Results of Operations | | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Net sales | $ | 1,355.8 | | | $ | 1,121.0 | | | $ | 2,676.8 | | | $ | 1,926.7 | |
Costs and expenses | | | | | | | |
Cost of sales | 788.6 | | | 663.1 | | | 1,541.2 | | | 1,155.6 | |
Selling, general and administrative expenses | 286.4 | | | 320.7 | | | 577.7 | | | 488.9 | |
Acquired intangible asset amortization | 51.3 | | | 32.8 | | | 104.9 | | | 42.6 | |
Total costs and expenses | 1,126.3 | | | 1,016.6 | | | 2,223.8 | | | 1,687.1 | |
Operating income | 229.5 | | | 104.4 | | | 453.0 | | | 239.6 | |
Interest and debt expense, net | (22.5) | | | (21.2) | | | (44.8) | | | (43.5) | |
Gain (loss) on debt extinguishment | 10.6 | | | — | | | 10.6 | | | (13.4) | |
Non-service retirement benefit income | 2.9 | | | 2.8 | | | 5.7 | | | 5.6 | |
Other income, net | 1.0 | | | 6.1 | | | — | | | 5.1 | |
Income before income taxes | 221.5 | | | 92.1 | | | 424.5 | | | 193.4 | |
Provision for income taxes | 50.2 | | | 27.4 | | | 40.6 | | | 44.0 | |
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Net income | $ | 171.3 | | | $ | 64.7 | | | $ | 383.9 | | | $ | 149.4 | |
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| Second Quarter | | % | | Six Months | | % |
(dollars in millions) | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
Net sales (a): | | | | | | | | | | | |
Digital Imaging (b) | $ | 775.8 | | | $ | 579.5 | | | 33.9 | % | | $ | 1,526.3 | | | $ | 842.8 | | | 81.1 | % |
Instrumentation | 312.5 | | | 291.1 | | | 7.4 | % | | 621.4 | | | 577.6 | | | 7.6 | % |
Aerospace and Defense Electronics | 168.8 | | | 152.4 | | | 10.8 | % | | 335.0 | | | 303.6 | | | 10.3 | % |
Engineered Systems | 98.7 | | | 98.0 | | | 0.7 | % | | 194.1 | | | 202.7 | | | (4.2) | % |
Total net sales | $ | 1,355.8 | | | $ | 1,121.0 | | | 20.9 | % | | $ | 2,676.8 | | | $ | 1,926.7 | | | 38.9 | % |
Operating income: | | | | | | | | | | | |
Digital Imaging (b) | $ | 117.9 | | | $ | 84.6 | | | 39.4 | % | | $ | 233.6 | | | $ | 136.6 | | | 71.0 | % |
Instrumentation | 73.6 | | | 64.6 | | | 13.9 | % | | 145.2 | | | 124.0 | | | 17.1 | % |
Aerospace and Defense Electronics | 44.1 | | | 28.4 | | | 55.3 | % | | 87.0 | | | 56.7 | | | 53.4 | % |
Engineered Systems | 8.6 | | | 11.0 | | | (21.8) | % | | 18.0 | | | 25.9 | | | (30.5) | % |
Corporate expense (c) | (14.7) | | | (84.2) | | | (82.5) | % | | (30.8) | | | (103.6) | | | (70.3) | % |
Total operating income | $ | 229.5 | | | $ | 104.4 | | | 119.8 | % | | $ | 453.0 | | | $ | 239.6 | | | 89.1 | % |
(a) Net sales excludes inter-segment sales of $5.1 million and $10.6 million for the second quarter and six months of 2022, respectively, and $5.1 million and $9.3 million for the second quarter and six months of 2021, respectively. |
(b) On May 14, 2021, the Company completed the acquisition of FLIR, and the financial results of FLIR have been included since the date of the acquisition. The second quarter and first six months of 2022 includes $167.6 million and $620.2 million in incremental net sales from FLIR, respectively. |
(c) Corporate expense for the second quarter and six months of 2021 includes $70.5 million and $76.4 million, respectively, in acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition. |
The table below presents net sales and cost of sales by segment and total company: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter | | | Six Months |
(dollars in millions) | | 2022 | | 2021 | | | 2022 | | 2021 |
Digital Imaging | | | | | | | | | |
Net sales | | $ | 775.8 | | | $ | 579.5 | | | | $ | 1,526.3 | | | $ | 842.8 | |
Cost of sales | | $ | 434.3 | | | $ | 328.7 | | | | $ | 839.5 | | | $ | 482.5 | |
Cost of sales as a % of net sales | | 56.0 | % | | 56.7 | % | | | 55.0 | % | | 57.3 | % |
Instrumentation | | | | | | | | | |
Net sales | | $ | 312.5 | | | $ | 291.1 | | | | $ | 621.4 | | | $ | 577.6 | |
Cost of sales | | $ | 166.9 | | | $ | 153.4 | | | | $ | 330.8 | | | $ | 309.3 | |
