On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was enacted. The Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering corporate income tax rates, implementing the territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. As a result of the Tax Act, Teledyne incurred provisional charges of $4.7 million in the fourth quarter of 2017 primarily due to the repatriation tax and the remeasurement of U.S. deferred tax assets and liabilities. The impacts of the Tax Act may differ from this estimate, possibly materially (and the amount of the provisional charge may accordingly be adjusted over the course of 2018), due to changes in interpretations and assumptions Teledyne has made, guidance that may be issued, and actions Teledyne may take as a result of the Tax Act. In 2018, the provisional charge was adjusted by an additional $0.6 million the first quarter.
Income Taxes
The effective tax rate for the second quarter of 2018 was 17.7%, compared with 21.3%. The second quarter of 2018 reflected net discrete income tax benefits of $3.4 million. This amount included a $4.7 million income tax benefit related to share-based accounting. The second quarter of 2017 included net discrete tax benefits of $4.6 million. This amount included a $1.2 million income tax benefit related to share-based accounting. Excluding the net discrete income tax benefits in both periods, the effective tax rates would have been 21.0% for the second quarter of 2018 and 27.4% for the second quarter of 2017. The decrease in the effective tax rate in 2018 primarily reflects the lower corporate income tax rates as part of the Tax Act.
Other
Stock option expense was $5.4 million for the second quarter of 2018, compared with $3.7 million. Non-service retirement benefit income was $3.3 million for the second quarter of 2018, compared with $3.4 million. Interest expense, net of interest income, was $6.7 million for the second quarter of 2018, compared with $9.1 million. The lower amount for the second quarter of 2018 primarily reflected lower debt levels in the second quarter of 2018, compared with the second quarter of 2017. Corporate expense increased to $13.8 million for the second quarter of 2018, compared with $12.6 million. Other income and expense was expense of $3.7 million for the second quarter of 2018 compared with expense of $0.7 million and reflected higher foreign currency impacts in the second quarter of 2018, compared with the second quarter of 2017.
Recent Accounting Pronouncements
Effective January 1, 2018, Teledyne adopted the requirements of Accounting Standards Update (“ASU”) No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This ASU requires the service cost component of net benefit costs to be reported in the same line item or items within operating income as other compensation costs, with the other components of net benefit cost to be presented outside of operating income. The 2017 period has been adjusted to be consistent with the 2018 presentation. In addition, effective January 1, 2018, Teledyne adopted ASU No. 2014-09 (Topic 606), “Revenue from Contracts with Customers,” using the modified retrospective transition method. Prior period comparative information is not adjusted and is reported under the accounting standards in effect for that period. The cumulative effect of adopting the new standard resulted in an immaterial increase to retained earnings as of January 1, 2018.
Outlook
Based on its current outlook, the company’s management believes that third quarter 2018 GAAP earnings per diluted share will be in the range of $2.01 to $2.06 and full year 2018 GAAP earnings per diluted share will be in the range of $8.18 to $8.28, an increase from the prior outlook of $7.67 to $7.77. The company’s annual estimated tax rate for 2018 is 21.3%, before discrete items which are currently expected to be lower in 2018 than in prior periods.
Forward-Looking Statements Cautionary Notice
This press release contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, relating to sales, earnings, operating margin, growth opportunities, acquisitions and divestitures, product sales, capital expenditures, pension matters, stock option compensation expense, interest expense, taxes, exchange rate fluctuations, cost reductions, facility consolidation costs, severance expenses 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 press release 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 the anticipated results,
including: disruptions in the global economy; 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; changes in the estimated impact of the Tax
Act; cuts to defense spending resulting from existing and future deficit
reduction measures; impacts from the United Kingdom’s planned 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; and threats to the security
of our confidential and proprietary information, including cyber
security threats. Lower oil and natural gas prices, as well as
instability in the Middle East or other oil producing regions, and
regulations or restrictions relating to energy production, including
with respect to hydraulic fracturing, could further negatively affect
the company’s businesses that supply the oil and gas industry.
Increasing fuel costs could negatively affect the markets of our
commercial aviation businesses. In addition, financial market
fluctuations affect the value of the company’s pension assets.
