filings.toolsItem 1. Financial Statements
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Item 1. Financial Statements
TELEDYNE TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 1, 2023 AND OCTOBER 3, 2022
(Unaudited - Amounts in millions, except per-share amounts)
| Third Quarter | Nine Months | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net sales | $ | 1,402.5 | $ | 1,363.6 | $ | 4,210.5 | $ | 4,040.4 | |||||||||||||||
| Costs and expenses | |||||||||||||||||||||||
| Cost of sales | 797.2 | 785.8 | 2,394.2 | 2,327.0 | |||||||||||||||||||
| Selling, general and administrative | 291.9 | 283.7 | 905.3 | 861.4 | |||||||||||||||||||
| Acquired intangible asset amortization | 49.1 | 48.9 | 148.1 | 153.8 | |||||||||||||||||||
| Total costs and expenses | 1,138.2 | 1,118.4 | 3,447.6 | 3,342.2 | |||||||||||||||||||
| Operating income (loss) | 264.3 | 245.2 | 762.9 | 698.2 | |||||||||||||||||||
| Interest and debt income (expense), net | (18.4) | (22.0) | (61.7) | (66.8) | |||||||||||||||||||
| Gain (loss) on debt extinguishment | — | — | 1.6 | 10.6 | |||||||||||||||||||
| Non-service retirement benefit income (expense), net | 3.1 | 2.9 | 9.3 | 8.6 | |||||||||||||||||||
| Other income (expense), net | (2.9) | 5.2 | (7.4) | 5.2 | |||||||||||||||||||
| Income (loss) before income taxes | 246.1 | 231.3 | 704.7 | 655.8 | |||||||||||||||||||
| Provision (benefit) for income taxes | 47.3 | 53.1 | 141.6 | 93.7 | |||||||||||||||||||
| Net income (loss) including noncontrolling interest | 198.8 | 178.2 | $ | 563.1 | $ | 562.1 | |||||||||||||||||
| Less: Net income (loss) attributable to noncontrolling interest | 0.2 | (0.1) | 0.5 | (0.1) | |||||||||||||||||||
| Net income (loss) attributable to Teledyne | $ | 198.6 | $ | 178.3 | $ | 562.6 | $ | 562.2 | |||||||||||||||
| Basic earnings per common share | $ | 4.22 | $ | 3.81 | $ | 11.97 | $ | 12.01 | |||||||||||||||
| Weighted average common shares outstanding | 47.1 | 46.8 | 47.0 | 46.8 | |||||||||||||||||||
| Diluted earnings per common share | $ | 4.15 | $ | 3.74 | $ | 11.75 | $ | 11.79 | |||||||||||||||
| Weighted average diluted common shares outstanding | 47.9 | 47.7 | 47.9 | 47.7 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
TELEDYNE TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THIRD QUARTER AND NINE MONTHS ENDED OCTOBER 1, 2023 AND OCTOBER 3, 2022
(Unaudited - Amounts in millions)
| Third Quarter | Nine Months | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income (loss) including noncontrolling interest | $ | 198.8 | $ | 178.2 | $ | 563.1 | $ | 562.1 | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign exchange translation adjustment | (76.6) | (357.1) | (68.6) | (544.5) | |||||||||||||||||||
| Hedge activity, net of tax | (1.1) | (6.2) | 3.0 | (2.0) | |||||||||||||||||||
| Pension and postretirement benefit adjustments, net of tax | 1.8 | 4.1 | 4.2 | 12.3 | |||||||||||||||||||
| Other comprehensive income (loss) | (75.9) | (359.2) | (61.4) | (534.2) | |||||||||||||||||||
| Comprehensive income (loss) including noncontrolling interest | 122.9 | (181.0) | 501.7 | 27.9 | |||||||||||||||||||
| Less: Comprehensive income (loss) attributable to noncontrolling interest | 0.2 | (0.1) | 0.5 | (0.1) | |||||||||||||||||||
| Comprehensive income (loss) attributable to Teledyne | $ | 122.7 | $ | (180.9) | $ | 501.2 | $ | 28.0 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
TELEDYNE TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - Amounts in millions, except share amounts)
| October 1, 2023 | January 1, 2023 | ||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 508.6 | $ | 638.1 | |||||||
| Accounts receivable, net | 854.7 | 883.7 | |||||||||
| Unbilled receivables, net | 340.2 | 274.7 | |||||||||
| Inventories, net | 962.0 | 890.7 | |||||||||
| Prepaid expenses and other current assets | 155.0 | 130.7 | |||||||||
| Total current assets | 2,820.5 | 2,817.9 | |||||||||
| Property, plant and equipment, net of accumulated depreciation and amortization of $932.1 at October 1, 2023 and $847.8 at January 1, 2023 | 754.1 | 769.8 | |||||||||
| Goodwill | 7,899.8 | 7,873.0 | |||||||||
| Acquired intangibles, net | 2,287.4 | 2,440.6 | |||||||||
| Prepaid pension assets | 190.0 | 178.4 | |||||||||
| Other assets, net | 264.0 | 274.3 | |||||||||
| Total Assets | $ | 14,215.8 | $ | 14,354.0 | |||||||
| Liabilities, Redeemable Noncontrolling Interest and Stockholders’ Equity | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ | 454.9 | $ | 505.7 | |||||||
| Accrued liabilities | 777.1 | 717.6 | |||||||||
| Current portion of long-term debt | 450.1 | 300.1 | |||||||||
| Total current liabilities | 1,682.1 | 1,523.4 | |||||||||
| Long-term debt, net of current portion | 2,794.0 | 3,620.5 | |||||||||
| Long-term deferred tax liabilities | 449.9 | 490.0 | |||||||||
| Other long-term liabilities | 563.7 | 547.2 | |||||||||
| Total Liabilities | 5,489.7 | 6,181.1 | |||||||||
| Commitments and contingencies | |||||||||||
| Redeemable Noncontrolling Interest | 4.2 | 3.7 | |||||||||
| Stockholders’ Equity | |||||||||||
| Preferred stock, $0.01 par value; outstanding shares - none | — | — | |||||||||
| Common stock, $0.01 par value; authorized 125,000,000 shares; issued shares: 47,194,766 at October 1, 2023 and 47,194,766 at January 1, 2023; outstanding shares: 47,183,514 at October 1, 2023 and 46,912,635 at January 1, 2023 | 0.5 | 0.5 | |||||||||
| Additional paid-in capital | 4,385.7 | 4,353.4 | |||||||||
| Retained earnings | 5,124.4 | 4,561.8 | |||||||||
| Treasury stock, 11,252 shares at October 1, 2023 and 282,131 shares at January 1, 2023 | (0.8) | (20.0) | |||||||||
| Accumulated other comprehensive income (loss) | (787.9) | (726.5) | |||||||||
| Total Stockholders’ Equity | 8,721.9 | 8,169.2 | |||||||||
| Total Liabilities, Redeemable Noncontrolling Interest and Stockholders' Equity | $ | 14,215.8 | $ | 14,354.0 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
TELEDYNE TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
| Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||||||||
| Balance, January 1, 2023 | $ | 0.5 | $ | 4,353.4 | $ | (20.0) | $ | 4,561.8 | $ | (726.5) | $ | 8,169.2 | |||||||||||||||||||||||
| Net income (loss) | — | — | — | 178.7 | — | 178.7 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | (0.3) | (0.3) | |||||||||||||||||||||||||||||
| Treasury stock issued | — | (10.6) | 10.6 | — | — | — | |||||||||||||||||||||||||||||
| Stock-based compensation | — | 7.9 | — | — | — | 7.9 | |||||||||||||||||||||||||||||
| Exercise of stock options | — | 10.2 | — | — | — | 10.2 | |||||||||||||||||||||||||||||
| Balance, April 2, 2023 | 0.5 | 4,360.9 | (9.4) | 4,740.5 | (726.8) | 8,365.7 | |||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | 185.3 | — | 185.3 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | 14.8 | 14.8 | |||||||||||||||||||||||||||||
