On December 22, 2017, the Tax Cuts and Jobs 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.
Income Taxes
The effective tax rate for the fourth quarter of 2017 was 23.4%, compared with 11.8%. The fourth quarter of 2017 reflected net discrete income tax benefits of $6.0 million, which includes a $3.7 million income tax benefit related to share-based accounting. The fourth quarter of 2017 also includes the provisional charge of $4.7 million related to Tax Act impact. The fourth quarter of 2016 includes net discrete tax benefits of $9.4 million, which includes a $2.7 million income tax benefit related to share-based accounting. Excluding the net discrete income tax benefits in both periods and the impact of the Tax Act, the effective tax rates would have been 24.9% for the fourth quarter of 2017 and 27.5% for the fourth quarter of 2016.
Other
Stock option expense was $3.2 million for the fourth quarter of 2017, compared with $2.8 million. Pension income was $0.7 million for the fourth quarter of 2017, compared with $0.6 million. Interest expense, net of interest income, was $7.6 million for the fourth quarter of 2017, compared with $6.0 million, and reflected the impact of higher debt levels, primarily due to the acquisition of e2v. Corporate expense increased to $14.4 million for the fourth quarter of 2017, compared with $13.4 million. The higher corporate expense reflected higher compensation accruals in 2017, partially offset by $1.9 million in expense in 2016 related to the e2v acquisition. Other income and expense was expense of $2.5 million for the fourth quarter of 2017, compared with expense of $4.4 million. The 2017 amount includes higher foreign currency expense while the 2016 amount included $5.5 million of expense for a foreign currency hedge contract related to the e2v acquisition.
Outlook
Based on its current outlook, the company’s management believes that first quarter 2018 GAAP earnings per diluted share will be in the range of $1.50 to $1.55 and full year 2018 GAAP earnings per diluted share will be in the range of $7.51 to $7.61. The company’s estimated tax rate for 2018 is 21.5%, before discrete items which are currently expected to be lower in 2018 than in prior periods.
Use of Non-GAAP Financial Measures
In addition to financial measures prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), this earnings announcement also contains non-GAAP financial measures. The reasons that we use these 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 press release contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, relating to earnings, 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; 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 new 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.
