Teledyne Technologies Incorporated (NYSE:TDY)

Record second quarter sales of $1,355.8 million, an increase of 20.9% compared with last year
Organic sales growth was 8.2% including the negative impact of foreign currency translation
Record second quarter GAAP diluted earnings per share of $3.59
Non-GAAP diluted earnings per share of $4.43
Revising full year 2022 GAAP earnings outlook to $15.13 to $15.45 diluted earnings per share, compared with the prior outlook of $15.34 to $15.66, and full year non-GAAP earnings outlook to $17.45 to $17.70, compared with the prior outlook of $17.75 to $18.00
Quarter-end Consolidated Leverage Ratio declined to 2.5x
Capital deployment included repurchases of fixed-rate debt and the recent acquisition of a majority interest in NL Acoustics

Teledyne today reported second quarter 2022 net sales of $1,355.8 million, compared with net sales of $1,121.0 million for the second quarter of 2021, an increase of 20.9%. Net income was $171.3 million ($3.59 diluted earnings per share) for the second quarter of 2022, compared with $64.7 million ($1.48 diluted earnings per share) for the second quarter of 2021, an increase of 164.8%. The second quarter of 2022 net sales included $167.6 million in incremental net sales from the acquisition of FLIR Systems, Inc. ("FLIR"), which was acquired midway through the second quarter of 2021. The second quarter of 2022 also reflected net discrete income tax benefits of $1.0 million compared with net discrete income tax expense of $4.1 million for the second quarter of 2021. The second quarter of 2022 included $51.3 million of pretax acquired intangible asset amortization expense and $0.6 million of acquisition related tax expense. Excluding these charges, non-GAAP net income for the second quarter of 2022 was $211.3 million ($4.43 diluted earnings per share). In the second quarter of 2021, Teledyne incurred pretax expenses of $150.7 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, $32.8 million in acquired intangible asset amortization expense and $23.4 million in acquired inventory step-up expense. Excluding these charges, non-GAAP net income for the second quarter of 2021 was $201.0 million ($4.61 diluted earnings per share). Operating margin was 16.9% for the second quarter of 2022, compared with 9.3% for the second quarter of 2021. Excluding acquisition-related transaction and purchase accounting expenses, non-GAAP operating margin for the second quarter of 2022 was 20.7%, compared with 22.8% for the second quarter of 2021.

"The demand environment for Teledyne remained strong in the second quarter. In fact, we achieved record quarterly orders and ended the quarter with over $3.0 billion of backlog. Consolidated book to bill was 1.08x with particular strength at Teledyne FLIR, where orders were 25% greater than sales," said Robert Mehrabian, Chairman, President and Chief Executive Officer. "Despite increased foreign currency headwind, organic sales growth accelerated and was 8.2% in the second quarter. Free cash flow improved from the first quarter, but inventory levels remained elevated to counter supply chain risk. Given the recent and significant appreciation of the U.S. dollar, ongoing supply chain constraints and inflation, we believe it is prudent to revise our reported revenue and adjusted earnings outlook modestly for the remainder of the year. Nevertheless, we continue to see mid-single digit organic sales growth in the second half and full year 2022 including the impact of foreign currency translation. We remain highly confident in our balanced and resilient mix of commercial and government businesses across a broad range of geographies and end markets. Finally, having reached our targeted leverage range, we are again pursuing acquisitions and are pleased to have recently completed our first bolt-on acquisition at Teledyne FLIR."

Review of Operations

Comparisons are with the second quarter of 2021, unless noted otherwise. In the current year, gain (loss) on debt extinguishment was presented as separate line item on the income statement. Prior year amounts were reclassified to conform to current year presentation.

Digital Imaging

The Digital Imaging segment's second quarter 2022 net sales were $775.8 million, compared with $579.5 million, an increase of 33.9%. Operating income was $117.9 million for the second quarter of 2022, compared with $84.6 million, an increase of 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. Operating income in the second quarter of 2021 reflected the concentration of FLIR net sales which were disproportionately higher than the operating expenses following the May 2021 closing date. The second quarter of 2021 also included $24.0 million of FLIR integration-related costs and $23.4 million in FLIR inventory step-up expense. Acquired intangible amortization expense for the second quarter of 2022 was $46.4 million compared with $27.4 million and reflected the timing of the FLIR acquisition midway into the second quarter of 2021.