| Treasury stock issued | — | (2.9) | 2.9 | — | — | — | |||||||||||||||||||||||||||||
| Stock-based compensation | — | 8.4 | — | — | — | 8.4 | |||||||||||||||||||||||||||||
| Exercise of stock options | — | 4.8 | — | — | — | 4.8 | |||||||||||||||||||||||||||||
| Balance, July 3, 2023 | $ | 0.5 | $ | 4,371.2 | $ | (6.5) | $ | 4,925.8 | $ | (712.0) | $ | 8,579.0 | |||||||||||||||||||||||
| Net income (loss) | — | — | — | 198.6 | — | 198.6 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | (75.9) | (75.9) | |||||||||||||||||||||||||||||
| Treasury stock issued | — | (5.7) | 5.7 | — | — | — | |||||||||||||||||||||||||||||
| Stock-based compensation | — | 8.0 | — | — | — | 8.0 | |||||||||||||||||||||||||||||
| Exercise of stock options | — | 12.2 | — | — | — | 12.2 | |||||||||||||||||||||||||||||
| Balance, October 1, 2023 | $ | 0.5 | $ | 4,385.7 | $ | (0.8) | $ | 5,124.4 | $ | (787.9) | $ | 8,721.9 |
| Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||||||||
| Balance, January 2, 2022 | $ | 0.5 | $ | 4,317.1 | $ | (38.8) | $ | 3,773.2 | $ | (430.0) | $ | 7,622.0 | |||||||||||||||||||||||
| Net income (loss) | — | — | — | 212.6 | — | 212.6 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | (21.9) | (21.9) | |||||||||||||||||||||||||||||
| Treasury stock issued | — | (11.6) | 11.6 | — | — | — | |||||||||||||||||||||||||||||
| Stock-based compensation | — | 7.0 | — | — | — | 7.0 | |||||||||||||||||||||||||||||
| Exercise of stock options | — | 12.7 | — | — | — | 12.7 | |||||||||||||||||||||||||||||
| Balance, April 3, 2022 | 0.5 | 4,325.2 | (27.2) | 3,985.8 | (451.9) | 7,832.4 | |||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | 171.3 | — | 171.3 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | (153.1) | (153.1) | |||||||||||||||||||||||||||||
| Treasury stock issued | — | (2.9) | 2.9 | — | — | — | |||||||||||||||||||||||||||||
| Stock based compensation | — | 6.5 | — | — | — | 6.5 | |||||||||||||||||||||||||||||
| Exercise of stock options | — | 4.8 | — | — | — | 4.8 | |||||||||||||||||||||||||||||
| Balance, July 3, 2022 | $ | 0.5 | $ | 4,333.6 | $ | (24.3) | $ | 4,157.1 | $ | (605.0) | $ | 7,861.9 | |||||||||||||||||||||||
| Net income (loss) | — | — | — | 178.3 | — | 178.3 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | (359.2) | (359.2) | |||||||||||||||||||||||||||||
| Treasury stock issued | — | (0.5) | 0.5 | — | — | — | |||||||||||||||||||||||||||||
| Stock-based compensation | — | 6.6 | — | — | — | 6.6 | |||||||||||||||||||||||||||||
| Exercise of stock options | — | 0.9 | — | — | — | 0.9 | |||||||||||||||||||||||||||||
| Balance, October 2, 2022 | $ | 0.5 | $ | 4,340.6 | $ | (23.8) | $ | 4,335.4 | $ | (964.2) | $ | 7,688.5 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
TELEDYNE TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 1, 2023 AND OCTOBER 3, 2022
(Unaudited - Amounts in millions)
| Nine Months | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating Activities | |||||||||||
| Net income (loss) including noncontrolling interest | $ | 563.1 | $ | 562.1 | |||||||
| Adjustments to reconcile net income (loss) including noncontrolling interest to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | 239.0 | 250.4 | |||||||||
| Stock-based compensation | 24.3 | 22.1 | |||||||||
| Debt extinguishment (income) expense | (1.6) | (10.6) | |||||||||
| Changes in operating assets and liabilities excluding the effect of business acquired: | |||||||||||
| Accounts receivable and unbilled receivables | (31.1) | (40.2) | |||||||||
| Inventories | (77.2) | (135.1) | |||||||||
| Accounts payable | (47.4) | 58.9 | |||||||||
| Deferred taxes and income taxes receivable (payable), net | 41.0 | (32.8) | |||||||||
| Prepaid expenses and other assets | (26.3) | 4.2 | |||||||||
| Accrued expenses and other liabilities | (13.4) | (403.0) | |||||||||
| Other operating, net | 1.3 | (26.9) | |||||||||
| Net cash provided by (used in) operating activities | 671.7 | 249.1 | |||||||||
| Investing Activities | |||||||||||
| Purchases of property, plant and equipment | (74.7) | (58.5) | |||||||||
| Purchase of businesses, net of cash acquired | (53.5) | (11.9) | |||||||||
| Proceeds from disposal of fixed assets | — | 5.2 | |||||||||
| Other investing, net | 0.9 | 1.3 | |||||||||
| Net cash provided by (used in) investing activities | (127.3) | (63.9) | |||||||||
| Financing Activities | |||||||||||
| Proceeds from (payments on) fixed rate senior notes | (308.4) | — | |||||||||
| Net borrowings from (repayments made to) credit facility | (125.0) | — | |||||||||
| Proceeds from (payments on) other debt | (245.3) | (174.7) | |||||||||
| Proceeds from exercise of stock options | 27.2 | 18.4 | |||||||||
| Liquidation (maturity) of cross currency swap | (13.5) | 43.1 | |||||||||
| Other financing, net | (0.7) | (2.0) | |||||||||
| Net cash provided by (used in) financing activities | (665.7) | (115.2) | |||||||||
| Effect of exchange rate changes on cash | (8.2) | (65.4) | |||||||||
| Change in cash and cash equivalents | (129.5) | 4.6 | |||||||||
| Cash and cash equivalents—beginning of period | 638.1 | 474.7 | |||||||||
| Cash and cash equivalents—end of period | $ | 508.6 | $ | 479.3 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
TELEDYNE TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
October 1, 2023
Note 1. General
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by Teledyne Technologies Incorporated (“Teledyne” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in notes to consolidated financial statements have been condensed or omitted pursuant to such rules and regulations, but resultant disclosures are in accordance with generally accepted accounting principles in the United States (“GAAP”) as they apply to interim reporting. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes in Teledyne’s Annual Report on Form 10-K for the fiscal year ended January 1, 2023 (“2022 Form 10-K”).
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly, in all material respects, Teledyne’s consolidated financial position as of October 1, 2023 and the consolidated results of operations, consolidated comprehensive income (loss) and consolidated cash flows for the third quarter and nine months ended October 1, 2023. The results of operations and cash flows for the periods ended October 1, 2023 and cash flows for the nine months ended October 1, 2023 are not necessarily indicative of the results of operations or cash flows to be expected for any subsequent quarter or the full fiscal year. Certain prior year amounts have been reclassified to conform to the current period presentation.