Cost of sales as a % of net sales | | 53.4 | % | | 52.7 | % | | | 53.2 | % | | 53.5 | % |
Aerospace and Defense Electronics | | | | | | | | | |
Net sales | | $ | 168.8 | | | $ | 152.4 | | | | $ | 335.0 | | | $ | 303.6 | |
Cost of sales | | $ | 103.2 | | | $ | 99.9 | | | | $ | 206.2 | | | $ | 199.5 | |
Cost of sales as a % of net sales | | 61.1 | % | | 65.6 | % | | | 61.6 | % | | 65.7 | % |
Engineered Systems | | | | | | | | | |
Net sales | | $ | 98.7 | | | $ | 98.0 | | | | $ | 194.1 | | | $ | 202.7 | |
Costs of sales | | $ | 84.2 | | | $ | 81.1 | | | | $ | 164.7 | | | $ | 164.3 | |
Cost of sales as a % of net sales | | 85.3 | % | | 82.8 | % | | | 84.9 | % | | 81.1 | % |
Total Company | | | | | | | | | |
Net sales | | $ | 1,355.8 | | | $ | 1,121.0 | | | | $ | 2,676.8 | | | $ | 1,926.7 | |
Costs of sales | | $ | 788.6 | | | $ | 663.1 | | | | $ | 1,541.2 | | | $ | 1,155.6 | |
Cost of sales as a % of net sales | | 58.2 | % | | 59.2 | % | | | 57.6 | % | | 60.0 | % |
Second Quarter Results
The following is a discussion of our 2022 second quarter results compared with the second quarter results of 2021. Comparisons are with the corresponding reporting period of 2021, unless noted otherwise. Prior period amounts have been reclassified to conform to the current presentation.
Second quarter of 2022 compared with the second quarter of 2021
Our second quarter of 2022 net sales increased 20.9%. Net income for the second quarter of 2022 increased 164.8%. Net income per diluted share was $3.59 for the second quarter of 2022, compared with net income per diluted share of $1.48.
The second quarter of 2022 net sales included $167.6 million in incremental net sales from the acquisition of FLIR, which was acquired in May 2021. In the second quarter of 2021, in connection with the FLIR acquisition, Teledyne incurred pretax expenses of $117.9 million, which included $42.3 million of transaction and integration-related costs, $52.2 million for the settlement of FLIR employee and director stock awards and $23.4 million in acquired inventory step-up expense. No comparable pretax expenses were incurred in the second quarter of 2022.
Net Sales
The second quarter of 2022 net sales, compared with the second quarter of 2021 net sales, reflected higher net sales in each segment. The second quarter of 2022 included $167.6 million in incremental net sales from the acquisition of FLIR in the Digital Imaging segment, as well as organic sales growth.
Cost of Sales
Cost of sales increased $125.5 million in the second quarter of 2022 and primarily reflected the increase in net sales. Cost of sales as a percentage of net sales decreased for the second quarter of 2022 to 58.2% from 59.2%. The lower cost of sales percentage in 2022 reflects the impact of the FLIR acquisition, which carries a lower cost of sales percentage than the average of other Teledyne businesses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including research and development expense, decreased $34.3 million in the second quarter of 2022. Selling, general and administrative expenses for the second quarter of 2022, as a percentage of net sales decreased to 21.1% from 28.6%. Corporate expense, which is included in selling, general and administrative expenses, was $14.7 million for the second quarter of 2022, compared with $84.2 million. Corporate expense in 2021 included $70.5 million in acquisition-related transaction and purchase accounting expenses. Stock option compensation expense was $3.6 million for both the second quarter of 2022 and 2021, respectively.
Acquired Intangible Asset Amortization
Acquired intangible asset amortization for the second quarter of 2022 was $51.3 million, compared with $32.8 million. The second quarter of 2022 includes a full quarter of FLIR intangible asset amortization as compared to the second quarter of 2021 which includes a partial quarter of amortization of FLIR intangibles due to the timing of the acquisition in that period.
