Teledyne Technologies(US:TDY)2021-02-26 01:33PART I Business Teledyne Technologies provides advanced enabling technologies across four segments, serving diverse industrial markets, with a significant pending $8.0 billion acquisition of FLIR Systems expected in mid-2021 - On January 4, 2021, Teledyne announced a definitive agreement to acquire FLIR Systems, Inc. in a cash and stock transaction valued at approximately $8.0 billion. The transaction is expected to close in mid-20211617 2020 Sales Contribution by Business Segment | Segment | Percentage of Total Net Sales (2020) | | :--- | :--- | | Instrumentation | 35% | | Digital Imaging | 32% | | Aerospace and Defense Electronics | 19% | | Engineered Systems | 14% | U.S. Government Sales by Segment (in millions) | Segment | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Instrumentation | $80.6 | $80.4 | $68.3 | | Digital Imaging | $120.9 | $107.4 | $90.5 | | Aerospace and Defense Electronics | $229.9 | $225.3 | $177.2 | | Engineered Systems | $386.8 | $346.7 | $319.3 | | Total U.S. Government Sales | $818.2 | $759.8 | $655.3 | - International customers accounted for approximately 45% of total sales in 2020. The top five international markets were China, the United Kingdom, Germany, Japan, and France, representing about 20% of total net sales39 - The company's total backlog of confirmed and funded orders was approximately $1,700.2 million at January 3, 2021, stable compared to $1,699.3 million at the end of 2019. Over 77% of this backlog is expected to be fulfilled in 202142 Workforce Demographics as of January 3, 2021 | Region | Percent of Total Employees | Average Age | Average Years of Service | Male | Female | Not Specified | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Americas | 72% | 49.1 | 11.4 | 59% | 34% | 7% | | Europe, the Middle East and Africa | 26% | 44.9 | 11.3 | 56% | 22% | 22% | | Asia-Pacific Region | 2% | 42.4 | 7.6 | 42% | 20% | 38% | Risk Factors The company faces significant risks, primarily from the pending FLIR acquisition, substantial indebtedness, global trade tensions, industry cyclicality, and dependence on U.S. Government contracts, alongside cybersecurity and goodwill impairment concerns - The pending acquisition of FLIR, valued at approximately $8.0 billion, is the company's largest to date and presents numerous risks, including the incurrence of substantial indebtedness, potential disruption to business relationships, and failure to realize anticipated benefits575859 - Escalating global trade tensions, particularly tariffs and restrictions involving China (a top-five international market), could increase material costs, cause production delays, and harm sales6768 - A material amount of revenue is derived from the cyclical offshore oil and gas industry. A prolonged reduction in exploration and development activities could adversely affect the Instrumentation segment71 - Sales from U.S. Government contracts represented approximately 26% of total revenue in 2020. These revenues are dependent on continued government funding and are subject to risks of cancellation, delays, and budget cuts8384 - As of January 3, 2021, the company had $2,150.0 million in goodwill. Changes in future business conditions could lead to impairment charges, which could have a material adverse effect on reported financial results81 - The commercial aerospace business faces risks from the heavily regulated airline industry and cyclical downturns. The grounding and production suspension of the Boeing 737 Max has negatively impacted the Teledyne Controls' business99102 Properties Teledyne operates 68 principal facilities across 17 U.S. states and six foreign countries, with its executive offices in Thousand Oaks, California - The Company operates 68 principal facilities in 17 states and six foreign countries, with executive offices and the main R&D center in Thousand Oaks, California132 Legal Proceedings The company is involved in various ordinary course lawsuits and claims, which management does not expect to materially affect its financial condition - Teledyne is involved in various lawsuits and claims in the ordinary course of business but does not expect their resolution to have a material adverse effect on its financial condition133 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Teledyne's common stock trades on the NYSE under 'TDY', with no anticipated cash dividends as earnings are prioritized for growth and acquisitions, and a dormant stock repurchase program - The company's common stock is listed on the New York Stock Exchange under the symbol "TDY"135 - Teledyne does not anticipate paying cash dividends in the foreseeable future, prioritizing the use of earnings for business development and acquisitions137 - A stock repurchase program for up to approximately three million shares is authorized, but no repurchases have been made since 2015138 Selected Financial Data This section presents a five-year summary of Teledyne's consolidated financial data, highlighting 2020 net sales of $3,086.2 million and net income of $401.9 million Five-Year Summary of Selected Financial Data (in millions, except per-share amounts) | | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $3,086.2 | $3,163.6 | $2,901.8 | $2,603.8 | $2,149.9 | | Net income | $401.9 | $402.3 | $333.8 | $227.2 | $190.9 | | Diluted earnings per common share | $10.62 | $10.73 | $9.01 | $6.26 | $5.37 | | Total assets | $5,084.8 | $4,579.8 | $3,809.3 | $3,846.4 | $2,774.4 | | Total stockholders' equity | $3,228.6 | $2,714.7 | $2,229.7 | $1,947.3 | $1,554.4 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, Teledyne achieved record operating margin and cash flow despite a 2.4% sales decrease, maintaining stable net income and strong liquidity, with a key strategic focus on the pending $8.0 billion FLIR acquisition - The company's strategy emphasizes growth in core markets (instrumentation, digital imaging, aerospace and defense electronics, engineered systems) through targeted acquisitions and product development, while pursuing operational excellence144 - Despite the COVID-19 pandemic, 2020 saw the best operating margin and cash flow in the company's history. Headcount was reduced by 9.8% to reduce exposure to weak end markets like commercial aerospace146148 Consolidated Operating Results Summary (in millions) | | 2020 | 2019 | | :--- | :--- | :--- | | Net sales | $3,086.2 | $3,163.6 | | Operating income | $480.1 | $491.7 | | Net income | $401.9 | $402.3 | | Diluted EPS | $10.62 | $10.73 | Results of Operations In 2020, net sales decreased by 2.4% to $3,086.2 million, while net income remained stable at $401.9 million, with segment-specific sales and operating income shifts and a 14.4% effective tax rate Net Sales by Segment: 2020 vs. 2019 (in millions) | Segment | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Instrumentation | $1,094.5 | $1,105.1 | (1.0)% | | Digital Imaging | $986.0 | $992.9 | (0.7)% | | Aerospace and Defense Electronics | $589.4 | $690.1 | (14.6)% | | Engineered Systems | $416.3 | $375.5 | 10.9% | | Total net sales | $3,086.2 | $3,163.6 | (2.4)% | Operating Income by Segment: 2020 vs. 2019 (in millions) | Segment | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Instrumentation | $213.2 | $200.4 | 6.4% | | Digital Imaging | $192.8 | $176.5 | 9.2% | | Aerospace and Defense Electronics | $80.8 | $143.4 | (43.7)% | | Engineered Systems | $50.1 | $36.5 | 37.3% | | Total Operating Income | $480.1 | $491.7 | (2.4)% | - The effective tax rate was 14.4% in 2020, down from 15.1% in 2019. The 2020 rate included $34.6 million in net discrete income tax benefits, primarily from share-based accounting and U.S. export sales169 Segments Analysis In 2020, Aerospace and Defense Electronics saw significant declines, while Engineered Systems grew strongly, and Instrumentation and Digital Imaging achieved higher operating income despite slight sales decreases - Instrumentation: 2020 sales decreased 1.0% to $1,094.5 million, but operating income increased 6.4% to $213.2 million due to improved margins. Lower marine and test & measurement sales were partly offset by acquired gas and flame detection businesses182183 - Digital Imaging: 2020 sales decreased 0.7% to $986.0 million, while operating income grew 9.2% to $192.8 million. The increase in operating income was driven by a favorable product mix, with higher sales of infrared detectors and MEMS products offsetting lower sales of X-ray products for dental/medical use190191 - Aerospace and Defense Electronics: 2020 sales fell 14.6% to $589.4 million, and operating income dropped 43.7% to $80.8 million. The decline was primarily due to a $94.8 million decrease in aerospace electronics sales caused by weakness in the commercial aerospace industry198199 - Engineered Systems: 2020 sales increased 10.9% to $416.3 million, with operating income rising 37.3% to $50.1 million. Growth was driven by increased sales from marine, space, nuclear, and other manufacturing programs206207 Financial Condition, Liquidity and Capital Resources The company ended 2020 with strong liquidity, including $673.1 million in cash and $618.9 million in operating cash flow, and has arranged a $4.5 billion credit commitment for the pending FLIR acquisition - A $4.5 billion 364-day credit commitment has been arranged to support funding of the pending FLIR acquisition213 Long-Term Debt Summary (in millions) | Debt Instrument | Jan 3, 2021 | Dec 29, 2019 | | :--- | :--- | :--- | | $750.0M credit facility | $125.0 | $125.0 | | Term loan | $150.0 | $150.0 | | Fixed Rate Senior Notes | $499.3 | $553.8 | | Other debt | $4.0 | $2.0 | | Total long-term debt | $778.5 | $850.6 | - The company was in compliance with all financial covenants at year-end, with a Consolidated Leverage Ratio of 1.338 to 1 (vs. a requirement of no more than 3.25 to 1)215216 Cash Flow Summary (in millions) | | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Cash provided by operating activities | $618.9 | $482.1 | $446.9 | | Capital expenditures | ($71.4) | ($88.4) | ($86.8) | | Free cash flow | $547.5 | $393.7 | $360.1 | Critical Accounting Policies Management identifies critical accounting policies including revenue recognition (40% over time), pension plans, business combinations (goodwill of $2.15 billion), and income taxes, all involving significant judgment and estimation - Approximately 40% of revenue is recognized over time, primarily using a cost-to-cost measure of progress which requires management judgment in