Recent Accounting Standards
In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-04, Liabilities-Supplier Finance Programs (Topic 405-50): Disclosure of Supplier Finance Program Obligations. This standard requires annual disclosure of the key terms of supplier finance programs, obligations outstanding with a description of where the amounts are presented in the financial statements, a rollforward of such amounts, and interim disclosure of amounts outstanding as of the end of each period. The adoption of ASU 2022-04 did not have an impact on the Company's disclosures as the impact of supplier finance programs is not material to the Company's financial statements.
Note 2. Business Acquisitions
2023 Acquisitions
ChartWorld
During the first quarter of 2023, the Company acquired ChartWorld International Limited and affiliates ("ChartWorld") for $53.5 million in cash, net of cash acquired, and subject to certain adjustments. ChartWorld, headquartered in Cyprus, with additional locations in Germany, Singapore, Canada and Japan, is a provider of digital marine navigation hardware and software provided through an affordable subscription-based model. ChartWorld is part of the Digital Imaging segment. Goodwill resulting from the ChartWorld acquisition will not be deductible for tax purposes.
2022 Acquisitions
ETM
During the fourth quarter of 2022, Teledyne acquired ETM-Electromatic, Inc. ("ETM") for $87.7 million in cash, net of cash acquired, and subject to certain adjustments. ETM, headquartered in Newark, California, designs and manufactures high-power microwave and high-energy X-ray subsystems for cancer radiotherapy, defense and X-ray security applications. ETM is part of the Digital Imaging segment. Goodwill resulting from the ETM acquisition will not be deductible for tax purposes.
NL Acoustics
During the third quarter of 2022, the Company acquired an approximate 80% majority interest in Noiseless Acoustics Oy ("NL Acoustics"), paying $11.9 million in cash, net of cash acquired, during the year. NL Acoustics, located in Helsinki, Finland, designs and manufactures acoustics imaging instruments and predictive maintenance solutions. NL Acoustics is part of the Digital Imaging segment. Goodwill resulting from the NL Acoustics acquisition will not be deductible for tax purposes. For further information about the Company's redeemable noncontrolling interest, refer to the Company's 2022 Form 10-K.
The following tables show the purchase price (net of cash acquired), goodwill acquired, and acquired intangible assets for these acquisitions (in millions):
| 2023 | ||||||||||||||||||||||||||
| Acquisitions | Acquisition Date | Cash Paid (a) | Goodwill Acquired | Acquired Intangible Assets | ||||||||||||||||||||||
| ChartWorld | January 3, 2023 | $ | 53.5 | $ | 55.9 | $ | 11.3 | |||||||||||||||||||
| (a) Net of cash acquired | ||||||||||||||||||||||||||
| 2022 | ||||||||||||||||||||||||||
| Acquisitions | Acquisition Date | Cash Paid (a) | Goodwill Acquired | Acquired Intangible Assets | ||||||||||||||||||||||
| ETM | October 28, 2022 | $ | 87.7 | $ | 33.5 | $ | 20.9 | |||||||||||||||||||
| NL Acoustics (acquisition of 80% interest) | July 15, 2022 | 11.9 | 11.7 | 3.8 | ||||||||||||||||||||||
| Total | $ | 99.6 | $ | 45.2 | $ | 24.7 | ||||||||||||||||||||
| (a) Net of cash acquired |
The Company’s cost to acquire these acquisitions was allocated to the assets acquired and liabilities assumed based upon their respective fair values as of the date of the completion of the acquisition. The differences between the fair value of the consideration paid and the estimated fair value of the assets and liabilities acquired was recorded as goodwill. The fair value of the acquired identifiable assets and liabilities for the ChartWorld and ETM acquisitions is provisional pending finalization of the Company’s acquisition accounting, including the measurement of tax basis in certain jurisdictions and the resulting deferred taxes that might arise from book and tax basis differences, if any. Pro forma results of operations, the revenue and net income subsequent to the acquisition date, and a more detailed breakout of the major classes of assets and liabilities acquired for these acquisitions have not been presented because the effects of these acquisitions, individually and in the aggregate, were not material to the Company's financial results. The significant factors that resulted in recognition of goodwill for the 2022 and 2023 acquisitions included the acquired businesses’ market positions, growth opportunities in the markets in which they operate, their experienced work force and established operating infrastructures. The results of these acquisitions have been included in Teledyne’s results since the dates of their respective acquisition.
Note 3. Business Segments
Teledyne is a leading provider of sophisticated digital imaging products and software, instrumentation, aerospace and defense electronics, and engineered systems. Our customers include government agencies, aerospace prime contractors, energy exploration and production companies, major industrial companies and airlines. The Company has four reportable segments: Digital Imaging; Instrumentation; Aerospace and Defense Electronics; and Engineered Systems.
Segment results include net sales and operating income by segment but excludes corporate expenses. Corporate expense primarily includes administrative expenses relating to the corporate office not allocated to our segments.
The following table presents net sales and operating income by segment (dollars in millions):
| Third Quarter | % | Nine Months | % | ||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
| Net sales (a): | |||||||||||||||||||||||||||||||||||
| Digital Imaging | $ | 775.8 | $ | 777.9 | (0.3) | % | $ | 2,341.6 | $ | 2,304.2 | 1.6 | % | |||||||||||||||||||||||
| Instrumentation | 329.1 | 306.4 | 7.4 | % | 991.0 | 927.8 | 6.8 | % | |||||||||||||||||||||||||||
| Aerospace and Defense Electronics | 183.3 | 169.5 | 8.1 | % | 542.5 | 504.5 | 7.5 | % | |||||||||||||||||||||||||||
| Engineered Systems | 114.3 | 109.8 | 4.1 | % | 335.4 | 303.9 | 10.4 | % | |||||||||||||||||||||||||||
| Total net sales | $ | 1,402.5 | $ | 1,363.6 | 2.9 | % | $ | 4,210.5 | $ | 4,040.4 | 4.2 | % | |||||||||||||||||||||||
| Operating income: | |||||||||||||||||||||||||||||||||||
| Digital Imaging | $ | 136.3 | $ | 133.7 | 1.9 | % | $ | 383.1 | $ | 367.3 | 4.3 | % | |||||||||||||||||||||||
| Instrumentation | 85.5 | 71.1 | 20.3 | % | 247.6 | 216.3 | 14.5 | % | |||||||||||||||||||||||||||
| Aerospace and Defense Electronics | 49.4 | 44.3 | 11.5 | % | 149.6 | 131.3 | 13.9 | % | |||||||||||||||||||||||||||
| Engineered Systems | 10.9 | 11.9 | (8.4) | % | 32.4 | 29.9 | 8.4 | % | |||||||||||||||||||||||||||
| Corporate expense | (17.8) | (15.8) | 12.7 | % | (49.8) | (46.6) | 6.9 | % | |||||||||||||||||||||||||||
| Operating income | $ | 264.3 | $ | 245.2 | 7.8 | % | $ | 762.9 | $ | 698.2 | 9.3 | % | |||||||||||||||||||||||
| (a) Net sales exclude inter-segment sales of $7.2 million and $21.5 million for the third quarter and first nine months of 2023, respectively, and $4.8 million and $15.4 million for the third quarter and first nine months of 2022, respectively. | |||||||||||||||||||||||||||||||||||
Identifiable assets are those assets used in the operations of the segments. Corporate assets primarily consist of cash and cash equivalents, deferred taxes, net pension assets/liabilities and other assets (in millions):
| Identifiable assets: | October 1, 2023 | January 1, 2023 | ||||||||||||
| Digital Imaging | $ | 11,267.8 | $ | 11,432.3 | ||||||||||
| Instrumentation | 1,643.1 | 1,626.4 | ||||||||||||
| Aerospace and Defense Electronics | 570.9 | 540.1 | ||||||||||||
| Engineered Systems | 210.7 | 200.3 | ||||||||||||
| Corporate | 523.3 | 554.9 | ||||||||||||
| Total identifiable assets | $ | 14,215.8 | $ | 14,354.0 |
Product Lines
The Instrumentation segment includes three product lines: Marine Instrumentation, Environmental Instrumentation and Test and Measurement Instrumentation. The Company’s other three segments each contain one product line.
