Teledyne Technologies(TDY) - 2023 Q4 - Annual Report

Part I Business Teledyne provides advanced enabling technologies across four segments, with Digital Imaging being the largest, serving a diversified industrial and government customer base - Teledyne provides enabling technologies for markets like aerospace and defense, factory automation, environmental monitoring, medical imaging, and more[13] Segment Contribution to Total Net Sales | Segment | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Digital Imaging | 56% | 57% | 52% | | Instrumentation | 23% | 23% | 25% | | Aerospace and Defense Electronics | 13% | 12% | 14% | | Engineered Systems | 8% | 8% | 9% | Digital Imaging Segment This largest segment provides high-performance sensors, cameras, and systems for industrial, scientific, defense, and medical applications - The Digital Imaging segment provides a wide range of products including sensors, cameras, MEMS, semiconductors, and unmanned systems for diverse applications such as machine vision, space imaging, medical diagnostics, and defense[18][19][21] Instrumentation Segment This segment offers monitoring and control instruments for marine, environmental, and industrial uses, plus electronic test and measurement equipment - Provides a broad range of instruments for marine applications (underwater vehicles, acoustic imaging), environmental monitoring (gas and water analysis), and test and measurement (oscilloscopes, protocol analyzers)[22][23][26] Aerospace and Defense Electronics Segment This segment supplies high-reliability electronic components and subsystems for commercial aerospace and defense applications - Focuses on high-reliability electronic components and subsystems for applications like aircraft data management, electronic countermeasures, and satellite communications[35][36] Engineered Systems Segment This segment delivers systems engineering, integration, and complex manufacturing solutions for defense, space, environmental, and energy sectors - Provides systems engineering and manufacturing for defense, space, and energy applications, with major customers including NASA and the Department of Defense[37][38] Customers The company has a diversified commercial customer base and significant sales to the U.S. Government and international markets U.S. Government Sales (in millions) | Segment | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Digital Imaging | $570.7 | $619.1 | $515.9 | | Instrumentation | $95.9 | $108.1 | $91.6 | | Aerospace and Defense Electronics | $330.3 | $266.3 | $227.2 | | Engineered Systems | $384.8 | $366.4 | $358.4 | | Total U.S. Government sales | $1,381.7 | $1,359.9 | $1,193.1 | | % of Total Net Sales | 24.5% | 24.9% | 25.9% | - Total sales to international customers were $2,740.1 million in 2023, representing approximately 49% of total net sales[39][82] - The top five countries for international sales in 2023 were the United Kingdom, China, Japan, Germany, and Norway, representing about 21% of total net sales[40] Human Capital The company maintains a stable, long-tenured global workforce of 14,900 with a focus on retention, development, and diversity Workforce Demographics (as of Dec 31, 2023) | Region | Percent of Total Employees | Average Age | Average Years of Service | | :--- | :--- | :--- | :--- | | Americas | 69% | 48.4 | 10.0 | | Europe, the Middle East and Africa | 28% | 43.3 | 9.9 | | Asia-Pacific Region | 3% | 40.7 | 8.0 | - The total workforce consisted of approximately 14,900 employees[56] - Voluntary employee turnover in 2023 was approximately 10%[56] Risk Factors The company faces material risks from economic conditions, acquisition strategy, supply chain disruptions, geopolitical tensions, and government contract dependency - Business and Industry Risks: Potential recessions, economic slowdown in China, and cyclical downturns in semiconductor and aerospace markets could reduce demand; Inflation and supply chain constraints increase costs[64][66][73] - Geopolitical Risks: Escalating trade tensions (U.S.-China), the conflict in Ukraine, and the conflict in Israel could negatively impact operations, supply chains, and costs[74][79][80] - Acquisition Risks: The company's growth strategy depends on acquisitions, which involve inherent risks like inaccurate valuation, integration difficulties, and potential unknown liabilities[68][70] - Government Contract Risks: Revenue from U.S. Government contracts (24.5% of 2023 sales) depends on continued funding, which is subject to congressional appropriations, budget cuts, and policy changes[93][94] - Cybersecurity Risks: The company faces sophisticated cyber-attacks which could lead to theft of intellectual property, business disruption, and liability; The risk is elevated by geopolitical tensions and new technologies like AI[151] - Goodwill Impairment Risk: A significant portion of assets is goodwill ($8.0 billion); A decline in business conditions could lead to impairment charges, particularly for the recently acquired FLIR reporting unit, whose fair value exceeded its carrying