||||||||||||||||||||||||||
| Digital Imaging | $ | 793.3 | $ | 775.8 | 2.3 | % | $ | 1,565.8 | $ | 1,526.3 | 2.6 | % | |||||||||||||||||||||||
| Instrumentation | 328.4 | 312.5 | 5.1 | % | 661.9 | 621.4 | 6.5 | % | |||||||||||||||||||||||||||
| Aerospace and Defense Electronics | 186.0 | 168.8 | 10.2 | % | 359.2 | 335.0 | 7.2 | % | |||||||||||||||||||||||||||
| Engineered Systems | 117.0 | 98.7 | 18.5 | % | 221.1 | 194.1 | 13.9 | % | |||||||||||||||||||||||||||
| Total net sales | $ | 1,424.7 | $ | 1,355.8 | 5.1 | % | $ | 2,808.0 | $ | 2,676.8 | 4.9 | % | |||||||||||||||||||||||
| Operating income (loss): | |||||||||||||||||||||||||||||||||||
| Digital Imaging | $ | 124.6 | $ | 117.9 | 5.7 | % | $ | 246.8 | $ | 233.6 | 5.7 | % | |||||||||||||||||||||||
| Instrumentation | 81.4 | 73.6 | 10.6 | % | 162.1 | 145.2 | 11.6 | % | |||||||||||||||||||||||||||
| Aerospace and Defense Electronics | 53.2 | 44.1 | 20.6 | % | 100.2 | 87.0 | 15.2 | % | |||||||||||||||||||||||||||
| Engineered Systems | 11.5 | 8.6 | 33.7 | % | 21.5 | 18.0 | 19.4 | % | |||||||||||||||||||||||||||
| Corporate expense | (14.6) | (14.7) | (0.7) | % | (32.0) | (30.8) | 3.9 | % | |||||||||||||||||||||||||||
| Total operating income (loss) | $ | 256.1 | $ | 229.5 | 11.6 | % | $ | 498.6 | $ | 453.0 | 10.1 | % | |||||||||||||||||||||||
| (a) Net sales excludes inter-segment sales of $8.1 million and $14.3 million for the second quarter and six months of 2023, respectively, and $5.1 million and $10.6 million for the second quarter and six months of 2022, respectively. | |||||||||||||||||||||||||||||||||||
Second Quarter Results
The following is a discussion of our 2023 second quarter results compared with the second quarter results of 2022. Comparisons are with the corresponding reporting period of 2022, unless noted otherwise.
Second quarter of 2023 compared with the second quarter of 2022
Our second quarter of 2023 net sales increased 5.1%. Net income for the second quarter of 2023 increased 8.2%, primarily driven by higher net sales. Net income per diluted share was $3.87 for the second quarter of 2023, compared with net income per diluted share of $3.59.
Net Sales
The second quarter of 2023 net sales, compared with the second quarter of 2022, reflected higher net sales in each segment.
Cost of Sales
Cost of sales increased $17.7 million in the second quarter of 2023. Cost of sales as a percentage of net sales decreased for the second quarter of 2023 to 56.6% from 58.2%.
Selling, General and Administrative Expenses
SG&A expenses, including research and development expense, increased $26.6 million in the second quarter of 2023. SG&A expenses as a percentage of net sales for the second quarter of 2023 increased to 22.0% from 21.1%. Corporate expense, which is included in SG&A expenses, was $14.6 million for the second quarter of 2023, compared with $14.7 million. Stock-based compensation expense was $8.4 million for the second quarter of 2023 compared with $6.4 million, with the increase due to timing of grants in previous years.
Acquired Intangible Asset Amortization
Acquired intangible asset amortization for the second quarter of 2023 was $49.3 million compared with $51.3 million, with the decrease from the previous year related primarily to foreign currency translation impacts as well as certain finite-lived intangibles within the test and measurement instrumentation product line becoming fully amortized in the third quarter of 2022.