The following table provides a summary of the net sales by product line for the Instrumentation segment (in millions):
| Third Quarter | Nine Months | ||||||||||||||||||||||
| Instrumentation | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Marine Instrumentation | $ | 132.5 | $ | 110.0 | $ | 388.1 | $ | 337.2 | |||||||||||||||
| Environmental Instrumentation | 113.0 | 114.8 | 346.2 | 344.3 | |||||||||||||||||||
| Test and Measurement Instrumentation | 83.6 | 81.6 | 256.7 | 246.3 | |||||||||||||||||||
| Total | $ | 329.1 | $ | 306.4 | $ | 991.0 | $ | 927.8 | |||||||||||||||
Note 4. Revenue Recognition and Contract Balances
Approximately 70% of the Company's net sales are recognized at a point in time, with the remaining 30% of net sales recognized over time. The Company disaggregates its revenue from contracts with customers by customer type and geographic region for each segment, as management believes it best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors.
| Third Quarter Ended October 1, 2023 | Third Quarter Ended October 1, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Customer Type | Geographic Region (c) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | U.S. Govt. (a) | Other (b) | Total | United States | Europe | Asia | All other | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Digital Imaging | $ | 151.5 | $ | 624.3 | $ | 775.8 | $ | 358.6 | $ | 196.6 | $ | 150.0 | $ | 70.6 | $ | 775.8 | |||||||||||||||||||||||||||||||||||||
| Instrumentation | 27.0 | 302.1 | 329.1 | 142.5 | 93.7 | 64.1 | 28.8 | 329.1 | |||||||||||||||||||||||||||||||||||||||||||||
| Aerospace and Defense Electronics | 69.8 | 113.5 | 183.3 | 123.7 | 35.1 | 17.0 | 7.5 | 183.3 | |||||||||||||||||||||||||||||||||||||||||||||
| Engineered Systems | 102.5 | 11.8 | 114.3 | 112.6 | — | 0.8 | 0.9 | 114.3 | |||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 350.8 | $ | 1,051.7 | $ | 1,402.5 | $ | 737.4 | $ | 325.4 | $ | 231.9 | $ | 107.8 | $ | 1,402.5 |
(a) U.S. Government sales include sales as a prime contractor or subcontractor.
(b) Primarily commercial sales
(c) Geographic region by destination
| Nine Months Ended October 1, 2023 | Nine Months Ended October 1, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Customer Type | Geographic Region (c) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | U.S. Govt. (a) | Other (b) | Total | United States | Europe | Asia | All other | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Digital Imaging | $ | 413.1 | $ | 1,928.5 | $ | 2,341.6 | $ | 1,049.4 | $ | 601.2 | $ | 460.8 | $ | 230.2 | $ | 2,341.6 | |||||||||||||||||||||||||||||||||||||
| Instrumentation | 71.3 | 919.7 | 991.0 | 419.9 | 286.1 | 196.2 | 88.8 | 991.0 | |||||||||||||||||||||||||||||||||||||||||||||
| Aerospace and Defense Electronics | 205.9 | 336.6 | 542.5 | 369.8 | 100.8 | 49.5 | 22.4 | 542.5 | |||||||||||||||||||||||||||||||||||||||||||||
| Engineered Systems | 299.0 | 36.4 | 335.4 | 330.3 | — | 1.4 | 3.7 | 335.4 | |||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 989.3 | $ | 3,221.2 | $ | 4,210.5 | $ | 2,169.4 | $ | 988.1 | $ | 707.9 | $ | 345.1 | $ | 4,210.5 |
(a) U.S. Government sales include sales as a prime contractor or subcontractor.
(b) Primarily commercial sales
(c) Geographic region by destination
| Third Quarter Ended October 2, 2022 | Third Quarter Ended October 2, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Customer Type | Geographic Region (c) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | U.S. Govt. (a) | Other (b) | Total | United States | Europe | Asia | All other | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Digital Imaging | $ | 156.3 | $ | 621.6 | $ | 777.9 | $ | 367.6 | $ | 182.8 | $ | 158.8 | $ | 68.7 | $ | 777.9 | |||||||||||||||||||||||||||||||||||||
| Instrumentation | 29.5 | 276.9 | 306.4 | 149.4 | 63.6 | 64.4 | 29.0 | 306.4 | |||||||||||||||||||||||||||||||||||||||||||||
| Aerospace and Defense Electronics | 62.8 | 106.7 | 169.5 | 136.5 | 10.3 | 16.6 | 6.1 | 169.5 | |||||||||||||||||||||||||||||||||||||||||||||
| Engineered Systems | 99.1 | 10.7 | 109.8 | 109.4 | — | 0.3 | 0.1 | 109.8 | |||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 347.7 | $ | 1,015.9 | $ | 1,363.6 | $ | 762.9 | $ | 256.7 | $ | 240.1 | $ | 103.9 | $ | 1,363.6 |
(a) U.S. Government sale include sales as a prime contractor or subcontractor.
(b) Primarily commercial sales
(c) Geographic region by destination
| Nine Months Ended October 2, 2022 | Nine Months Ended October 2, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Customer Type | Geographic Region (c) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | U.S. Govt. (a) | Other (b) | Total | United States | Europe | Asia | All other | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Digital Imaging | $ | 463.4 | $ | 1,840.8 | $ | 2,304.2 | $ | 1,053.1 | $ | 549.9 | $ | 472.1 | $ | 229.1 | $ | 2,304.2 | |||||||||||||||||||||||||||||||||||||
| Instrumentation | 79.1 | 848.7 | 927.8 | 417.2 | 219.0 | 204.1 | 87.5 | 927.8 | |||||||||||||||||||||||||||||||||||||||||||||
| Aerospace and Defense Electronics | 184.3 | 320.2 | 504.5 | 387.8 | 55.9 | 43.9 | 16.9 | 504.5 | |||||||||||||||||||||||||||||||||||||||||||||
| Engineered Systems | 274.4 | 29.5 | 303.9 | 302.3 | — | 0.9 | 0.7 | 303.9 | |||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 1,001.2 | $ | 3,039.2 | $ | 4,040.4 | $ | 2,160.4 | $ | 824.8 | $ | 721.0 | $ | 334.2 | $ | 4,040.4 |
(a) U.S. Government sale include sales as a prime contractor or subcontractor.
(b) Primarily commercial sales
(c) Geographic region by destination
With the exception of the Engineered Systems segment, net sales in each segment are primarily derived from fixed price contracts. Net sales in the Engineered Systems segment are typically between 45% and 55% fixed price contracts in a given reporting period, with the balance of net sales derived from cost-reimbursable type contracts. For the nine months ended October 1, 2023, approximately 49% of net sales in the Engineered Systems segment were derived from fixed price contracts.