Pension Service Expense
Pension service expense is included in both cost of sales and selling general and administrative expense. For the second quarter of 2022 pension service expense was $2.1 million, compared with $2.7 million. For 2022, the weighted-average discount rate used to determine the benefit obligation for the domestic qualified pension plans is 2.97% compared with 2.64% in 2021.
Operating Income
Operating income for the second quarter of 2022 increased 119.8%. The second quarter of 2022, compared with the second quarter of 2021, reflected higher operating income in each business segment, except the Engineered Systems segment. In the second quarter of 2021, in connection with the FLIR acquisition, Teledyne incurred pretax expenses of $117.9 million, which included $42.3 million of transaction and integration-related costs, $52.2 million for the settlement of FLIR employee and director stock awards and $23.4 million in acquired inventory step-up expense. The incremental operating income included in the results for the second quarter of 2022 from the FLIR acquisition was $21.8 million.
Interest and Debt Expense, Debt Extinguishment, Non-Service Retirement Benefit Income and Other Income and Expense
Interest and debt expense, net of interest income, was $22.5 million for the second quarter of 2022, compared with $21.2 million. During the second quarter of 2022, Teledyne repurchased and retired $75.0 million of its Fixed Rate Senior Notes due August 2030 and April 2031, recording a $10.6 million non-cash gain on the extinguishment of this debt. Non-service retirement benefit income was $2.9 million for the second quarter of 2022 compared with $2.8 million for the second quarter of 2021. Other income and expense was income of $1.0 million for the second quarter of 2022 compared with other income of $6.1 million for the second quarter of 2021 and reflected higher foreign currency transaction gains in 2021.
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 share-based accounting income tax benefits, are treated separately.
The Company’s effective income tax rate for the second quarter of 2022 was 22.7%, compared with 29.8%. The second quarter of 2022 included net discrete income tax benefits of $1.0 million, which included a $1.8 million income tax benefit related to share-based accounting. The second quarter of 2021 included net discrete tax expense of $4.1 million, which included $11.5 million expense related to foreign tax rate changes, partially offset by a $5.3 million income tax benefit related to the release of a valuation allowance and a $2.1 million income tax benefit related to share-based accounting. The foreign tax rate changes are a result of the United Kingdom Parliament enacting legislation to increase the corporate tax rate to 25% effective April 2023. Excluding the net discrete income tax items in both periods, the effective tax rates would have been 23.1% for the second quarter of 2022 and 25.3% for the second quarter of 2021. The Company’s annual effective tax rate for fiscal year 2022 is expected to be 23.1% before discrete tax items.
First six months of 2022 compared with the first six months of 2021
The first six months of 2022 net sales increased 38.9% and included $620.2 million in incremental net sales from the acquisition FLIR. Net income for the first six months of 2022 increased 157.0%. Net income per diluted share was $8.05 for the first six months of 2022 compared with net income per diluted share of $3.66. In the first six months of 2021 and in connection with the FLIR acquisition, Teledyne incurred pretax expenses of $154.4 million, which included $48.2 million of transaction and integration-related costs, $52.2 million for the settlement of FLIR employee and director stock awards, $23.4 million in acquired inventory step-up expense and $30.6 million in bridge loan and debt extinguishment fees. The first six months of 2022 included net discrete income tax benefits of $57.5 million, compared with $2.2 million.
Net Sales
The first six months of 2022 net sales, compared with the first six months of 2021 net sales, reflected higher net sales in each segment other than the Engineered Systems segment. The first six months of 2022 included $620.2 million in incremental net sales from the acquisition of FLIR in the Digital Imaging segment, as well as organic sales growth.
Cost of Sales
Cost of sales increased $385.6 million in the first six months of 2022 and primarily reflected the impact of higher net sales. Cost of sales as a percentage of net sales for the six months of 2022 decreased to 57.6%, compared with 60.0%. The lower cost of sales percentage in 2022 primarily reflects the impact of the FLIR acquisition, which carries a lower cost of sales percentage than the average of other Teledyne businesses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including research and development, increased by $88.8 million in the first six months of 2022 and primarily reflected the impact of higher net sales, partially offset by $100.1 million in 2021 for acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition. Selling, general and administrative expenses for the first six months of 2022, as a percentage of net sales, decreased to 21.6% compared with 25.4%. In the first six months of 2022 and 2021, we recorded a total of $7.9 million and $7.8 million, respectively, in stock option compensation expense.