Pension Service Expense
Pension service expense is included in both cost of sales and selling general and administrative expense. For the second quarter of 2023, pension service expense was $1.5 million, compared with $2.1 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 second quarter of 2023 increased 11.6%. The second quarter of 2023, compared with the second 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 $22.3 million for the second quarter of 2023, compared with $22.5 million. Non-service retirement benefit income was $2.9 million for both the second quarter of 2023 and 2022. Other income and expense, net was expense of $3.4 million for the second quarter of 2023 compared with income of $1.0 million for the second quarter of 2022.
Income Taxes
The Company’s effective income tax rate for the second quarter of 2023 was 21.0% compared with an effective income tax rate of 22.7% for the second quarter of 2022. The second quarter of 2023 includes net discrete income tax benefits of $1.4 million compared with net discrete income tax benefits of $1.0 million. The second quarter of 2023 net discrete tax benefits include $1.3 million related to stock-based accounting compared with $1.8 million. Excluding the net discrete income tax items in both periods, the effective rate would have been 21.6% for the second quarter of 2023 and 23.1% for the second quarter of 2022.
First six months of 2023 compared with the six months of 2022
The first six months of 2023 net sales increased 4.9%. Net income for the first six months of 2023 decreased 5.2%, primarily driven by higher income tax expense in the first half of 2023, as discussed below. Net income per diluted share was $7.60 for the first six months of 2023, compared with net income per diluted share of $8.05.
Net Sales
The first six months of 2023 net sales, compared with the first six months of 2022 net sales, reflected higher net sales in each segment.
Cost of Sales
Cost of sales increased $55.8 million in the first six months of 2023. Cost of sales as a percentage of net sales decreased for the first six months of 2023 to 56.9% from 57.6%.
Selling, General and Administrative Expenses
SG&A expenses, including research and development expense, increased $35.7 million in the first six months of 2023. SG&A expenses as a percentage of net sales for the first six months of 2023 increased slightly to 21.8% from 21.6%. Corporate expense, which is included in SG&A expenses, was $32.0 million for the first six months of 2023, compared with $30.8 million, with the increase primarily related to higher professional fees during the period. Stock-based compensation expense was $16.3 million for the first six months of 2023 compared with $15.4 million.
Acquired Intangible Asset Amortization
Acquired intangible asset amortization for the first six months of 2023 was $99.0 million compared with $104.9 million, with the decrease from the previous year related primarily to foreign currency translation impacts, finalization of FLIR purchase accounting in the second quarter of 2022 and certain finite-lived intangibles within the test and measurement instrumentation product line becoming fully amortized in the third 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 six months of 2023, pension service expense was $3.0 million compared with $4.3 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 six months of 2023 increased 10.1%. The first six months of 2023, compared with the first six months of 2022, reflected higher operating income in each business segment.
Non-operating Income and Expenses
Interest and debt expense, net of interest income, was $43.3 million for the first six months of 2023, compared with $44.8 million. Non-service retirement benefit income was $6.2 million for the first six months of 2023 compared with $5.7 million for the first six months of 2022. Other income and expense, net was expense of $4.5 million for the first six months of 2023 compared with an immaterial amount for the first six months of 2022.