estimating contract revenue and costs263264 - Accounting for defined benefit pension plans requires significant assumptions regarding the discount rate and the expected long-term rate of return on plan assets268 - Goodwill and acquired intangible assets are tested for impairment annually. The quantitative test uses a discounted cash flow model requiring judgmental assumptions about revenue growth, margins, and discount rates. As of the 2020 test, the fair value of all reporting units exceeded their carrying values by at least 116%271274276 Financial Statements and Supplementary Data This section presents the complete audited consolidated financial statements for 2018-2020, including notes, management's internal control report, and Deloitte & Touche LLP's unqualified audit opinion Consolidated Statements of Income For fiscal year 2020, Teledyne reported net sales of $3,086.2 million, operating income of $480.1 million, and stable net income of $401.9 million Consolidated Statements of Income (in millions, except per-share amounts) | | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Sales | $3,086.2 | $3,163.6 | $2,901.8 | | Operating income | $480.1 | $491.7 | $416.6 | | Net income | $401.9 | $402.3 | $333.8 | | Diluted earnings per common share | $10.62 | $10.73 | $9.01 | Consolidated Balance Sheets As of January 3, 2021, Teledyne's total assets increased to $5,084.8 million, driven by higher cash, with total liabilities at $1,856.2 million and stockholders' equity at $3,228.6 million Consolidated Balance Sheet Highlights (in millions) | | Jan 3, 2021 | Dec 29, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $673.1 | $199.5 | | Total Current Assets | $1,722.6 | $1,313.7 | | Goodwill | $2,150.0 | $2,050.5 | | Total Assets | $5,084.8 | $4,579.8 | | Total Liabilities | $1,856.2 | $1,865.1 | | Total Stockholders' Equity | $3,228.6 | $2,714.7 | Consolidated Statements of Cash Flows In 2020, net cash from operating activities significantly increased to $618.9 million, while investing and financing activities used $99.4 million and $61.8 million respectively, leading to a $473.6 million increase in cash Consolidated Statements of Cash Flows Highlights (in millions) | | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $618.9 | $482.1 | $446.9 | | Net cash used in investing activities | ($99.4) | ($571.9) | ($88.6) | | Net cash provided by (used in) financing activities | ($61.8) | $141.7 | ($271.3) | | Change in cash and cash equivalents | $473.6 | $57.0 | $71.6 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on the pending $8.0 billion FLIR acquisition, goodwill, $778.5 million long-term debt, segment performance, pension plans, and income taxes, with 40% of revenue recognized over time - Note 3: In 2020, the company acquired OakGate Technology for $28.5 million. In 2019, three acquisitions were completed for a total of $484.0 million. Goodwill stood at $2,150.0 million at year-end 2020403404412 - Note 9: Total long-term debt was $778.5 million as of January 3, 2021, with maturities extending to 2024 and beyond. The company maintains a $750.0 million credit facility, of which $615.5 million was available442443 - Note 11: The company restructured its domestic qualified defined benefit pension plan into two separate plans (active and inactive participants). As of January 3, 2021, the domestic plans had a funded status of $7.7 million (assets exceeded obligations)454463 - Note 12: Provides detailed segment data, including sales by customer type, contract type, and geographic region. U.S. Government sales were $818.2 million in 2020, with the Engineered Systems segment being the largest contributor488 - Note 15: Details the subsequent event of the definitive agreement to acquire FLIR Systems, Inc. for approximately $8.0 billion in a cash and stock transaction, expected to close in mid-2021500 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of January 3, 2021, with an unqualified audit opinion from Deloitte & Touche LLP - The President and CEO and the Senior VP and CFO concluded that the company's disclosure controls and procedures were effective as of January 3, 2021295 - Management's report on internal control over financial reporting, based on the COSO framework, concluded that controls were effective as of January 3, 2021. This was attested to by the independent auditor, Deloitte & Touche LLP313314316 PART III Directors, Executive Officers, Corporate Governance, and Other Matters This section incorporates by reference information from the 2021 Proxy Statement regarding directors, executive officers, compensation, security ownership, and related party transactions - Information required for Items 10 through 14 is incorporated by reference from the registrant's definitive proxy statement for the 2021 Annual Meeting of Shareholders301302303304305 PART IV Exhibits and Financial Statement Schedules This section lists all exhibits and financial statement schedules filed with the Form 10-K, including financial statements, Schedule II, and an index of various corporate documents - This section provides an index to the financial statements, financial statement schedules (Schedule II - Valuation and Qualifying Accounts), and a list of all exhibits filed with the report306