Business Combinations, Goodwill and Acquired Intangible Assets

6 Months Ended

Jul. 03, 2022

Business Combination and Asset Acquisition [Abstract]

Business Combinations, Goodwill and Acquired Intangible Assets

Business Combinations, Goodwill and Acquired Intangible Assets

Acquisition of FLIR Systems, Inc.

On May 14, 2021, Teledyne acquired the outstanding stock of FLIR Systems, Inc. ( “FLIR”) for approximately $8.1 billion, comprising of net cash payments of $3.7 billion, net Teledyne share issuances of $3.9 billion, and the assumption of FLIR debt of $0.5 billion. FLIR stockholders received $28.00 per share in cash and 0.0718 shares of Teledyne common stock for each FLIR share, and Teledyne issued approximately 9.5 million shares at $409.41 per share. See Note 3 to the Notes to Consolidated Financial Statements in Teledyne’s 2021 Form 10-K for additional information regarding the FLIR acquisition.

Founded in 1978, FLIR is an industrial technology company focused on intelligent sensing solutions for defense and industrial applications. FLIR technologies include thermal imaging systems, visible-light imaging systems, locater systems, measurement and diagnostic systems, and advanced threat-detection solutions. FLIR is part of the Digital Imaging segment.

The significant factors that resulted in recognition of goodwill were: (a) the purchase price was based on cash flow and return on capital projections assuming integration with our businesses and (b) the calculation of the fair value of tangible and intangible assets acquired that qualified for recognition. Goodwill resulting from the FLIR acquisition will not be deductible for tax purposes.

The following table presents the final purchase price allocation for FLIR, as the measurement period closed in the second quarter of 2022. We are accounting for the FLIR acquisition under the acquisition method and are required to measure identifiable assets acquired and liabilities assumed of the acquiree at the fair values on the closing date. The Company has completed the process of specifically identifying the amounts assigned to certain assets, including acquired intangible assets, and liabilities and the related impact on taxes and goodwill for the FLIR acquisition. The fair values of acquired intangibles were determined based on estimates and assumptions that are deemed reasonable by the Company.

Fair values allocated to the assets acquired and liabilities assumed - FLIR (in millions):
Cash and cash equivalents	$	287.7
Accounts receivables, net	241.3
Unbilled receivables, net	72.1
Inventories, net	519.4
Prepaid expenses and other current assets	54.8
Total current assets	1,175.3
Property, plant and equipment	354.1
Goodwill	5,939.7
Acquired intangible assets	2,490.0
Other long-term assets	141.9
Total assets acquired	$	10,101.0
Accounts payable	144.7
Accrued liabilities	612.1
Total current liabilities assumed	756.8
Long-term debt, net	496.8
Long-term deferred tax liabilities	603.3
Other long-term liabilities	335.5
Total liabilities assumed	2,192.4
Consideration transferred	$	7,908.6
Consideration transferred, net of cash acquired (a)	$	7,620.9

(a)     The consideration transferred included approximately $3.9 billion of Teledyne shares issued to existing shareholders of the acquired company. This $3.9 billion of equity consideration is a non-cash transaction. An immaterial portion of the cash consideration for certain vested FLIR restricted stock awards was deferred at the election of the award holder and will be paid out in future periods.

During fiscal year 2018, the Swedish Tax Authority (“STA”) issued a reassessment of tax for the year ending December 31, 2012 to one of FLIR’s non-operating subsidiaries in Sweden. The total taxes, penalties and interest levied by the STA totaled SEK 3.1 billion ($364.7 million based on exchange rates as of the acquisition date). The reassessment concerned the use of tax credits applied against capital gains pursuant to European Union Council Directive 2009/133/EC, commonly referred to as the EU Merger Directive, and the reassessment levied significant taxes and penalties. In March 2020, FLIR received an adverse judgment from the First Instance Court of Sweden regarding the STA’s reassessment. FLIR appealed the decision to the Administrative Court of Appeal in Stockholm, Sweden. After completing an extensive analysis, including consultation with outside specialists, Teledyne recorded a liability for this uncertain tax position that reflected the most likely outcome for this tax matter under the acquisition method for business combinations in the third quarter of 2021, which was included within accrued liabilities on the consolidated balance sheet at January 2, 2022. On January 26, 2022, the Administrative Court of Appeal in Stockholm, Sweden generally affirmed the March 2020 ruling of the First Instance Court and determined an estimated tax liability in the amount of SEK 2.765 billion. We paid the tax on February 2, 2022 totaling $296.4 million. We have requested for permission to appeal this ruling to the Swedish Administrative Supreme Court. We have not yet received a response to our request.