Contract Liabilities
| Balance at | |||||||||||||||||||||||
| Contract Liabilities by Balance Sheet Location (in millions) | October 1, 2023 | January 1, 2023 | |||||||||||||||||||||
| Accrued liabilities | $ | 215.5 | $ | 187.6 | |||||||||||||||||||
| Other long-term liabilities | 21.9 | 20.2 | |||||||||||||||||||||
| Total contract liabilities | $ | 237.4 | $ | 207.8 |
The Company recognized revenue of $118.9 million during the nine months ended October 1, 2023 from contract liabilities that existed at the beginning of year.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of firm orders for which work has not been performed as of the period end date and exclude unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity). As of October 1, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $3,122.5 million. The Company expects approximately 80% of remaining performance obligations to be recognized into revenue within the next twelve months, with the remaining 20% recognized thereafter.
Changes in Contract Estimates at Completion
For over time contracts using the cost-to-cost method, the Company has an Estimate at Completion (“EAC”) process in which management reviews the progress and execution of our performance obligations. This EAC process requires management judgment relative to assessing risks, estimating contract revenue, determining reasonably dependable cost estimates, and making assumptions for schedule and technical issues. The majority of revenue recognized over time uses an EAC process. Since certain contracts extend over a long period of time, the impact of revisions in cost and revenue estimates during the progress of work may adjust the current period earnings through a cumulative catch-up basis. This method recognizes, in the
current period, the cumulative effect of the changes on current and prior quarters. Additionally, if the current contract estimate indicates a loss, a provision is made for the total anticipated loss in the period that it becomes evident. Contract cost and revenue estimates for significant contracts are generally reviewed and reassessed quarterly.
The net aggregate effects of these changes in estimates on contracts accounted for under the cost-to-cost method in the first nine months of 2023 was $1.7 million of favorable operating income compared with $30.5 million of favorable operating income in the first nine months of 2022, with the first nine months of 2022 primarily related to favorable changes in estimates that impacted revenue within our Digital Imaging operating segment. None of the effects of changes in estimates on any individual contract were material to the consolidated statements of income (loss) for any period presented.
Note 5. Goodwill and Intangible Assets
Goodwill
The carrying value of goodwill by segment was as follows (in millions):
| Digital Imaging | Instrumentation | Aerospace and Defense Electronics | Engineered Systems | Total | |||||||||||||||||||||||||
| Balance at January 1, 2023 | $ | 6,780.4 | $ | 913.2 | $ | 161.8 | $ | 17.6 | $ | 7,873.0 | |||||||||||||||||||
| Current year acquisitions | 55.9 | — | — | — | 55.9 | ||||||||||||||||||||||||
| Foreign currency changes and other | (27.5) | (1.9) | 0.3 | — | (29.1) | ||||||||||||||||||||||||
| Balance at October 1, 2023 | $ | 6,808.8 | $ | 911.3 | $ | 162.1 | $ | 17.6 | $ | 7,899.8 |
| Acquired intangible assets (in millions): | October 1, 2023 | January 1, 2023 | ||||||||||||||||||||||||||||||||||||
| Gross carrying amount | Accumulated amortization | Net carrying amount | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||||||||||||||||||||||||||||||
| Proprietary technology | $ | 1,652.4 | $ | 608.6 | $ | 1,043.8 | $ | 1,667.7 | $ | 497.4 | $ | 1,170.3 | ||||||||||||||||||||||||||
| Customer list/relationships | 599.0 | 206.2 | 392.8 | 596.1 | 177.0 | 419.1 | ||||||||||||||||||||||||||||||||
| Patents | 0.6 | 0.6 | — | 0.6 | 0.6 | — | ||||||||||||||||||||||||||||||||
| Non-compete agreements | 0.9 | 0.9 | — | 0.9 | 0.9 | — | ||||||||||||||||||||||||||||||||
| Trademarks | 9.9 | 5.4 | 4.5 | 7.1 | 4.4 | 2.7 | ||||||||||||||||||||||||||||||||
| Backlog | 16.2 | 16.2 | — | 16.1 | 15.8 | 0.3 | ||||||||||||||||||||||||||||||||
| Total intangibles subject to amortization | 2,279.0 | 837.9 | 1,441.1 | 2,288.5 | 696.1 | 1,592.4 | ||||||||||||||||||||||||||||||||
| Intangibles not subject to amortization: | ||||||||||||||||||||||||||||||||||||||
| Trademarks | 846.3 | — | 846.3 | 848.2 | — | 848.2 | ||||||||||||||||||||||||||||||||
| Total acquired intangible assets | $ | 3,125.3 | $ | 837.9 | $ | 2,287.4 | $ | 3,136.7 | $ | 696.1 | $ | 2,440.6 |
An evaluation of the carrying value of goodwill and indefinite-lived intangibles is required to be performed on an annual basis and on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. There have been no events or changes in circumstances which indicate an interim impairment review is required in 2023. The Company will perform its annual analysis during the fourth quarter of 2023.
Note 6. Supplemental Balance Sheet Information
Cash Equivalents
The Company had $171.0 million and $167.1 million of cash equivalents at October 1, 2023 and January 1, 2023, respectively. The Company has categorized its cash equivalents as a Level 1 financial asset, measured at fair value based on quoted prices in active markets of identical assets.
Accounts Receivable, net
Accounts receivable is presented net of an allowance for doubtful accounts of $10.7 million at October 1, 2023 and $11.7 million at January 1, 2023.
Inventories, net
Inventories are stated at current cost, net of reserves for excess, slow moving and obsolete inventory. Inventories are primarily valued under the FIFO method or average cost method, with an immaterial amount of inventories valued under the LIFO
method. Inventory balances are summarized as follows (in millions):
| Balance at | |||||||||||
| October 1, 2023 | January 1, 2023 | ||||||||||
| Raw materials and supplies | $ | 577.5 | $ | 563.7 | |||||||
| Work in process | 202.8 | 156.8 | |||||||||
| Finished goods | 181.7 | 170.2 | |||||||||
| Total inventories, net | $ | 962.0 | $ | 890.7 |
Product Warranty Costs
Some of the Company’s products are subject to specified warranties, and the Company provides for the estimated cost of product warranties. The adequacy of the warranty reserve is assessed regularly, and the reserve is adjusted as necessary based on a review of historic warranty experience with respect to the applicable business or products, as well as the length and actual terms of the warranties. The warranty reserve is included in current accrued liabilities and other long-term liabilities on the condensed consolidated balance sheet.