value by only 6% at the last test[91][266] Cybersecurity The company's cybersecurity strategy, overseen by the Audit Committee, aligns with NIST frameworks to manage and mitigate cyber threats - The company's cybersecurity strategy is aligned with its Enterprise Risk Management strategy and focuses on deterrence, early detection, and interruption of cyber-attacks, using frameworks like NIST[163] - Governance is managed by the Audit Committee of the Board, which receives quarterly updates from the Chief Information Officer (CIO) and Chief Information Security Officer (CISO)[167] - The company has incident response plans and conducts 'tabletop' exercises to maintain readiness; It also engages third-party expertise and utilizes threat intelligence feeds[166] Properties Teledyne operates 76 principal facilities across the U.S. and 10 foreign countries, which are considered adequate for current operations - The company has 76 principal operating facilities located in 20 states and 10 foreign countries[171] - Principal operating facilities are located in the US, Canada, and Europe, with specific locations detailed for each business segment[171] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "TDY," with no plans for dividends or near-term stock repurchases - Common Stock is listed on the NYSE under the symbol "TDY"[175] - The company does not anticipate paying any cash dividends in the foreseeable future[176] - A stock repurchase program for up to three million shares is authorized, but no shares have been repurchased since 2015 and there are no current plans to do so[177] Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2023 saw sales and income growth driven by all segments, alongside significant debt reduction and strong free cash flow generation Overall Financial Performance In 2023, the company achieved 3.2% sales growth to $5.64 billion and an 11.9% increase in diluted EPS to $18.49 Consolidated Operating Results (2023 vs 2022, in millions, except per-share amounts) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $5,635.5 | $5,458.6 | 3.2% | | Operating income | $1,034.4 | $972.0 | 6.4% | | Net income attributable to Teledyne | $885.7 | $788.6 | 12.3% | | Diluted earnings per common share | $18.49 | $16.53 | 11.9% | - Net income for 2023 included net discrete tax benefits of $137.5 million, compared to $86.7 million in 2022[189] Business Segment Operating Results All segments reported sales growth in 2023, with Instrumentation and Engineered Systems showing the strongest operating income gains Net Sales by Segment (in millions) | Segment | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Digital Imaging | $3,144.1 | $3,110.9 | 1.1% | | Instrumentation | $1,326.2 | $1,254.0 | 5.8% | | Aerospace and Defense Electronics | $726.5 | $682.4 | 6.5% | | Engineered Systems | $438.7 | $411.3 | 6.7% | Operating Income by Segment (in millions) | Segment | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Digital Imaging | $517.4 | $519.3 | (0.4)% | | Instrumentation | $338.3 | $295.3 | 14.6% | | Aerospace and Defense Electronics | $199.6 | $184.1 | 8.4% | | Engineered Systems | $44.7 | $39.2 | 14.0% | Financial Condition, Liquidity and Capital Resources The company improved its financial position in 2023 by generating $721.2 million in free cash flow and reducing long-term debt by over $675 million - Long-term debt was reduced from $3,920.6 million at the beginning of 2023 to $3,244.9 million at year-end[222] - During 2023, the company repaid $125.0 million 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[222][236] Cash Flow Summary (in millions) | Cash Flow | 2023 | 2022 | | :--- | :--- | :--- | | Net cash from operating activities | $836.1 | $486.8 | | Net cash used in investing activities | ($190.3) | ($175.4) | | Net cash used in financing activities | ($651.5) | ($110.0) | | Free Cash Flow | $721.2 | $394.2 | Contractual Obligations Summary (in millions) | Obligation Type | Total | Due in 2024 | | :--- | :--- | :--- | | Debt obligations | $3,266.0 | $600.1 | | Interest expense | $405.8 | $73.1 | | Operating lease obligations | $174.5 | $36.4 | | Purchase obligations | $304.0 | $269.5 | | Total | $4,150.3 | $979.1 | Critical Accounting Policies and Estimates Key accounting estimates involve revenue recognition, business combinations, and goodwill, with the FLIR unit showing a heightened risk of impairment - Key critical accounting policies are: Revenue Recognition, Business Combinations, Goodwill and Acquired Intangible Assets, and Income Taxes[256] - Approximately 30% of revenue is recognized over time, primarily using a cost-to-cost method that requires significant estimation[257] - Goodwill impairment testing is a critical estimate; In the Q4 2023 test, the estimated fair value of the FLIR reporting unit (goodwill of $5.83B) exceeded its carrying value by approximately 6%, indicating a higher risk of future impairment if business conditions change[266] - The FLIR indefinite-lived trademark, with a carrying value of $685.3 million, had a fair value of $694.9 million at