Acquired Intangible Asset Amortization
Acquired intangible asset amortization for the first six months of 2022 was $104.9 million, compared with $42.6 million. The first six months of 2022 includes $86.5 million in acquired intangible asset amortization from the FLIR acquisition compared with $22.8 million in the first six months of 2021 due to the timing of the FLIR acquisition midway through the second quarter of 2021.
Pension Service Expense
Pension service expense for the first six months of 2022 was $4.3 million compared with $5.4 million.
Operating Income
Operating income for the first six months of 2022 increased 89.1%. The first six months of 2022 compared with the first six months of 2021, reflected higher operating income in each segment other than the Engineered Systems segment. Corporate expense was $30.8 million in the first six months of 2022 compared with $103.6 million, and the 2021 amount included $76.4 million in acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition. The incremental operating income included in the results for the first six months of 2022 from the FLIR acquisition was $67.7 million.
Interest Expense, Non-Service Retirement Benefit Income and Other Income/Expense
Interest expense, net of interest income, was $44.8 million for the first six months of 2022, compared with $43.5 million. During the first six months of 2022, Teledyne repurchased and retired $75.0 million of its Fixed Rate Senior Notes due August 2030 and April 2031, recording a $10.6 million non-cash gain on the extinguishment of this debt. During the first six months of 2021 and in connection with acquisition of FLIR, Teledyne called $493.3 million of existing fixed rate senior notes and incurred debt extinguishment expenses of $13.4 million. Other income and expense was immaterial for the first six months of 2022 compared with income of $5.1 million and reflected higher foreign currency transaction gains in 2021.
Income Taxes
The Company’s effective income tax rate for the first six months of 2022 was 9.6% compared with 22.8%. The first six months of 2022 reflected $57.5 million in net discrete income tax benefits, which included $49.4 million of net discrete income tax benefits primarily related to the resolution of certain FLIR tax reserves and an $8.5 million income benefit related to share-based accounting. The first six months of 2021 reflected $2.2 million in net discrete income tax benefits, which included a $6.9 million income benefit related to share-based accounting and a $5.3 million income tax benefit related to the release of a valuation allowance partially offset by $11.5 million expense related to foreign tax rate changes. The foreign tax rate changes were a result of the United Kingdom Parliament enacting legislation to increase the corporate tax rate to 25% effective April 2023. Excluding the net discrete income tax items in both periods, the effective tax rates would have been 23.1% for both the first six months and second quarter of 2022, 23.9% for the first six months of 2021, and 25.3% for the second quarter of 2021.
Segment Results
Segment results include net sales and operating income by segment but excludes non-service retirement benefit income, equity income or loss, unusual non-recurring legal matter settlements, interest income and expense, gains and losses on the disposition of assets, sublease rental income and non-revenue licensing and royalty income, domestic and foreign income taxes and corporate office expenses. Corporate expense includes various administrative expenses relating to the corporate office and certain nonoperating expenses, including certain acquisition-related transaction costs, not allocated to our segments. See Note 14 to these condensed consolidated financial statements for additional segment information.
Digital Imaging (a) | | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
(dollars in millions) | 2022 | | 2021 (a) | | 2022 | | 2021 (a) |
Net sales | $ | 775.8 | | | $ | 579.5 | | | $ | 1,526.3 | | | $ | 842.8 | |
Cost of sales | $ | 434.3 | | | $ | 328.7 | | | $ | 839.5 | | | $ | 482.5 | |
Selling, general and administrative expenses | $ | 177.2 | | | $ | 138.8 | | | $ | 358.3 | | | $ | 191.7 | |
Acquired intangible asset amortization | $ | 46.4 | | | $ | 27.4 | | | $ | 94.9 | | | $ | 32.0 | |
Operating income | $ | 117.9 | | | $ | 84.6 | | | $ | 233.6 | | | $ | 136.6 | |
Cost of sales as a % of net sales | 56.0 | % | | 56.7 | % | | 55.0 | % | | 57.3 | % |
Selling, general and administrative expenses as a % of net sales | 22.8 | % | | 24.0 | % | | 23.5 | % | | 22.7 | % |
Acquired intangible asset amortization as a % of net sales | 6.0 | % | | 4.7 | % | | 6.2 | % | | 3.8 | % |
Operating income as a % of net sales | 15.2 | % | | 14.6 | % | | 15.3 | % | | 16.2 | % |
(a) On May 14, 2021, the Company completed the acquisition of FLIR, and the financial results of FLIR have been included since the date of the acquisition.