| Nine Months | |||||||||||
| Warranty Reserve (in millions): | 2023 | 2022 | |||||||||
| Balance at beginning of year | $ | 50.3 | $ | 49.5 | |||||||
| Product warranty expense | 11.7 | 4.5 | |||||||||
| Deductions | (11.5) | (7.3) | |||||||||
| Acquisition | 0.2 | 1.6 | |||||||||
| Balance at end of period | $ | 50.7 | $ | 48.3 |
Note 7. Long-Term Debt
| Balance at | |||||||||||
| Long-Term Debt (in millions): | October 1, 2023 | January 1, 2023 | |||||||||
| $1.15 billion credit facility due March 2026, weighted average variable rate of 5.46% at January 1, 2023 | $ | — | $ | 125.0 | |||||||
| 0.65% Fixed Rate Senior Notes due April 2023 | — | 300.0 | |||||||||
| 0.95% Fixed Rate Senior Notes due April 2024 | 450.0 | 450.0 | |||||||||
| Term loan due October 2024, variable rate of 6.67% at October 1, 2023 and 5.63% at January 1, 2023, swapped to a Euro fixed rate of 0.61% | 150.0 | 150.0 | |||||||||
| 1.60% Fixed Rate Senior Notes due April 2026 | 450.0 | 450.0 | |||||||||
| Term loan due May 2026, variable rate of 5.61% at January 1, 2023 | — | 245.0 | |||||||||
| 2.25% Fixed Rate Senior Notes due April 2028 | 700.0 | 700.0 | |||||||||
| 2.50% Fixed Rate Senior Notes due August 2030 | 485.0 | 485.0 | |||||||||
| 2.75% Fixed Rate Senior Notes due April 2031 | 1,030.0 | 1,040.0 | |||||||||
| Other debt | 1.4 | 2.1 | |||||||||
| Debt discount and debt issuance costs | (22.3) | (26.5) | |||||||||
| Total debt, net | 3,244.1 | 3,920.6 | |||||||||
| Less: Current portion of long-term debt | (450.1) | (300.1) | |||||||||
| Total long-term debt, net of current portion | $ | 2,794.0 | $ | 3,620.5 |
During the first nine months of 2023, the Company repaid $125.0 million of amounts outstanding on its credit facility, the $300.0 million Fixed Rate Senior Notes due April 2023, and the remaining $245.0 million on its term loan due May 2026. The Company also 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.
At October 1, 2023, $1,130.9 million was available under the $1.15 billion credit facility, after a reduction of $19.1 million in outstanding letters of credit. Our bank credit agreements require Teledyne to comply with various financial and operating covenants and at October 1, 2023, the Company was in compliance with these covenants.
Teledyne estimates the fair value of its long-term debt based on debt of similar type, rating and maturity and at comparable interest rates. The Company’s long-term debt is considered a level 2 input in the fair value hierarchy and is valued based on observable market data. As of October 1, 2023 and January 1, 2023, the aggregate fair values of our borrowings were $2,823.4 million and $3,492.7 million, respectively, and the carrying values were $3,266.4 million and $3,947.1 million, respectively.
Note 8. Income Taxes
The income tax provision is calculated using an estimated annual effective tax rate, based upon estimates of annual income, permanent items, statutory tax rates and planned tax strategies in the various jurisdictions in which we operate except that certain loss jurisdictions and discrete items, such as the resolution of uncertain tax positions and stock-based accounting income tax benefits, are treated separately.
The Company’s effective income tax rate for the third quarter and first nine months of 2023 was 19.2% and 20.1%, respectively, compared with an effective income tax rate for the third quarter and first nine months of 2022 of 23.0% and 14.3%, respectively. The third quarter and first nine months of 2023 includes net discrete income tax benefits of $6.1 million and $14.1 million, respectively, compared with net discrete income tax benefits of $0.3 million and $57.8 million for the third quarter and first nine months of 2022, respectively. The third quarter and first nine months of 2023 net discrete income tax benefits include $6.5 million and $13.7 million, respectively, related to stock-based accounting compared with $0.2 million and $8.7 million, of net discrete income tax benefits related to stock-based accounting for the third quarter and first nine months of 2022, respectively. The first nine months of 2022 also includes net discrete income tax benefits of $49.1 million primarily related to the change in or resolution of certain acquisition-related tax reserves. Excluding the net discrete income tax items in both periods, the effective tax rates would have been 21.7% and 22.1% for the third quarter and first nine months of 2023, respectively, and 23.1% for both the third quarter and first nine months of 2022.
Note 9. Pension Plans
| Third Quarter | Nine Months | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Service cost — benefits earned during the period (in millions) | $ | 1.5 | $ | 2.2 | $ | 4.5 | $ | 6.5 | |||||||||||||||
| Pension non-service cost (income) (in millions): | |||||||||||||||||||||||
| Interest cost on benefit obligation | $ | 8.4 | $ | 6.0 | $ | 25.2 | $ | 17.8 | |||||||||||||||
| Expected return on plan assets | (13.6) | (14.1) | (40.7) | (42.2) | |||||||||||||||||||
| Amortization of net prior service cost (income) | (0.4) | (0.4) | (1.3) | (1.3) | |||||||||||||||||||
| Amortization of net actuarial loss (gain) | 2.5 | 5.6 | 7.5 | 17.1 | |||||||||||||||||||
| Pension non-service cost (income) | $ | (3.1) | $ | (2.9) | $ | (9.3) | $ | (8.6) | |||||||||||||||
Note 10. Stock-based Compensation
Teledyne has long-term incentive plans pursuant to which it has granted non-qualified stock options, restricted stock awards and restricted stock units. The Company also has non-employee director stock compensation plans, pursuant to which common stock, stock options and restricted stock units have been issued to its directors. The Company issues shares of common stock upon the exercise of stock options.
Stock-based compensation expense was $8.0 million and $24.3 million for the third quarter and first nine months of 2023, respectively, and $6.7 million and $22.1 million for the third quarter and first nine months of 2022, respectively.
Stock option activity for the third quarter and first nine months of 2023 is as follows:
| Third Quarter | Nine Months | |||||||||||||||||||||||||
| Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||||||||||||||||
| Beginning balance | 1,587,655 | $ | 230.70 | 1,726,731 | $ | 223.43 | ||||||||||||||||||||
| Exercised | (111,455) | $ | 109.23 | (238,758) | $ | 113.83 | ||||||||||||||||||||
| Canceled | (2,945) | $ | 390.58 | (14,718) | $ | 385.28 | ||||||||||||||||||||
| Ending balance | 1,473,255 | $ | 239.57 | 1,473,255 | $ | 239.57 | ||||||||||||||||||||
| Exercisable at end of period | 1,277,837 | $ | 217.11 | 1,277,837 | $ | 217.11 |
Restricted stock activity for the first nine months of 2023 is as follows:
| Shares | Weighted average fair value per share | ||||||||||
| Balance at January 1, 2023 | 166,395 | $ | 368.62 | ||||||||
| Granted | 20,645 | $ | 372.67 | ||||||||
| Vested | (24,435) | $ | 394.33 | ||||||||
| Forfeited/Canceled | (12,362) | $ | 363.49 | ||||||||
| Balance at October 1, 2023 | 150,243 | $ | 363.48 |
Note 11. Earnings Per Share
The weighted average number of common shares used in the calculation of basic and diluted earnings per share consisted of the following (in millions):
| Third Quarter | Nine Months | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Weighted average basic common shares outstanding | 47.1 | 46.8 | 47.0 | 46.8 | |||||||||||||||||||
| Effect of dilutive securities (primarily stock options) | 0.8 | 0.9 | 0.9 | 0.9 | |||||||||||||||||||
| Weighted average diluted common shares outstanding | 47.9 | 47.7 | 47.9 | 47.7 |
For the third quarter and first nine months of 2023 and 2022, the Company excluded approximately 0.2 million of stock options in the computation of diluted earnings per share because the effect of their inclusion would have been anti-dilutive.