Instrumentation

The Instrumentation segment's second quarter 2022 net sales were $312.5 million, compared with $291.1 million, an increase of 7.4%. Operating income was $73.6 million for the second quarter of 2022, compared with $64.6 million, an increase of 13.9%.

The second quarter of 2022 net sales increase resulted from higher sales across all external 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, respectively. The increase in operating income primarily reflected the impact of higher sales and favorable product mix.

Aerospace and Defense Electronics

The Aerospace and Defense Electronics segment's second quarter 2022 net sales were $168.8 million, compared with $152.4 million, an increase of 10.8%. Operating income was $44.1 million for the second quarter of 2022, compared with $28.4 million, an increase of 55.3%.

The second quarter 2022 net sales reflected higher sales of $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 the stronger sales of aerospace electronics in the quarter.

Engineered Systems

The Engineered Systems segment's second quarter 2022 net sales were $98.7 million, compared with $98.0 million, an increase of 0.7%. Operating income was $8.6 million for the second quarter of 2022, compared with $11.0 million, a decrease of 21.8%.

The second quarter 2022 net sales 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.

Additional Financial Information

Cash Flow

Cash provided by operating activities was $196.9 million for the second quarter of 2022, compared with $211.3 million. The second quarter of 2022 reflected higher purchases of inventories and higher income tax payments compared with the second quarter of 2021. Depreciation and amortization expense for the second quarter of 2022 was $82.7 million compared with $59.7 million and reflected the timing of the FLIR acquisition midway into the second quarter of 2021. Non-cash inventory step-up expense related to FLIR was $23.4 million for the second quarter of 2021, and there was no comparable amount recorded in the second quarter of 2022. Capital expenditures for both the second quarter of 2022 and 2021 were $20.8 million.

Teledyne repaid $187.0 million of debt during the second quarter of 2022, including making $112.0 million of floating rate debt payments which reduced its term loan due May 2026 by $80.0 million and reduced its outstanding credit facility balance by $32.0 million. In addition, 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. During the second quarter of 2022, Teledyne terminated and re-designated certain cross-currency swaps, receiving $18.3 million of cash which is included in cash provided by financing activities. Teledyne received $4.8 million from the exercise of stock options in the second quarter of 2022 compared with $5.1 million.

As of July 3, 2022, net debt was $3,666.9 million which is calculated as total debt of $3,945.7 million, net of cash and cash equivalents of $278.8 million. As of January 2, 2022, net debt was $3,624.7 million and included total debt of $4,099.4 million, net of cash and cash equivalents of $474.7 million. As of July 3, 2022, approximately $1,004.0 million was available under the $1.15 billion credit facility, after reductions of $125.0 million in outstanding borrowings and $21.0 million in outstanding letters of credit.

	Second Quarter
Free Cash Flow		2022			2021
Cash provided by operating activities	$	196.9		$	211.3
Capital expenditures for property, plant and equipment		(20.8	)		(20.8	)
Free cash flow		176.1			190.5
FLIR transaction related cash payments, net of tax		—			66.7
Adjusted free cash flow	$	176.1		$	257.2

Income Taxes

The effective tax rate for the second quarter of 2022 was 22.7%, compared with 29.8%. The second quarter of 2022 reflected 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 reflected net discrete income 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. 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, compared with 25.3%.

Other

Corporate expense decreased to $14.7 million for the second quarter of 2022, compared with $84.2 million. Corporate expense in the second quarter of 2021 included $70.5 million of transaction costs related to the FLIR acquisition. Stock option expense was $3.6 million for both the second quarter of 2022 and 2021. Non-service retirement benefit income was $2.9 million for the second quarter of 2022 compared with $2.8 million. Interest expense, net of interest income, was $22.5 million for the second quarter of 2022 compared with $21.2 million.

Outlook

Based on its current outlook, the company's management believes that third quarter 2022 GAAP diluted earnings per share will be in the range of $3.36 to $3.54 and full year 2022 GAAP diluted earnings per share will be in the range of $15.13 to $15.45. The company's management further believes that third quarter 2022 non-GAAP diluted earnings per share will be in the range of $4.20 to $4.35 and full year 2022 non-GAAP diluted earnings per share will be in the range of $17.45 to $17.70. The non-GAAP outlook excludes acquired intangible asset amortization for all acquisitions and benefits or charges for acquisition-related tax matters. The company's annual expected tax rate for 2022 is 23.1%, before discrete tax items.