Income Taxes
The Company’s effective income tax rate for the first six months of 2023 was 20.6% compared with an effective income tax rate of 9.6% for the first six months of 2022. The first six months of 2023 includes net discrete income tax benefits of $8.0 million compared with net discrete income tax benefits of $57.5 million. The first six months of 2023 net discrete tax benefits include $7.2 million related to stock-based accounting. The first six months of 2022 net discrete income tax amounts include a non-cash income tax benefit of $49.4 million primarily related to the resolution of certain FLIR tax reserves and $8.5 million related to stock-based accounting. Excluding the net discrete income tax items in both periods, the effective tax rates would have been 22.3% for the first six months of 2023 and 23.1% for the first six months 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
| Second Quarter | Change | Six Months | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 793.3 | $ | 775.8 | $ | 17.5 | 2.3 | % | $ | 1,565.8 | $ | 1,526.3 | $ | 39.5 | 2.6 | % | |||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | $ | 427.2 | $ | 434.3 | $ | (7.1) | (1.6) | % | $ | 846.5 | $ | 839.5 | $ | 7.0 | 0.8 | % | |||||||||||||||||||||||||||||||||||||||||||
| SG&A expense | $ | 195.9 | $ | 177.2 | $ | 18.7 | 10.6 | % | $ | 381.1 | $ | 358.3 | $ | 22.8 | 6.4 | % | |||||||||||||||||||||||||||||||||||||||||||
| Acquired intangible asset amortization | $ | 45.6 | $ | 46.4 | $ | (0.8) | (1.7) | % | $ | 91.4 | $ | 94.9 | $ | (3.5) | (3.7) | % | |||||||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 124.6 | $ | 117.9 | $ | 6.7 | 5.7 | % | $ | 246.8 | $ | 233.6 | $ | 13.2 | 5.7 | % | |||||||||||||||||||||||||||||||||||||||||||
| As a percentage of net sales: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | 53.9 | % | 56.0 | % | 54.1 | % | 55.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| SG&A expense | 24.7 | % | 22.8 | % | 24.3 | % | 23.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquired intangible asset amortization | 5.7 | % | 6.0 | % | 5.8 | % | 6.2 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | 15.7 | % | 15.2 | % | 15.8 | % | 15.3 | % |
Second quarter of 2023 compared with the second quarter of 2022
Net sales increased primarily due to $28.8 million of incremental sales from acquisitions as well as greater sales of x-ray products, commercial infrared imaging components and solutions, and industrial and scientific cameras sales, partially offset by lower sales of unmanned ground systems for defense applications.
Cost of sales decreased primarily due to product mix partially offset by the increase in net sales. As a result, the cost of sales percentage decreased during the period. SG&A and SG&A as a percentage of net sales increased primarily due to the impact of higher net sales and higher employee compensation costs and travel costs. Research and development expense also increased $4.9 million compared to the previous period. Acquired intangible asset amortization expense decreased slightly primarily due to foreign currency translation impacts.
Operating income increased primarily due to increased net sales during the period, and operating income as a percentage of net sales increased slightly during the period.
First six months of 2023 compared with the six months of 2022
Net sales increased primarily due to $53.9 million of incremental sales from acquisitions as well as greater sales of x-ray products, commercial infrared imaging components and solutions, and industrial and scientific cameras sales, 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 decreased slightly during the period. SG&A and SG&A as a percentage of net sales increased primarily due to the impact of higher net sales as well as increased research and development expense of $13.2 million. 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
| Second Quarter | Change | Six Months | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 328.4 | $ | 312.5 | $ | 15.9 | 5.1 | % | $ | 661.9 | $ | 621.4 | $ | 40.5 | 6.5 | % | |||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | $ | 172.5 | $ | 166.9 | $ | 5.6 | 3.4 | % | $ | 352.9 | $ | 330.8 | $ | 22.1 | 6.7 | % | |||||||||||||||||||||||||||||||||||||||||||
| SG&A expense | $ | 71.0 | $ | 67.3 | $ | 3.7 | 5.5 | % | $ | 139.7 | $ | 135.8 | $ | 3.9 | 2.9 | % | |||||||||||||||||||||||||||||||||||||||||||
| Acquired intangible asset amortization | $ | 3.5 | $ | 4.7 | $ | (1.2) | (25.5) | % | $ | 7.2 | $ | 9.6 | $ | (2.4) | (25.0) | % | |||||||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 81.4 | $ | 73.6 | $ | 7.8 | 10.6 | % | $ | 162.1 | $ | 145.2 | $ | 16.9 | 11.6 | % | |||||||||||||||||||||||||||||||||||||||||||
| As a percentage of net sales: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | 52.5 | % | 53.4 | % | 53.3 | % | 53.2 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| SG&A expense | 21.6 | % | 21.5 | % | 21.1 | % | 21.9 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquired intangible asset amortization | 1.1 | % | 1.5 | % | 1.1 | % | 1.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | 24.8 | % | 23.6 | % | 24.5 | % | 23.4 | % |
Second quarter of 2023 compared with the second quarter of 2022
Net sales increased due to higher sales at our marine instrumentation and our test and measurement instrumentation product lines. Sales of marine instrumentation increased $12.1 million and sales of test and measurement instrumentation increased $4.0 million, respectively. Sales of environmental instrumentation decreased $0.2 million.