Note 12. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) ("AOCI") by component, net of tax, for the third quarter and nine months ended October 1, 2023 and October 2, 2022 are as follows (in millions):
| Foreign Currency Translation | Cash Flow Hedges and Other | Pension and Postretirement Benefits | Total | ||||||||||||||||||||
| Balance at July 2, 2023 | $ | (464.3) | $ | 5.4 | $ | (253.1) | $ | (712.0) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (76.6) | 2.4 | — | (74.2) | |||||||||||||||||||
| Amounts reclassified from AOCI | — | (3.5) | 1.8 | (1.7) | |||||||||||||||||||
| Net other comprehensive income (loss) | (76.6) | (1.1) | 1.8 | (75.9) | |||||||||||||||||||
| Balance at October 1, 2023 | $ | (540.9) | $ | 4.3 | $ | (251.3) | $ | (787.9) | |||||||||||||||
| Foreign Currency Translation | Cash Flow Hedges and Other | Pension and Postretirement Benefits | Total | ||||||||||||||||||||
| Balance at July 3, 2022 | $ | (316.4) | $ | 0.8 | $ | (289.4) | $ | (605.0) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (357.1) | 7.7 | — | (349.4) | |||||||||||||||||||
| Amounts reclassified from AOCI | — | (13.9) | 4.1 | (9.8) | |||||||||||||||||||
| Net other comprehensive income (loss) | (357.1) | (6.2) | 4.1 | (359.2) | |||||||||||||||||||
| Balance at October 2, 2022 | $ | (673.5) | $ | (5.4) | $ | (285.3) | $ | (964.2) |
| Foreign Currency Translation | Cash Flow Hedges and Other | Pension and Postretirement Benefits | Total | ||||||||||||||||||||
| Balance as of January 1, 2023 | $ | (472.3) | $ | 1.3 | $ | (255.5) | $ | (726.5) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (68.6) | 15.2 | — | (53.4) | |||||||||||||||||||
| Amounts reclassified from AOCI | — | (12.2) | 4.2 | (8.0) | |||||||||||||||||||
| Net other comprehensive income (loss) | (68.6) | 3.0 | 4.2 | (61.4) | |||||||||||||||||||
| Balance as of October 1, 2023 | $ | (540.9) | $ | 4.3 | $ | (251.3) | $ | (787.9) | |||||||||||||||
| Foreign Currency Translation | Cash Flow Hedges and Other | Pension and Postretirement Benefits | Total | ||||||||||||||||||||
| Balance as of January 2, 2022 | $ | (129.0) | $ | (3.4) | $ | (297.6) | $ | (430.0) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (544.5) | 28.4 | — | (516.1) | |||||||||||||||||||
| Amounts reclassified from AOCI | — | (30.4) | 12.3 | (18.1) | |||||||||||||||||||
| Net other comprehensive income (loss) | (544.5) | (2.0) | 12.3 | (534.2) | |||||||||||||||||||
| Balance as of October 2, 2022 | $ | (673.5) | $ | (5.4) | $ | (285.3) | $ | (964.2) |
The reclassifications out of AOCI to net income for the third quarter and nine months ended October 1, 2023 and October 2, 2022 are as follows (in millions):
| Amount Reclassified from AOCI for the Quarter Ended | Amount Reclassified from AOCI for the Quarter Ended | Statement of Income (Loss) Presentation | ||||||||||||
| October 1, 2023 | October 2, 2022 | |||||||||||||
| (Gain) loss on cash flow hedges: | ||||||||||||||
| Gain recognized in income on derivatives | $ | (4.6) | $ | (18.5) | See Note 13 | |||||||||
| Income tax impact | 1.1 | 4.6 | Provision for income taxes | |||||||||||
| Total | $ | (3.5) | $ | (13.9) | ||||||||||
| Amortization of defined benefit pension and postretirement plan items: | ||||||||||||||
| Amortization of prior service cost | $ | (0.4) | $ | (0.4) | Costs and expenses | |||||||||
| Amortization of net actuarial loss | 2.7 | 5.8 | Costs and expenses | |||||||||||
| Total before tax | 2.3 | 5.4 | ||||||||||||
| Income tax impact | (0.5) | (1.3) | Provision for income taxes | |||||||||||
| Total | $ | 1.8 | $ | 4.1 |
| Amount Reclassified from AOCI for the Nine Months Ended | Amount Reclassified from AOCI for the Nine Months Ended | Statement of Income (Loss) Presentation | ||||||||||||
| October 1, 2023 | October 2, 2022 | |||||||||||||
| (Gain) loss on cash flow hedges: | ||||||||||||||
| Gain recognized in income on derivatives | $ | (16.2) | $ | (40.5) | See Note 13 | |||||||||
| Income tax impact | 4.0 | 10.1 | Provision for income taxes | |||||||||||
| Total | $ | (12.2) | $ | (30.4) | ||||||||||
| Amortization of defined benefit pension and postretirement plan items: | ||||||||||||||
| Amortization of prior service cost | (1.3) | (1.2) | Costs and expenses | |||||||||||
| Amortization of net actuarial loss | 7.0 | 17.4 | Costs and expenses | |||||||||||
| Total before tax | 5.7 | 16.2 | ||||||||||||
| Income tax impact | $ | (1.5) | $ | (3.9) | Provision for income taxes | |||||||||
| Total | $ | 4.2 | $ | 12.3 |
Note 13. Derivative Instruments and Hedging Activities
The Company's primary exposure to market risk relates to changes in foreign currency exchange rates and interest rates. The Company’s primary foreign currency risk management objective is to protect the U.S. dollar value of future cash flows and minimize the volatility of reported earnings. The Company does not use foreign currency forward contracts for speculative or trading purposes.
The Company mitigates exposure to foreign currency exchange rates and interest rates primarily through the following:
| Mitigation Approach | Quantitative Information on Approach | |||||||||||||
| The Company utilizes foreign currency forward contracts to reduce the volatility of cash flows primarily related to forecasted revenue and expenses denominated in Canadian dollars for our Canadian companies, and in British pounds for our U.K. companies. These contracts are designated and qualify as cash flow hedges. | As of October 1, 2023, the Company had foreign currency forward contracts to buy Canadian dollars and to sell U.S. dollars totaling $111.9 million. These foreign currency forward contracts have maturities ranging from December 2023 to February 2025. As of October 1, 2023, the Company had foreign currency forward contracts to buy British pounds and to sell U.S. dollars totaling $5.2 million. These foreign currency forward contracts have maturities ranging from December 2023 to February 2024. | |||||||||||||
| The Company utilizes foreign currency forward contracts to mitigate foreign exchange rate risk associated with foreign currency denominated monetary assets and liabilities, including intercompany receivables and payables. These foreign currency forward contracts are not designated as accounting hedges. | See Non-Designated Hedging Activities section below. | |||||||||||||
| The Company has converted a U.S. dollar denominated, variable rate debt obligation of a European subsidiary into euro fixed rate obligation using a receive float, pay fixed cross currency swap to reduce the variability of interest rates. This cross currency swap is designated as cash flow hedge. | As of October 1, 2023, the Company has a cross currency swap outstanding with a notional amount of €156.0 million and $150.0 million that matures in October 2024. | |||||||||||||
All derivative instruments are recorded on the condensed consolidated balance sheets at fair value. The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative instrument and whether it is designated and qualifies for hedge accounting.