Second quarter of 2022 compared with the second quarter of 2021
The Digital Imaging segment’s second quarter of 2022 net sales increased 33.9%. Operating income for the second quarter of 2022 increased 39.4%.
The second quarter of 2022 net sales increase included $167.6 million of incremental net sales from the FLIR acquisition as well as strong organic sales growth from industrial and scientific sensors and cameras and X-ray products. The increase in operating income in the second quarter of 2022 reflected the contribution from the FLIR acquisition as well as the impact of organic sales growth during the period. The incremental operating income included in the results for the second quarter of 2022 from the FLIR acquisition was $21.8 million.
The second quarter of 2022 cost of sales increased $105.6 million and primarily reflected the impact of higher net sales. The cost of sales percentage decreased to 56.0% in the second quarter of 2022 from 56.7%. Second quarter 2022 selling, general and administrative expenses increased to $177.2 million and primarily reflected the impact of higher net sales. The selling, general and administrative expense percentage decreased to 22.8% in the second quarter of 2022 from 24.0%. Acquired intangible asset amortization expense for the second quarter of 2022 was $46.4 million, compared with $27.4 million.
First six months of 2022 compared with the first six months of 2021
The Digital Imaging segment’s first six months of 2022 net sales increased 81.1%. Operating income for the first six months of 2022 increased 71.0%.
The first six months of 2022 net sales included $620.2 million incremental net sales from the FLIR acquisition as well as organic sales growth from industrial and scientific sensors and cameras and X-Ray products. The first six months of 2021 included $70.2 million of acquisition-related transaction and purchase accounting expenses related to FLIR which included $24.0 million of integration-related costs, $22.8 million in acquired intangible asset amortization expense and $23.4 million in inventory step-up expense. The increase in operating income also reflected the impact of organic sales growth. The incremental operating income included in the results for the first six months of 2022 from the FLIR acquisition was $67.7 million.
The first six months of 2022 cost of sales increased $357.0 million and reflected the impact of higher sales. The cost of sales percentage in 2022 decreased to 55.0%, compared with 57.3%. The 2021 cost of sales amount included $23.4 million in inventory step-up expense related to the acquisition of FLIR, and no comparable amount occured in 2022. Selling, general and administrative expenses increased $166.6 million in the first six months of 2022 and reflected the impact of higher net sales, partially offset by acquisition-related transaction and purchase accounting expenses related to the FLIR acquisition in 2021. The selling, general and administrative expense percentage increased to 23.5% in the first six months of 2022 from 22.7% and reflects the impact of higher research and development expense for FLIR as a percentage of net sales.
Instrumentation | | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
(dollars in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Net sales | $ | 312.5 | | | $ | 291.1 | | | $ | 621.4 | | | $ | 577.6 | |
Cost of sales | $ | 166.9 | | | $ | 153.4 | | | $ | 330.8 | | | $ | 309.3 | |
Selling, general and administrative expenses | $ | 67.3 | | | $ | 67.9 | | | $ | 135.8 | | | $ | 134.1 | |
Acquired intangible asset amortization | $ | 4.7 | | | $ | 5.2 | | | $ | 9.6 | | | $ | 10.2 | |
Operating income | $ | 73.6 | | | $ | 64.6 | | | $ | 145.2 | | | $ | 124.0 | |
Cost of sales as a % of net sales | 53.4 | % | | 52.7 | % | | 53.2 | % | | 53.5 | % |
Selling, general and administrative expenses as a % of net sales | 21.5 | % | | 23.3 | % | | 21.9 | % | | 23.2 | % |
Acquired intangible asset amortization as a % of net sales | 1.5 | % | | 1.8 | % | | 1.5 | % | | 1.8 | % |
Operating income as a % of net sales | 23.6 | % | | 22.2 | % | | 23.4 | % | | 21.5 | % |
Second quarter of 2022 compared with the second quarter of 2021
The Instrumentation segment’s second quarter of 2022 net sales increased 7.4%. Operating income for the second quarter of 2022 increased 13.9%.