Cost of sales increased primarily due to higher net sales. The cost of sales percentage decreased due to product mix. SG&A expense increased due to higher net sales, and SG&A expense as a percentage of net sales increased slightly in the period. Acquired intangible asset amortization expense decreased primarily due to certain finite-lived intangibles within the test and measurement instrumentation line becoming fully amortized in the third quarter of 2022.
Operating income and operating income as a percentage of net sales increased primarily due to increased net sales and lower acquired intangible asset amortization.
For six months of 2023 compared with the six months of 2022
Net sales increased due to higher sales across all product lines. Sales of marine instrumentation increased $28.4 million, sales of test and measurement instrumentation increased $8.4 million and sales of environmental instrumentation increased $3.7 million, respectively.
Cost of sales increased primarily due to higher net sales, and the cost of sales percentage increased slightly. SG&A expense increased slightly due to higher net sales. SG&A expense as a percentage of net sales decreased slightly in the period. Acquired intangible asset amortization expense decreased primarily due to certain finite-lived intangibles within the test and measurement instrumentation line becoming fully amortized in the third quarter of 2022.
Operating income and operating income as a percentage of net sales increased primarily due to increased net sales and lower acquired intangible asset amortization.
Aerospace and Defense Electronics
| Second Quarter | Change | Six Months | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 186.0 | $ | 168.8 | $ | 17.2 | 10.2 | % | $ | 359.2 | $ | 335.0 | $ | 24.2 | 7.2 | % | |||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | $ | 107.3 | $ | 103.2 | $ | 4.1 | 4.0 | % | $ | 211.0 | $ | 206.2 | $ | 4.8 | 2.3 | % | |||||||||||||||||||||||||||||||||||||||||||
| SG&A expense | $ | 25.3 | $ | 21.3 | $ | 4.0 | 18.8 | % | $ | 47.6 | $ | 41.4 | $ | 6.2 | 15.0 | % | |||||||||||||||||||||||||||||||||||||||||||
| Acquired intangible asset amortization | $ | 0.2 | $ | 0.2 | $ | — | — | % | $ | 0.4 | $ | 0.4 | $ | — | — | % | |||||||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 53.2 | $ | 44.1 | $ | 9.1 | 20.6 | % | $ | 100.2 | $ | 87.0 | $ | 13.2 | 15.2 | % | |||||||||||||||||||||||||||||||||||||||||||
| As a percentage of net sales: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | 57.7 | % | 61.1 | % | 58.7 | % | 61.6 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| SG&A expense | 13.6 | % | 12.7 | % | 13.3 | % | 12.3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquired intangible asset amortization | 0.1 | % | 0.1 | % | 0.1 | % | 0.1 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | 28.6 | % | 26.1 | % | 27.9 | % | 26.0 | % |
Second quarter of 2023 compared with the second quarter of 2022
Net sales increased due to a $9.6 million increase for defense electronics and a $7.6 million increase for aerospace electronics.
Cost of sales increased primarily due to higher net sales partially offset by the impact of improved product margins across certain defense electronics 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 to higher compensation costs as well as increased research and development expense.
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.
First six months of 2023 compared with the six months of 2022
Net sales increased due to a $13.6 million increase for defense electronics and a $10.6 million increase for aerospace electronics.
Cost of sales increased primarily due to higher net sales partially offset by the impact of improved product margins across certain defense electronics 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 compensation costs as well as increased research and development expense.
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.