the annual test, also indicating sensitivity to changes in assumptions[268] Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of year-end 2023 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[281] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[303] - No material changes to internal control over financial reporting occurred during the quarter ended December 31, 2023[283] Financial Statements This section presents the audited consolidated financial statements and related notes for the fiscal year ended December 31, 2023 Consolidated Statements of Income For 2023, the company reported net sales of $5.64 billion, net income of $885.7 million, and diluted EPS of $18.49 Consolidated Income Statement Highlights (in millions, except per-share amounts) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net sales | $5,635.5 | $5,458.6 | $4,614.3 | | Operating income | $1,034.4 | $972.0 | $624.3 | | Net income attributable to Teledyne | $885.7 | $788.6 | $445.3 | | Diluted earnings per common share | $18.49 | $16.53 | $10.05 | Consolidated Balance Sheets As of year-end 2023, total assets were $14.53 billion, while total liabilities decreased to $5.30 billion due to debt reduction Consolidated Balance Sheet Highlights (in millions) | Account | Dec 31, 2023 | Jan 1, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $648.3 | $638.1 | | Total Current Assets | $2,981.4 | $2,817.9 | | Goodwill | $8,002.8 | $7,873.0 | | Total Assets | $14,527.9 | $14,354.0 | | Liabilities and Equity | | | | Total Current Liabilities | $1,766.1 | $1,523.4 | | Long-term debt | $2,644.8 | $3,620.5 | | Total Liabilities | $5,302.1 | $6,181.1 | | Total Stockholders' Equity | $9,221.2 | $8,169.2 | Consolidated Statements of Cash Flows Operating activities generated $836.1 million in cash, financing activities used $651.5 million for debt repayment, and investing used $190.3 million Consolidated Cash Flow Highlights (in millions) | Activity | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $836.1 | $486.8 | $824.6 | | Net cash used in investing activities | ($190.3) | ($175.4) | ($3,824.3) | | Net cash from (used in) financing activities | ($651.5) | ($110.0) | $2,807.1 | | Effect of exchange rate changes | $15.9 | ($38.0) | ($5.8) | | Change in cash and cash equivalents | $10.2 | $163.4 | ($198.4) | Note 8. Long-Term Debt Total long-term debt was reduced to $3.24 billion in 2023, with $1.13 billion of available capacity under the credit facility Maturities of Long-Term Debt (as of Dec 31, 2023, in millions) | Fiscal year | Amount | | :--- | :--- | | 2024 | $600.1 | | 2025 | $0.2 | | 2026 | $450.2 | | 2027 | $0.2 | | 2028 | $700.1 | | Thereafter | $1,515.2 | | Total principal payments | $3,266.0 | - In 2023, the company repaid $125.0 million on its credit facility, the $300.0 million Senior Notes due 2023, and the remaining $245.0 million on its term loan due 2026[420] Note 9. Income Taxes The effective tax rate was 7.5% in 2023, significantly below the statutory rate due to reversals of unrecognized tax benefits and various credits Reconciliation of Statutory to Effective Tax Rate (2023) | Description | Rate | | :--- | :--- | | U.S. federal statutory income tax rate | 21.0% | | State and local taxes, net of federal benefit | 1.8% | | Research and development tax credits | (2.4)% | | Net accruals (reversals) for unrecognized tax benefits | (10.8)% | | Stock-based compensation | (2.1)% | | U.S. export sales | (2.2)% | | Other | (0.3)% | | Effective income tax rate | 7.5% | - Unrecognized tax benefits decreased from $162.8 million at the start of 2023 to $96.5 million at year-end, primarily due to a $96.3 million reduction from the lapse of statutes of limitation[428] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - The information required by this item is incorporated by reference from the 2024 Proxy Statement[289] Executive Compensation Details on executive and director compensation are incorporated by reference from the 2024 Proxy Statement - The information required by this item is incorporated by reference from the 2024 Proxy Statement[291] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference from the 2024 Proxy Statement - The information required by this item is incorporated by reference from the 2024 Proxy Statement[292] Certain Relationships and Related Transactions, and Director Independence Details on related party transactions and director independence are incorporated by reference from the 2024 Proxy Statement - The information required by this item is incorporated by reference from the 2024 Proxy Statement[293] Principal Accountant Fees and Services Information on accountant fees and services is incorporated by reference from the 2024 Proxy Statement - The information required by this item is incorporated by reference from the 2024 Proxy Statement[294] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with or incorporated into the Form 10-K - This section contains the index to Financial Statements, Financial Statement Schedules, and a list of all Exhibits filed with the report[296]