The second quarter of 2022 net sales increase resulted from higher sales across all product lines. Sales of marine instrumentation increased $10.4 million, sales of test and measurement instrumentation increased $8.3 million and sales of environmental instrumentation increased $2.7 million. The increase in operating income primarily reflected the impact of higher sales and favorable product mix.
The second quarter of 2022 cost of sales increased $13.5 million. The cost of sales percentage increased to 53.4% in the second quarter of 2022 from 52.7%. Second quarter 2022 selling, general and administrative expenses decreased $0.6 million. The selling, general and administrative expense percentage decreased to 21.5% in the second quarter of 2022 from 23.3%.
First six months of 2022 compared with the first six months of 2021
The Instrumentation segment’s first six months 2022 net sales increased 7.6%. Operating income for the first six months of 2022 increased of 17.1%. The first six months of 2022 net sales increase resulted from higher sales across all product lines. Sales of marine instrumentation increased $20.3 million, sales of test and measurement instrumentation increased $21.6 million and sales of environmental instrumentation increased $1.9 million. The increase in operating income the first six months of 2022 reflected the impact of higher sales and favorable product mix.
The first six months of 2022 cost of sales increased by $21.5 million and primarily reflected the impact of higher sales. The cost of sales percentage decreased to 53.2% from 53.5%. The first six months of 2022 selling, general and administrative expenses increased by $1.7 million. The selling, general and administrative expense percentage decreased to 21.9% in the first six months of 2022 from 23.2%.
Aerospace and Defense Electronics | | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
(dollars in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Net sales | $ | 168.8 | | | $ | 152.4 | | | $ | 335.0 | | | $ | 303.6 | |
Cost of sales | $ | 103.2 | | | $ | 99.9 | | | $ | 206.2 | | | $ | 199.5 | |
Selling, general and administrative expenses | $ | 21.3 | | | $ | 23.9 | | | $ | 41.4 | | | $ | 47.0 | |
Acquired intangible asset amortization | $ | 0.2 | | | $ | 0.2 | | | $ | 0.4 | | | $ | 0.4 | |
Operating income | $ | 44.1 | | | $ | 28.4 | | | $ | 87.0 | | | $ | 56.7 | |
Cost of sales as a % of net sales | 61.1 | % | | 65.6 | % | | 61.6 | % | | 65.7 | % |
Selling, general and administrative expenses as a % of net sales | 12.7 | % | | 15.7 | % | | 12.3 | % | | 15.5 | % |
Acquired intangible asset amortization as a % of net sales | 0.1 | % | | 0.1 | % | | 0.1 | % | | 0.1 | % |
Operating income as a % of net sales | 26.1 | % | | 18.6 | % | | 26.0 | % | | 18.7 | % |
Second quarter of 2022 compared with the second quarter of 2021
The Aerospace and Defense Electronics segment’s second quarter of 2022 net sales increased 10.8%. Operating income for the second quarter of 2022 increased 55.3%.
The second quarter of 2022 net sales increase reflected $12.3 million for aerospace electronics and $4.1 million for defense electronics. Operating income in the second quarter of 2022 reflected the impact of higher sales and favorable product mix primarily driven by stronger sales of aerospace electronics.
The second quarter of 2022 cost of sales increased $3.3 million and reflected the impact of higher sales. The cost of sales percentage decreased to 61.1% for the second quarter of 2022, from 65.6% and reflected favorable product mix. Selling, general and administrative expenses, including research and development expense, decreased to $21.3 million in the second quarter of 2022 from $23.9 million and reflected $1.8 million of lower research and development expense. The selling, general and administrative expense percentage decreased to 12.7% in the second quarter of 2022 from 15.7% and reflected the impact of lower research and development expense and higher sales.
First six months of 2022 compared with the first six months of 2021
The Aerospace and Defense Electronics segment’s first six months of 2022 net sales increased 10.3%. Operating income for the first six months of 2022 increased 53.4%.
The first six months of 2022 net sales reflected $26.1 million of higher sales for aerospace electronics and $5.3 million of higher sales for defense electronics. The increase in operating income in the first six months of 2022 primarily reflected the impact of higher sales and favorable product mix, primarily driven by the stronger sales of aerospace electronics.