During the second quarter of 2022, the Company finalized the measurement period including reviewing and identifying acquisition accounting adjustments for a number of acquired tax positions of FLIR that may meet the definition of an acquired uncertain tax position. In addition to the STA matter described above, the Company recorded $187.6 million of purchase accounting adjustments for the accrual of other uncertain tax positions of FLIR. These amounts are included within other long-term liabilities on the Condensed Consolidated Balance Sheet.

The following table is a summary at the acquisition date of the acquired intangible assets and weighted average useful life in years for the FLIR acquisition made in 2021 (dollars in millions):

Intangibles subject to amortization:	Intangible Assets		Weighted average useful life in years
Proprietary technology	$	1,355.0	9.7
Customer list/relationships	450.0		14.4
Total intangibles subject to amortization	1,805.0		10.9
Intangibles not subject to amortization:
Trademarks	685.0
Total acquired intangible assets	$	2,490.0

The unaudited proforma information below assumes that FLIR had been acquired at the beginning of the 2020 fiscal year and includes the effect of transaction accounting adjustments. These adjustments include financing and interest costs associated with debt to fund the acquisition, amortization of acquired intangible assets, depreciation of the fair value step-up of acquired property, plant and equipment, amortization of inventory fair value step-up (assumed to be fully amortized in 2020) and tax related effects as well as the issuance of Teledyne common stock in connection with the acquisition.

This unaudited proforma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have resulted had the acquisition been in effect at the beginning of the 2020 fiscal year. In addition, the unaudited proforma results are not intended to be a projection of future results and do not reflect any operating efficiencies or cost savings that might be achievable.

The following table presents proforma net sales, net income and earnings per share data assuming FLIR was acquired at the beginning of the 2020 fiscal year:

	Second Quarter (a)		Six Months (a)
(unaudited - in millions, except per share amounts)	2021		2021
Net sales	$	1,275.0	$	2,548.0
Net income	$	93.2	$	192.3
Basic earnings per common share	$	2.19	$	4.84
Diluted earnings per common share	$	2.14	$	4.71
(a) The above unaudited proforma information is presented for the FLIR acquisition as it is considered a material acquisition.

Goodwill and Acquired Intangible Assets

Teledyne’s goodwill was $7,894.6 million at July 3, 2022 and $7,986.7 million at January 2, 2022. Teledyne’s net acquired intangible assets were $2,618.8 million at July 3, 2022 and $2,741.6 million at January 2, 2022. The decrease in the balance of net acquired intangible assets primarily reflected amortization of acquired intangible assets.

Acquired intangible assets are summarized as follows:

	July 3, 2022						January 2, 2022
Acquired intangible assets (in millions):	Gross carrying amount		Accumulated amortization		Net carrying amount		Gross carrying amount		Accumulated amortization		Net carrying amount
Proprietary technology	$	1,750.4	$	432.7	$	1,317.7	$	1,767.7	$	358.2	$	1,409.5
Customer list/relationships	611.0		159.6		451.4		616.2		141.8		474.4
Patents	0.6		0.6		—		0.6		0.6		—
Non-compete agreements	0.9		0.9		—		0.9		0.9		—
Trademarks	5.3		4.1		1.2		4.5		3.9		0.6
Backlog	15.8		15.8		—		16.3		16.3		—
Total intangibles subject to amortization	2,384.0		613.7		1,770.3		2,406.2		521.7		1,884.5
Intangibles not subject to amortization:
Trademarks	848.5		—		848.5		857.1		—		857.1
Total acquired intangible assets	$	3,232.5	$	613.7	$	2,618.8	$	3,263.3	$	521.7	$	2,741.6