Grade: F — Major Red Flags
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-02-20, Fiscal Year Ended December 28, 2025) + Yahoo Finance
Auditor: Ernst & Young LLP — Unqualified opinion
One-line verdict: Teledyne is a well-run industrial technology conglomerate with improving fundamentals — revenue up 7.9% to $6.1B, net income of $895M, and CFFO/NI of 1.33. But the screening engine assigns an F because two structural balance sheet items trip red flags: cash of $352M covers only 13% of $2.6B debt, and goodwill-plus-intangibles at $10.8B equal 103% of equity — a direct legacy of the $8.2B FLIR Systems acquisition in 2021. The operating performance is strong, and the M-Score at -2.44 is clean. This is another case where the grade penalizes an acquisition-driven capital structure rather than detecting actual financial distress.
| Metric | Result |
|---|---|
| Red Flags | **2** (cash coverage, goodwill dominance) |
| Watch Items | **1** (CapEx surge) |
| Checks Completed | **17/18** |
| Beneish M-Score | **-2.44** (clean, below -2.22 threshold) |
| F-Score (Fraud) | **0.69** (predicted probability 0.3%) |
| Altman Z-Score | **4.86** (safe zone) |
| Auditor | Ernst & Young LLP — Unqualified opinion |
The Business: Four-Segment Industrial Technology
Teledyne operates across four segments, primarily serving defense, industrial, and scientific markets. The 10-K describes the company as providing "digital imaging sensors, cameras and systems within the visible, infrared and X-ray spectra, monitoring and control instrumentation for marine and environmental applications, harsh environment interconnects, electronic test and measurement equipment, aircraft information management systems, and defense electronics and satellite communication subsystems."
Segment results from the 10-K:
| Segment | FY2025 Revenue | FY2024 Revenue | Growth |
|---|---|---|---|
| Digital Imaging | ~$2.5B | ~$2.2B | +13% |
| Instrumentation | ~$1.5B | ~$1.4B | +7% |
| Aerospace & Defense Electronics | ~$1.0B | ~$1.0B | Flat |
| Engineered Systems | ~$1.1B | ~$1.1B | Flat |
| **Total** | **$6,115M** | **$5,670M** | **+7.9%** |
The 10-K notes: "Total year 2025 net sales included $270.1 million in incremental net sales from current and prior year acquisitions." Organic growth was therefore approximately 3-4%.
Revenue grew "across three of our four business segments." China exposure is modest at "approximately 4% of total revenues in 2025."
Profitability: Steady and Consistent
| Metric | FY2022 | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|---|
| Revenue | $5,459M | $5,636M | $5,670M | $6,115M | +7.9% YoY |
| Net Income | $789M | $886M | $819M | $895M | +9.2% YoY |
| Gross Margin | 42.7% | 43.3% | 42.9% | 42.8% | Rock stable |
| Net Margin | 14.4% | 15.7% | 14.4% | 14.6% | Stable |
| ROE | 9.7% | 9.6% | 8.6% | 8.5% | Modest decline |
The most striking feature: gross margin has been between 42.7% and 43.3% for four consecutive years. This kind of stability is rare in industrial technology and indicates a business with strong pricing power and consistent cost structure. Operating income grew 16.2% to $1,150M, implying solid operating leverage.
The 10-K shows: Diluted EPS grew 9.7% to $18.88 from $17.21. Income tax provision jumped to $198.8M from $117.2M (+70%), reflecting a higher effective tax rate.
ROE at 8.5% appears modest but is depressed by the large equity base ($10.5B), which includes $8.7B in goodwill — the FLIR acquisition effect. On a tangible equity basis, returns would be substantially higher.
Cash Flow: Strong Conversion, Improving Trajectory
| Metric | FY2022 | FY2023 | FY2024 | FY2025 |
|---|---|---|---|---|
| Operating Cash Flow | $487M | $836M | $1,192M | $1,191M |
| Net Income | $789M | $886M | $819M | $895M |
| **CFFO / Net Income** | **0.62** | **0.94** | **1.45** | **1.33** |
| Free Cash Flow | $394M | $721M | $1,108M | $1,074M |
| CapEx | $93M | $115M | $84M | $117M |
CFFO/NI has improved dramatically from 0.62 in FY2022 to 1.33 in FY2025, reflecting the working capital normalization following the FLIR integration. The $1.19B in CFFO is backed by $895M net income plus $336M depreciation and amortization, $40M stock-based compensation, and other adjustments.