Engineered Systems
| Second Quarter | Change | Six Months | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 117.0 | $ | 98.7 | $ | 18.3 | 18.5 | % | $ | 221.1 | $ | 194.1 | $ | 27.0 | 13.9 | % | |||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | $ | 99.3 | $ | 84.2 | $ | 15.1 | 17.9 | % | $ | 186.6 | $ | 164.7 | $ | 21.9 | 13.3 | % | |||||||||||||||||||||||||||||||||||||||||||
| SG&A expense | $ | 6.2 | $ | 5.9 | $ | 0.3 | 5.1 | % | $ | 13.0 | $ | 11.4 | $ | 1.6 | 14.0 | % | |||||||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 11.5 | $ | 8.6 | $ | 2.9 | 33.7 | % | $ | 21.5 | $ | 18.0 | $ | 3.5 | 19.4 | % | |||||||||||||||||||||||||||||||||||||||||||
| As percentage of net sales: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of sales | 84.9 | % | 85.3 | % | 84.4 | % | 84.9 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| SG&A expense | 5.3 | % | 6.0 | % | 5.9 | % | 5.8 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | 9.8 | % | 8.7 | % | 9.7 | % | 9.3 | % |
Second quarter of 2023 compared with the second quarter of 2022
Net sales increased due to higher sales of $14.8 million for engineered products and higher sales of $3.5 million for energy systems.
Cost of sales increased primarily due to higher net sales. The cost of sales percentage decreased slightly. SG&A expense increased slightly primarily due to higher net sales, and SG&A expense as a percentage of net sales decreased due primarily to
net sales growth in excess of general and administrative expenses, which these expenses were at similar levels in both periods.
Operating income and operating income as a percentage of net sales increased primarily due to increased net sales. Operating income as a percentage of net sales increased primarily due to higher net sales growth and lower SG&A expense as a percentage of net sales.
First six months of 2023 compared with the six months of 2022
Net sales increased due primarily to higher sales of $19.6 million for engineered products and higher sales of $7.4 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 net sales as well as higher research and development expense, including higher bid and proposal costs.
Operating income increased primarily due to increased net sales. Operating income as a percentage of net sales increased slightly primarily due to increased net sales, partially offset by 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 $364.2 million at July 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 July 2, 2023 was $3,353.3 million compared with $3,920.6 million at January 1, 2023.
At July 2, 2023, $1,131.1 million was available under the $1.15 billion credit facility, after reductions of $18.9 million in outstanding letters of credit.
Our bank credit agreements, which includes our $1.15 billion credit facility expiring March 2026, our $110.0 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 July 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 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 $393.5 million for the first six months of 2023 compared with net cash used in operating activities of $19.8 million, driven primarily by the first six months of 2022 including 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. The first six months of 2023 reflected higher accounts receivable collections, lower inventory purchases, lower income tax payments and higher accounts payable activity as compared with the first quarter of 2022. The IRS announcement related to the California floods (IR-2023-33) postponed approximately $102 million of our second quarter 2023 U.S. federal income tax payments until October 2023. We also expect to defer an additional federal tax payment of approximately $37 million in the third quarter of 2023. As a result, our cash paid for income taxes in the fourth quarter of fiscal 2023 will significantly increase because of these deferred federal tax payments.
Net cash used in investing activities was $104.5 million for the first six months of 2023 compared with $35.4 million. During the first six months of 2023, we spent $53.5 million on acquisition activity. Capital expenditures for the first six months of 2023 and 2022 were $51.7 million and $41.8 million, respectively. We currently plan to invest approximately $100 million for capital expenditures in 2023.
Net cash used in financing activities was $567.8 million for the first six months of 2023 compared with $110.6 million. During the first six months of 2023, we repaid $570.0 million of debt, including paying $300.0 million of debt that matured in April 2023 and making $260.0 million of floating rate debt payments which reduced our term loan due May 2026 by $135.0 million and reduced our outstanding credit facility balance by $125.0 million. In addition, during the second quarter of 2023, Teledyne repurchased and retired $10.0 million of its Fixed Rate Senior Notes due April 2031, recording a $1.6 million non-cash gain on
the extinguishment of this debt. Proceeds from the exercise of stock options were $15.0 million for the first six months of 2023 compared with $17.5 million for the first six months of 2022. Subsequent to the end of the second quarter of 2023, the Company repaid $50.0 million outstanding on its term loan due May 2026.
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 anticipated results, including: ongoing challenges and uncertainties posed by the lingering COVID pandemic for businesses and governments around the world; 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 inflation, rising interest costs, and economic conditions; 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 trade compliance 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 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.
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 and subsequent Quarterly Reports on Form 10-Q.
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.
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