Use of Non-GAAP Financial Measures

We report our financial results in accordance with generally accepted accounting principles in the United States ("GAAP"). We supplement the reporting of our financial results determined under GAAP with certain non-GAAP financial measures. The non-GAAP financial measures presented provides management, financial analysts, and investors with additional useful information in evaluating the performance of the company. The non-GAAP financial measures should be considered in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP. Further details on reasons that we use non-GAAP financial measures, a reconciliation of these measures to the most directly comparable GAAP measures, and other information relating to these measures are included following our GAAP financial statements.

Forward-Looking Statements Cautionary Notice

This earnings release contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, with respect to management's beliefs about the financial condition, results of operations and businesses of Teledyne in the future. Forward-looking statements involve risks and uncertainties, are based on the current expectations of the management of Teledyne and are subject to uncertainty and changes in circumstances.

The forward-looking statements contained herein may include statements relating to stock option compensation expense, and about the continuing expected effects on Teledyne of the acquisition of FLIR and synergies related to the transaction, anticipated capital expenditures and product developments, and other strategic options. Forward-looking statements generally are accompanied by words such as "projects", "intends", "expects", "anticipates", "targets", "estimates", "will" and words of similar import that convey the uncertainty of future events or outcomes. All statements made in this communication that are not historical in nature should be considered forward-looking. By its nature, forward-looking information is not a guarantee of future performance or results and involves risks and uncertainties because it relates to events and depends on circumstances that will occur in the future.

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.

Additional factors that could cause results to differ materially from those described above can be found in Teledyne's Annual Report on Form 10-K for the year ended January 2, 2022, and subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, all of which are on file with the SEC and available in the "Investors" section of Teledyne's website, teledyne.com, under the heading "Investor Information" and in other documents Teledyne files with the SEC.

All forward-looking statements speak only as of the date they are made and are based on information available at that time. Teledyne assumes 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.

A live webcast of Teledyne's second quarter earnings conference call will be held at 11:00 a.m. (Eastern) on Wednesday, July 27, 2022. To access the call, go to www.teledyne.com/investors/events-and-presentations approximately ten minutes before the scheduled start time. A replay will also be available for one month starting at 12:00 p.m. (Eastern) on Wednesday, July 27, 2022.

TELEDYNE TECHNOLOGIES INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 2022 AND JULY 4, 2021 (Unaudited - in millions, except per share amounts)

	Second Quarter			Second Quarter (a)			Six Months			Six Months (a)
		2022			2021			2022			2021
Net sales	$	1,355.8		$	1,121.0		$	2,676.8		$	1,926.7
Costs and expenses:
Costs 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 (b)		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 (c)		50.2			27.4			40.6			44.0
Net income	$	171.3		$	64.7		$	383.9		$	149.4

Diluted earnings per common share	$	3.59		$	1.48		$	8.05		$	3.66

Weighted average diluted common shares outstanding		47.7			43.6			47.7			40.8

a)		The second quarter of 2021 includes pretax charges of $150.7 million primarily related to the acquisition of FLIR. Of this amount, $23.7 million was recorded to cost of sales, $94.2 million was recorded to selling, general and administrative expenses and $32.8 million was recorded to acquired intangible asset amortization ($10.0 million related to prior acquisitions). The first six months of 2021 includes pretax charges of $197.0 million mostly related to the acquisition of FLIR, of which, $23.7 million was recorded to cost of sales, $100.1 million was recorded to selling, general and administrative expenses, $42.6 million was recorded to acquired intangible asset amortization, ($19.8 million related to prior acquisitions), $17.2 million was recorded to interest expense and $13.4 million was recorded to loss on debt extinguishment.
b)		The second quarter and first six months of 2022 includes pretax charges of $42.4 million and $86.5 million in acquired intangible asset amortization related to FLIR, respectively.
c)		The second quarter of 2022 includes net discrete income tax benefits of $1.0 million and the first six months of 2022 includes net discrete income tax benefits of $57.5 million. The second quarter of 2021 includes net discrete income tax expense of $4.1 million and the first six months of 2021 includes net discrete income tax benefits of $2.2 million.

		This financial statement was prepared in accordance with U.S. GAAP.