The first six months of 2022 cost of sales increased by $6.7 million and reflected the impact of higher sales. Cost of sales as a percentage of sales for the first six months of 2022 decreased to 61.6% from 65.7% and reflected favorable product mix. Selling, general and administrative expenses, including research and development expense, decreased to $41.4 million in the first six months of 2022, compared with $47.0 million for the first six months of 2021, primarily due to lower research and development expense. The selling, general and administrative expense percentage decreased to 12.3% in the first six months of 2022, compared with 15.5% and reflected the impact of lower research and development expense and higher sales.
Engineered Systems | | | | | | | | | | | | | | | | | | | | | | | |
| Second Quarter | | Six Months |
(dollars in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Net sales | $ | 98.7 | | | $ | 98.0 | | | $ | 194.1 | | | $ | 202.7 | |
Cost of sales | $ | 84.2 | | | $ | 81.1 | | | $ | 164.7 | | | $ | 164.3 | |
Selling, general and administrative expenses | $ | 5.9 | | | $ | 5.9 | | | $ | 11.4 | | | $ | 12.5 | |
Operating income | $ | 8.6 | | | $ | 11.0 | | | $ | 18.0 | | | $ | 25.9 | |
Cost of sales as a % of net sales | 85.3 | % | | 82.8 | % | | 84.9 | % | | 81.1 | % |
Selling, general and administrative expenses as a % of net sales | 6.0 | % | | 6.0 | % | | 5.8 | % | | 6.1 | % |
Operating income as a % of net sales | 8.7 | % | | 11.2 | % | | 9.3 | % | | 12.8 | % |
Second quarter of 2022 compared with the second quarter of 2021
The Engineered Systems segment’s second quarter of 2022 net sales increased 0.7%. Operating income for the second quarter of 2022 decreased 21.8%.
The second quarter of 2022 net sales primarily reflected higher sales of $0.9 million for energy systems partially offset by lower sales of $0.2 million for engineered products. The lower sales for engineered products primarily reflected decreased sales from electronic manufacturing services products and space programs, partially offset by higher sales from marine and other manufacturing programs. Operating income in the second quarter of 2022 primarily reflected the impact of decreased sales and lower gross margins for electronic manufacturing services products.
The second quarter of 2022 cost of sales increased $3.1 million. The cost of sales percentage increased to 85.3% for the second quarter of 2022 from 82.8%. Selling, general and administrative expense was $5.9 million for both the second quarter of 2022 and 2021, respectively. The selling, general and administrative expense percentage for the second quarter of 2022 and 2021 was 6.0%, respectively.
First six months of 2022 compared with the first six months of 2021
The Engineered Systems segment’s first six months of 2022 net sales decreased 4.2%. Operating income for the first six months of 2022 decreased 30.5%.
The first six months of 2022 net sales reflected lower net sales of $5.2 million for turbine engines and $4.5 million of lower sales of engineered products, partially offset by higher sales of $1.1 million for energy systems. Teledyne exited the cruise missile turbine engine business in the first quarter of 2021. Operating income in the first six months of 2022 reflected the
impact of lower sales, including no sales of higher margin turbine engines and lower margins for electronic manufacturing services products.
The first six months of 2022 cost of sales increased by $0.4 million and primarily reflected the impact of higher cost of sales for electronic manufacturing services. Cost of sales as a percentage of sales for the first six months of 2022 increased to 84.9% from 81.1%. Selling, general and administrative expenses, including research and development expense, decreased to $11.4 million for the first six months of 2022, compared with $12.5 million for the first six months of 2021. The selling, general and administrative expense percentage decreased to 5.8% for the first six months of 2022 compared with 6.1%.
Financial Condition, Liquidity and Capital Resources
Net cash used in operating activities was $19.8 million for the first six months of 2022, compared with net cash provided by operating activities of $336.2 million. The first six months of 2022 included a payment of $296.4 million to the Swedish Tax Authority, related to a disputed pre-acquisition 2018 tax reassessment issued to a FLIR subsidiary in Sweden. The first six months of 2022 also reflected investments in inventories, semi-annual interest payments, increased incentive compensation payments and higher cash income tax payments compared to 2021, partially offset by higher net income in 2022.
Net cash used in investing activities was $35.4 million for the first six months of 2022, compared with $3,761.8 million, as the first six months of 2021 included the acquisition of FLIR. Capital expenditures for the first six months of 2022 and 2021 were $41.8 million and $38.4 million, respectively.