Designated Hedging Activities
For a derivative instrument designated as an accounting hedge of an anticipated transaction (a cash flow hedge), the change in the fair value is recorded on the condensed consolidated balance sheets in AOCI to the extent the derivative instrument is effective in mitigating the exposure related to the anticipated transaction. The amount recorded within AOCI is reclassified into earnings in the same period during which the underlying hedged transaction affects earnings. The effect of derivative instruments designated as cash flow hedges in the condensed consolidated financial statements for the third quarter and nine months ended October 1, 2023 and October 2, 2022 was as follows (in millions):
| Third Quarter | Nine Months | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net gain (loss) recognized in AOCI - Foreign Exchange Contracts (a) | $ | 4.0 | $ | 10.2 | $ | 20.7 | $ | 36.0 | |||||||||||||||
| Net gain (loss) reclassified from AOCI into revenue - Foreign Exchange Contracts (a) | $ | (1.1) | $ | (1.0) | $ | (4.8) | $ | (1.4) | |||||||||||||||
| Net gain (loss) recognized in AOCI - Interest Rate Contracts | $ | — | $ | 0.3 | — | $ | 2.3 | ||||||||||||||||
| Net gain (loss) reclassified from AOCI into other income and expense, net - Foreign Exchange Contracts (b) | $ | 4.2 | $ | 17.8 | $ | 15.0 | $ | 38.9 | |||||||||||||||
| Net gain (loss) reclassified from AOCI into interest expense - Foreign Exchange Contracts | $ | 1.9 | $ | 1.6 | $ | 5.6 | $ | 3.5 | |||||||||||||||
| Net gain (loss) reclassified from AOCI into interest expense - Interest Rate Contracts | $ | — | $ | 0.3 | $ | 0.6 | $ | (0.3) | |||||||||||||||
(a) Effective portion, pre-tax
(b) Amount reclassified to offset earnings impact of liability hedged by cross currency swap
Net deferred losses recorded in AOCI for the forward contracts that will mature in the next twelve months total $0.3 million, net of taxes. These losses are expected to be offset by anticipated gains in the value of the forecasted underlying hedged item. Amounts related to the cross currency swap expected to be reclassified from AOCI into income in the next twelve months total $7.5 million.
Non-Designated Hedging Activities
For a derivative instrument that has not been designated as an accounting hedge, the change in the fair value is recognized immediately in earnings. As of October 1, 2023, the Company had foreign currency forward contracts not designated as accounting hedges primarily in the following types and pairs (in millions):
| Contracts to Buy | Contracts to Sell | |||||||||||||||||||
| Currency | Amount | Currency | Amount | |||||||||||||||||
| Canadian Dollars | $ | 214.1 | U.S. Dollars | US$ | 158.8 | |||||||||||||||
| Danish Krone | DKR | 89.2 | U.S. Dollars | US$ | 13.0 | |||||||||||||||
| Euros | € | 80.7 | U.S. Dollars | US$ | 87.5 | |||||||||||||||
| Great Britain Pounds | £ | 10.6 | Euros | € | 12.3 | |||||||||||||||
| Great Britain Pounds | £ | 57.0 | U.S. Dollars | US$ | 71.9 | |||||||||||||||
| Swedish Krona | SEK | 207.5 | Euros | € | 17.5 | |||||||||||||||
| Swedish Krona | SEK | 150.8 | U.S. Dollars | US$ | 13.8 | |||||||||||||||
| U.S. Dollars | US$ | 6.7 | Chinese Yuan | ¥ | 49.0 | |||||||||||||||
The preceding table includes non-designated hedges derived from terms contained in previously designated cash flow hedges. The gains and losses on these derivatives instruments which are not designated as accounting hedges are intended to, at a minimum, partially offset the transaction gains and losses recognized in earnings.
The effect of derivative instruments not designated as accounting hedges recognized in other income and expense for the third quarter and nine months ended October 1, 2023 was expense of $12.9 million and $3.1 million, respectively. The effect of derivative instruments not designated as accounting hedges in other income and expense for the third quarter and nine months ended October 2, 2022 was expense of $40.5 million and $70.9 million, respectively. The income or expense was largely offset by losses or gains in the value of the underlying hedged item excluding the impact of forward points.
Fair Value of Derivative Financial Instruments
The fair values of the Company’s derivative instruments are presented below. All fair values for these derivative instruments were measured using Level 2 inputs in the fair value hierarchy (in millions):
| Asset/(Liability) Derivative Instruments | Balance sheet location | October 1, 2023 | January 1, 2023 | ||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||
| Cash flow forward contracts | Other current assets | $ | 1.5 | $ | 0.4 | ||||||||||||
| Cash flow forward contracts | Accrued liabilities | (1.2) | (6.8) | ||||||||||||||
| Interest rate contracts | Other current assets | — | 0.7 | ||||||||||||||
| Cash flow cross currency swap | Other current assets | 3.4 | 2.7 | ||||||||||||||
| Cash flow cross currency swap | Accrued liabilities | — | (14.0) | ||||||||||||||
| Cash flow cross currency swap | Other long-term liabilities | (16.7) | (18.3) | ||||||||||||||
| Total derivatives designated as hedging instruments | (13.0) | (35.3) | |||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||
| Non-designated forward contracts | Other current assets | 5.8 | 3.5 | ||||||||||||||
| Non-designated forward contracts | Accrued liabilities | (10.3) | (7.0) | ||||||||||||||
| Total derivatives not designated as hedging instruments | (4.5) | (3.5) | |||||||||||||||
| Total derivative instruments, net | $ | (17.5) | $ | (38.8) |
Note 14. Commitments and Contingencies
Trade Compliance Matters
Effective April 24, 2022, the United States Department of State’s Office of Defense Trade Controls Compliance (“DDTC”) closed the four-year Consent Agreement that had been entered into by FLIR Systems, Inc. ("FLIR"), to resolve various export allegations under the International Traffic in Arms Regulations (“ITAR”). In connection with this Consent Agreement and other export matters, while FLIR and its successor by mergers, Teledyne FLIR, have enhanced the trade compliance program more broadly, implemented remedial measures and have undergone external and internal audits of the trade compliance program, adverse disclosures and findings could cause additional expenses in connection with further remedial measures or potential penalties.
The Company has made other voluntary disclosures to the U.S. Department of State and the U.S. Department of Commerce, including to the Bureau of Industry and Security (“BIS”) with respect to Teledyne FLIR shipments of products from non-U.S. jurisdictions which were not licensed due to incorrect de minimis calculation methodology under the Export Administration Regulations. The Company has also made voluntary disclosures to export authorities in jurisdictions outside the U.S. for certain potential violations of local export laws. At this time, based on available information, we are unable to reasonably estimate the time it may take to resolve these matters or the amount or range of potential loss, penalty or other government
action, if any, that may be incurred in connection with these matters. However, an unfavorable outcome could result in substantial fines and penalties or loss or suspension of export privileges or of particular authorizations that could be material to the Company’s financial position, results of operations or cash flows in and following the period in which such outcome becomes estimable or known.
Environmental Remediation Obligations
At October 1, 2023, the Company’s reserves for environmental remediation obligations totaled $5.5 million, of which $1.5 million is included in current accrued liabilities. At January 1, 2023, the Company’s reserves for environmental remediation obligations totaled $5.8 million. The Company evaluates whether it may be able to recover a portion of future costs for environmental liabilities from its insurance carriers and from third parties. The timing of expenditures depends on a number of factors that vary by site, including the nature and extent of contamination, the number of potentially responsible parties, the timing of regulatory approvals, the complexity of the investigation and remediation, and the standards for remediation. The Company expects that it will pay the amounts recorded over many years and will complete remediation of all sites with which it has been identified in up to 30 years.
Legal Matters
A number of other lawsuits, claims and proceedings have been or may be asserted against the Company, including those pertaining to product liability, acquisitions, patent infringement, contracts, environmental, employment and employee benefits matters. While the outcome of such matters cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to the Company, management does not believe that the disposition of any such pending matters is likely to have a material adverse effect on the Company’s financial statements.
Note 15. Subsequent Events
On October 13, 2023, the Company acquired Xena Networks ApS and affiliates ("Xena Networks"). Xena Networks, headquartered in Denmark, is a leading provider of high-speed terabit ethernet validation, quality assurance, and production test solutions. Xena Networks is part of the test and measurement instrumentation product line within the Instrumentation segment.
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