TELEDYNE TECHNOLOGIES INCORPORATED SUMMARY OF SEGMENT NET SALES AND OPERATING INCOME FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 2022 AND JULY 4, 2021 (Unaudited - $ in millions)

	Second Quarter			Second Quarter			% Change		Six Months			Six Months			% Change
		2022			2021		% Change			2022			2021		% Change
Net sales:
Digital Imaging	$	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 (a)	$	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 (a)		(14.7	)		(84.2	)	(82.5	)%		(30.8	)		(103.6	)	(70.3	)%
Operating income		229.5			104.4		119.8	%		453.0			239.6		89.1	%
Interest and debt expense, net (a)		(22.5	)		(21.2	)	6.1	%		(44.8	)		(43.5	)	3.0	%
Gain (loss) on debt extinguishment (a)		10.6			—		*			10.6			(13.4	)	(179.1	)%
Non-service retirement benefit income		2.9			2.8		3.6	%		5.7			5.6		1.8	%
Other income, net		1.0			6.1		(83.6	)%		—			5.1		(100.0	)%
Income before income taxes		221.5			92.1		140.5	%		424.5			193.4		119.5	%
Provision for income taxes (b)		50.2			27.4		83.2	%		40.6			44.0		(7.7	)%
Net income	$	171.3		$	64.7		164.8	%	$	383.9		$	149.4		157.0	%
* not meaningful

a)		The second quarter and first six months of 2022 includes pretax charges of $42.4 million and $86.5 million in acquired intangible asset amortization related to FLIR, respectively. The second quarter of 2021 includes pretax charges of $140.7 million related to the acquisition of FLIR, of which, $70.2 million was recorded in the Digital Imaging segment and $70.5 million was recorded to corporate expense. The first six months of 2021 includes pretax charges of $177.2 million related to the acquisition of FLIR, of which, $70.2 million was recorded in the Digital Imaging segment, $76.4 million was recorded to corporate expense, $17.2 million was recorded to interest expense and $13.4 million was recorded to loss on debt extinguishment.
b)		The second quarter of 2022 includes net discrete income tax benefits of $1.0 million and the first six months of 2022 includes net discrete income tax benefits of $57.5 million. The second quarter of 2021 includes net discrete income tax expense of $4.1 million and the first six months of 2021 includes net discrete income tax benefits of $2.2 million.

		This financial statement was prepared in accordance with U.S. GAAP.

TELEDYNE TECHNOLOGIES INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited – in millions)

	July 3, 2022		January 2, 2022
ASSETS
Cash and cash equivalents	$	278.8	$	474.7
Accounts receivable and unbilled receivables, net		1,129.3		1,083.8
Inventories, net		821.5		752.9
Prepaid expenses and other current assets		107.8		118.0
Total current assets		2,337.4		2,429.4
Property, plant and equipment, net		774.2		827.5
Goodwill and acquired intangible assets, net		10,523.3		10,728.3
Prepaid pension assets		135.5		123.7
Other assets, net		287.0		321.4
Total assets	$	14,057.4	$	14,430.3
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable	$	483.0	$	469.5
Accrued liabilities		620.0		1,028.9
Current portion of long-term debt		300.0		—
Total current liabilities		1,403.0		1,498.4
Long-term debt, net of current portion		3,645.7		4,099.4
Other long-term liabilities		1,136.9		1,210.5
Total liabilities		6,185.6		6,808.3
Total stockholders' equity		7,871.8		7,622.0
Total liabilities and stockholders' equity	$	14,057.4	$	14,430.3
This financial statement was prepared in accordance with U.S. GAAP.

TELEDYNE TECHNOLOGIES INCORPORATED RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES FOR THE SECOND QUARTER AND SIX MONTHS ENDED JULY 3, 2022 AND JULY 4, 2021 (Unaudited - in millions, except per share amounts)

	Second Quarter 2022						Second Quarter 2021
	Income before income taxes		Net income		Diluted earnings per common share		Income before income taxes		Net income		Diluted earnings per common share
GAAP	$	221.5	$	171.3	$	3.59	$	92.1	$	64.7	$	1.48
Adjusted for specified items:
FLIR transaction and integration costs		—		—		—		94.5		80.7		1.85
FLIR inventory step-up expense		—		—		—		23.4		18.0		0.41
Acquired intangible asset amortization		51.3		39.4		0.83		32.8		25.2		0.59
Acquisition-related tax matters		—		0.6		0.01		—		12.4		0.28
Non-GAAP	$	272.8	$	211.3	$	4.43	$	242.8	$	201.0	$	4.61