Net cash used in financing activities was $110.6 million for the first six months of 2022, compared with cash provided by financing activities of $3,451.4 million. During the first six months of 2022, the Company made $80.0 million of floating rate debt payments which reduced its term loan due May 2026. In addition, during the first six months of 2022, the Company repurchased and retired $75.0 million of its Fixed Rate Senior Notes due August 2030 and April 2031, recording a $10.6 million non-cash gain on the extinguishment of this debt. During the first six months of 2022, the Company terminated and re-designated certain cross-currency swaps, receiving $18.3 million of cash which is included in cash provided by financing activities. The first six months of 2021 included the proceeds of debt incurred to fund the cash portion of the then pending FLIR acquisition. Proceeds from the exercise of stock options were $17.5 million for the first six months of 2022 compared with $15.9 million for the first six months of 2021.
Total debt at July 3, 2022 was $3,945.7 million compared with $4,099.4 million at January 2, 2022. At July 3, 2022, $1,004.0 million was available under the $1.15 billion credit facility, after reductions of $125.0 million in borrowings and $21.0 million in outstanding letters of credit.
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 the $1.15 billion credit facility, will be sufficient to meet these requirements. To support acquisitions, we may raise additional capital. We currently expect to spend approximately $100.0 million for capital expenditures in 2022, of which $41.8 million has been spent in the first six months of 2022. No cash pension contributions have been made since 2013 or are planned for the remainder of 2022 for the domestic qualified pension plans.
Our credit agreements require Teledyne to comply with various financial and operating covenants and at July 3, 2022, the Company was in compliance with these covenants. As of July 3, 2022, the Company had an adequate amount of margin between required financial covenant ratios (as required by applicable credit agreements) and our actual ratios. At July 3, 2022, the required financial ratios and the actual ratios were as follows for our $1.15 billion Credit Facility expires March 2026, $275.0 million term loan due May 2026 and $150.0 million term loan due October 2024 (issued October 2019): | | | | | | | | | | | |
Financial Covenants | Requirement | | Actual Measure |
Consolidated Leverage Ratio (Net Debt/EBITDA) (a) | No more than 4.5 to 1 | | 2.5 to 1 |
Consolidated Interest Coverage Ratio (EBITDA/Interest) (b) | No less than 3.0 to 1 | | 16.2 to 1 |
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a) The Consolidated Leverage Ratio is equal to Net Debt/EBITDA as defined in our $1.150 billion credit agreement. The requirement changes to 4.0 to 1 for the fourth quarter of 2022 and 3.5 to 1 thereafter.
b) The Consolidated Interest Coverage Ratio is equal to EBITDA/Interest as defined in our $1.150 billion credit agreement.
Our liquidity is not dependent upon the use of off-balance sheet financial arrangements. We have no off-balance sheet financing arrangements that incorporate the use of special purpose entities or unconsolidated entities.
We may, at any time and from time to time, seek to retire or purchase our outstanding debt through cash purchases, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. The Company repurchased and retired $75.0 million of its Fixed Rate Senior Notes during the first six months of 2022.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are those that are reflective of significant judgments and uncertainties, and may potentially result in materially different results under different assumptions and conditions. Our critical accounting policies are
the following: accounting for revenue recognition; accounting for business combinations, goodwill, and acquired intangible assets; accounting for income taxes; and accounting for pension plans.
For additional discussion of the application of the critical accounting policies and other accounting policies, see Note 1 to these Condensed Consolidated Financial Statements and also Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Note 2 of the Notes to Consolidated Financial Statements included in Teledyne’s 2021 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”, “believes” 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 COVID pandemic for businesses and governments around the world, including production, supply, contractual and other disruptions, such as COVID related lockdowns, facility closures, furloughs and travel restrictions; the inability to achieve operating synergies with respect to the FLIR acquisition; 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; operating results of FLIR being lower than anticipated; disruptions in the global economy; the ongoing conflict between Russia and Ukraine; customer and supplier bankruptcies; changes in demand for products sold to the defense electronics, instrumentation, digital imaging, energy exploration and production, commercial aviation, semiconductor and communications markets; funding, continuation and award of government programs; cuts to defense spending resulting from existing and future deficit reduction measures or changes to U.S. and foreign government spending and budget priorities triggered by the COVID pandemic, 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 export and tax matters; escalating economic and diplomatic tension between China and the United States; threats to the security of our confidential and proprietary information, including cybersecurity threats; and 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 the Company’s 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 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.
While we believe our internal and disclosure control systems are effective, there are inherent limitations in all control systems, and misstatements due to error or fraud may occur and 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 Teledyne’s 2021 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.