	Six Months 2022								Six Months 2021
	Income before income taxes		Net income			Diluted earnings per common share			Income before income taxes		Net income		Diluted earnings per common share
GAAP	$	424.5	$	383.9		$	8.05		$	193.4	$	149.4	$	3.66
Adjusted for specified items:
FLIR transaction and integration costs		—		—			—			100.4		86.5		2.12
FLIR inventory step-up expense		—		—			—			23.4		18.0		0.44
Acquired intangible asset amortization		104.9		80.7			1.69			42.6		32.7		0.80
Acquisition-related tax matters		—		(49.4	)		(1.04	)		—		12.4		0.31
Bridge loan and debt extinguishment fees		—		—			—			30.6		23.3		0.57
Non-GAAP	$	529.4	$	415.2		$	8.70		$	390.4	$	322.3		7.90

	Second Quarter 2022				Second Quarter 2021
	Operating income		Operating margin		Operating income		Operating margin
GAAP	$	229.5	16.9	%	$	104.4	9.3	%
Adjusted for specified items:
FLIR transaction and integration costs		—				94.5
FLIR inventory step-up expense		—				23.4
Acquired intangible asset amortization		51.3				32.8
Non-GAAP	$	280.8	20.7	%	$	255.1	22.8	%

	Six Months 2022				Six Months 2021
	Operating income		Operating margin		Operating income		Operating margin
GAAP	$	453.0	16.9	%	$	239.6	12.4	%
Adjusted for specified item:
FLIR transaction and integration costs		—				100.4
FLIR inventory step-up expense		—				23.4
Acquired intangible asset amortization		104.9				42.6
Non-GAAP	$	557.9	20.8	%	$	406.0	21.1	%

TELEDYNE TECHNOLOGIES INCORPORATED RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES (Unaudited - in millions, except per share amounts)

	July 3, 2022			January 2, 2022
Current portion of long-term debt - GAAP	$	300.0		$	—
Long-term debt - GAAP		3,645.7			4,099.4
Total debt - non-GAAP		3,945.7			4,099.4
Less cash and cash equivalents - GAAP		(278.8	)		(474.7	)
Net debt - non-GAAP	$	3,666.9		$	3,624.7

	Third Quarter 2022				Twelve Months 2022
	Low		High		Low			High
GAAP Diluted Earnings Per Common Share Outlook	$	3.36	$	3.54	$	15.13		$	15.45
Adjusted for specified non-GAAP item:
Acquired intangible asset amortization		0.84		0.81		3.35			3.30
Acquisition-related tax matters		—		—		(1.03	)		(1.05	)
Non-GAAP Diluted Earnings Per Common Share Outlook	$	4.20	$	4.35	$	17.45		$	17.70

Explanation of Non-GAAP Financial Measures

We report our financial results in accordance with GAAP. However, management believes that, in order to more fully understand our short-term and long-term financial and operational trends, and to aid in comparability with our competitors, investors and financial analysts may wish to consider the impact of certain items resulting from our acquisitions which have an infrequent or non-recurring impact on operations or assist in understanding our operations pre-acquisition. Accordingly, we present non-GAAP financial measures as a supplement to the financial measures we present in accordance with GAAP. These non-GAAP financial measures provide management, investors and financial analysts with additional means to understand and evaluate the operating results and trends in our ongoing business by adjusting for certain expenses and other items. Management believes these non-GAAP financial measures also provide additional means of evaluating period-over-period operating performance. In addition, management understands that some investors and financial analysts find this information helpful in analyzing our financial and operational performance and comparing this performance to our peers and competitors. The company's 2022 diluted earnings per common share guidance is also presented on a non-GAAP basis.

The non-GAAP financial measures are not meant to be considered superior to, or a substitute for, our financial statements prepared in accordance with GAAP. There are material limitations associated with non-GAAP financial measures because they exclude charges that have an effect on our reported results and, therefore, should not be relied upon as the sole financial measures by which to evaluate our financial results. Management compensates and believes that investors should compensate for these limitations by viewing the non-GAAP financial measures in conjunction with the GAAP financial measures. In addition, the non-GAAP financial measures included in this earnings announcement may be different from, and therefore may not be comparable to, similar measures used by other companies. The non-GAAP financial measures are also used by our management to evaluate our operating performance and benchmark our results against our historical performance and the performance of our peers.

Our non-GAAP measures are as follows:

Non-GAAP income before income taxes, net income and diluted earnings per common share

These non-GAAP measures provided a supplemental view of income before taxes, net income, and diluted earnings per common share. These non-GAAP measures exclude certain costs related to the FLIR acquisition, such as acquired intangible asset amortization, amortization of inventory step-up, bridge loan and debt extinguishment fees, and transaction costs such as advisory, legal and other consulting fees, filing fees, employee separation costs and other costs. These non-GAAP measures also exclude acquired intangible asset amortization from prior acquisitions, the remeasurement of deferred taxes related to acquired intangible assets due to changes in tax laws, and the tax benefits or costs related to the settlement or other resolution of the FLIR tax reserves. We adjust for any income tax impact related to these items to take into account the tax treatment and related tax rate and changes in tax rates that apply to each adjustment in the applicable tax jurisdiction. Generally, this results in the tax impact at the U.S. marginal tax rate for certain adjustments, including the majority of amortization of intangible assets, whereas the tax impact of other adjustments, including transaction expenses, depend on whether the amounts are deductible in the respective tax jurisdictions and the applicable tax rates in those jurisdictions. We also adjust for any post-acquisition interest on certain income tax reserves related to FLIR. We believe these measures provide investors and management with additional means to understand and evaluate the operating results of our business by adjusting for certain expenses and other items and present an alternative view of our performance compared to prior periods.

Non-GAAP operating income and operating margin

We define non-GAAP operating margin as non-GAAP operating income divided by net sales. These non-GAAP measures exclude certain costs related to the FLIR acquisition, such as acquired intangible asset amortization, amortization of inventory step-up, and transaction costs such as advisory, legal and other consulting fees, filing fees, employee separation costs and other costs. These non-GAAP measures also exclude acquired intangible asset amortization from prior acquisitions. We believe these measures provide investors and management with additional means to understand and evaluate the operating results of our business by adjusting for certain expenses and other items and present an alternative view of our performance compared to prior periods.

Non-GAAP total debt and net debt

We define non-GAAP total debt as the sum of current portion of long-term debt and other debt and long-term debt. We define net debt as the difference between non-GAAP total debt less cash and cash equivalents. The company believes that this supplemental non-GAAP information is useful to assist investors and management in analyzing the company's liquidity.

Non-GAAP diluted earnings per common share outlook

These non-GAAP measures represent our earnings per common share outlook for the second quarter 2022 and total year 2022 on a fully diluted basis, excluding acquired intangible asset amortization for all acquisitions and acquisition-related tax matters.

Non-GAAP cash provided by operations and free cash flow and adjusted free cash flow

We define adjusted cash provided by operating activities as cash provided by operating activities (a measure prescribed by GAAP) adjusted for the payment of a pre-acquisition 2018 tax reassessment issued to a FLIR subsidiary in Sweden. We define free cash flow as cash provided by operating activities (a measure prescribed by GAAP) less capital expenditures for property, plant and equipment. Adjusted free cash flow eliminates the impact of cash paid for transaction related expenses for the FLIR acquisition on a net of tax basis as well as the payment of a pre-acquisition 2018 tax reassessment issued to a FLIR subsidiary in Sweden. We believe that this supplemental non-GAAP information is useful to assist management and the investment community in analyzing the company's ability to generate cash flow.

Non-GAAP line items used in previous tables

Management excludes the effect of each of the acquisition related items identified below to arrive at the applicable non-GAAP financial measure referenced in the previous tables for the reasons set forth below with respect to that item:

FLIR transaction and integration costs – Included in our GAAP presentation of cost of sales and selling, general and administrative expenses are expenses incurred in connection with our acquisition of FLIR and primarily include legal, accounting, other professional fees as well as integration-related costs such as employee separation costs and facility lease impairments. Employee separation costs include required change-in-control payments, cash settlement of FLIR employee and director stock awards, as well as other employee severance amounts. We exclude these costs from our non-GAAP measures because we believe it does not reflect our ongoing financial performance.
FLIR inventory step-up expense – The purchase accounting entries associated with our acquisition of FLIR require us to record inventory at its fair value, which is sometimes greater than the previous book value of inventory. Included in our GAAP presentation, the increase in inventory value is amortized to cost of sales over the period that the related inventory is sold. We exclude inventory step-up amortization from our non-GAAP measures because it is a non-cash expense that we do not believe is indicative of our ongoing operating results.
Acquired intangible asset amortization – We believe that excluding the amortization of acquired intangible assets, which primarily represents purchased technology and customer relationships, as well as purchase order and contract backlog, provides an alternative way for investors to compare our operations pre-acquisition to those post acquisition and to those of our competitors that have pursued internal growth strategies. However, we note that companies that grow internally will incur costs to develop intangible assets that will be expensed in the period incurred, which may make a direct comparison more difficult.
Bridge loan and debt extinguishment fees – Included in our GAAP presentation of interest and debt expense are expenses incurred in connection with the financing activities to fund the FLIR acquisition. We exclude these acquisition related expenses, many of which are one-time costs, from our non-GAAP measures because we believe it does not reflect our ongoing financial performance.
Acquisition-related tax matters – Included in our tax provision is post-acquisition interest on certain income tax reserves related to FLIR, as well as the tax benefits or costs related to the settlement or other resolution of the FLIR tax reserves. Also, in June 2021, the United Kingdom Parliament enacted legislation to increase the corporate tax rate to 25% effective April 2023. Accordingly, the tax rate changes required us to remeasure our deferred taxes related to acquired intangible assets. We exclude these impacts from our non-GAAP measures because we believe it does not reflect our ongoing financial performance.

APPENDIX A

The following tables are presented to show the reconciliation of GAAP operating income to non-GAAP operating income by segment for 2022 and 2021.

TELEDYNE TECHNOLOGIES INCORPORATED RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES SUMMARY OF QUARTERLY OPERATING INCOME (Unaudited - in millions)

	Second Quarter 2022
	GAAP Operating Income			Acquired intangible asset amortization		Non-GAAP Operating Income

Digital Imaging	$	117.9		$	46.4	$	164.3
Instrumentation		73.6			4.7		78.3
Aerospace and Defense Electronics		44.1			0.2		44.3
Engineered Systems		8.6			—		8.6
Corporate expense		(14.7	)		—		(14.7	)
Total	$	229.5		$	51.3	$	280.8

	Six Months 2022
	GAAP Operating Income			Acquired intangible asset amortization		Non-GAAP Operating Income

Digital Imaging	$	233.6		$	94.9		328.5
Instrumentation		145.2			9.6		154.8
Aerospace and Defense Electronics		87.0			0.4		87.4
Engineered Systems		18.0			—		18.0
Corporate expense		(30.8	)		—		(30.8	)
Total	$	453.0		$	104.9	$	557.9

	Second Quarter 2021
	GAAP Operating Income			Acquired intangible asset amortization		Inventory step-up expense		Transaction and integration costs		Non-GAAP Operating Income

Digital Imaging	$	84.6		$	27.4	$	23.4	$	24.0	$	159.4
Instrumentation		64.6			5.2		—		—		69.8
Aerospace and Defense Electronics		28.4			0.2		—		—		28.6
Engineered Systems		11.0			—		—		—		11.0
Corporate expense		(84.2	)		—		—		70.5		(13.7	)
Total	$	104.4		$	32.8	$	23.4	$	94.5	$	255.1

TELEDYNE TECHNOLOGIES INCORPORATED RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES SUMMARY OF QUARTERLY OPERATING INCOME (continued) (Unaudited - in millions)

	Six Months 2021
	GAAP Operating Income			Acquired intangible asset amortization		Inventory step-up expense		Transaction and integration costs		Non-GAAP Operating Income

Digital Imaging	$	136.6		$	32.0	$	23.4	$	24.0		216.0
Instrumentation		124.0			10.2		—		—		134.2
Aerospace and Defense Electronics		56.7			0.4		—		—		57.1
Engineered Systems		25.9			—		—		—		25.9
Corporate expense		(103.6	)		—		—		76.4		(27.2	)
Total	$	239.6		$	42.6	$	23.4	$	100.4	$	406.0

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Teledyne Technologies Reports Second Quarter Results