Free cash flow of $1.07B is robust. CapEx is modest at $117M — Teledyne is not a capital-intensive manufacturer but rather a designer and assembler of high-value instrumentation.
Capital Structure: FLIR Legacy Debt
| Item | Amount | Notes |
|---|---|---|
| Cash | $352M | Down from $650M |
| Total Debt | $2,642M | Down from $2,789M |
| Goodwill | $8,688M | 103% of equity |
| Intangibles | $2,100M | Amortizing |
| Equity | $10,505M | Large base |
| Debt/EBITDA | 1.8x | Comfortable |
The 10-K states: "On December 28, 2025, Teledyne's goodwill was $8,687.6 million and net acquired intangible assets were $2,100.1 million." The $8.7B in goodwill is predominantly from the FLIR Systems acquisition. Teledyne tests goodwill annually and notes: "We have chosen to perform our annual impairment reviews of goodwill and other indefinite-lived intangible assets" — no impairment has been identified.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO | PASS | 59 days, +1 day YoY. Stable |
| A2 | AR vs Revenue | PASS | AR +10.1% vs revenue +7.9% |
| A3 | Revenue vs CFFO | PASS | Revenue +7.9%, CFFO flat. Cash stable |
Clean revenue quality across the board. DSO at 59 days is normal for a defense/industrial technology company with government contracts.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory | PASS | Inventory +14.1% vs COGS +8.2%. Normal |
| B2 | CapEx | WATCH | CapEx +40.1% vs revenue +7.9% |
| B3 | SG&A Ratio | PASS | SG&A/Gross Profit = 35.6%. Normal |
| B4 | Gross Margin | PASS | 42.8%, -0.2pp. Rock stable |
B2: CapEx grew 40% from $84M to $117M. Given the small absolute base, this could reflect timing of equipment purchases or facility upgrades. At less than 2% of revenue, CapEx is not a cash drain concern.
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs NI | PASS | Ratio 1.33. Profits backed by cash |
| C2 | FCF | PASS | $1.07B. FCF/NI = 1.20 |
| C3 | Accruals | PASS | Accruals ratio -1.9%. Low |
| C4 | Cash vs Debt | FAIL | Cash $352M covers only 13% of debt $2.6B |
C4: The low cash-to-debt ratio reflects Teledyne's decision to use cash for acquisitions and debt paydown rather than accumulating it. With $1.07B in annual FCF and Debt/EBITDA at 1.8x, the leverage is serviceable. Total debt declined from $3.9B (FY2022) to $2.6B, a $1.3B reduction over three years.
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | FAIL | $10.8B = 103% of equity |
| D2 | Leverage | PASS | Debt/EBITDA = 1.8x |
| D3 | Soft Assets | PASS | Other assets +13.2% vs revenue +7.9% |
| D4 | Impairment | N/A | No data |
D1: Goodwill exceeding equity is a direct consequence of the 2021 FLIR acquisition. The 10-K warns: "Changes in future business conditions could cause business investments, goodwill and other long-lived assets to become impaired, resulting in significant losses and write-downs that would reduce our operating income." No impairment has been identified to date.
Acquisition Risk & M-Score
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer | PASS | FCF after acquisitions positive |
| E2 | Goodwill Surge | PASS | Goodwill +8% YoY (small acquisitions) |
| F1 | M-Score | PASS | -2.44. Clean |
The 10-K confirms ongoing acquisition activity: "Subsequent to the end of the year, we completed one acquisition which will be included within the Instrumentation segment." Teledyne is a disciplined serial acquirer — acquisitions added $270M in revenue in FY2025.
Key Risks from the 10-K
1. FLIR Legacy — Export Control History
The 10-K notes: "Effective April 24, 2022, the United States Department of State's Office of Defense Trade Controls Compliance (DDTC) closed the four-year Consent Agreement that had been entered into by FLIR Systems, Inc., to resolve various export allegations under the International Traffic in Arms Regulations." While resolved, this history could create ongoing compliance burden and reputational risk with government customers.
2. Government Contract Dependency
As a defense electronics supplier, Teledyne depends on U.S. and allied government budgets. The 10-K warns of risks from "reduced orders, payment delays, collection difficulties" in economic downturns affecting government spending.
3. Integration and Acquisition Risk
The company acknowledges that with acquisitions, "we may not achieve the revenue or net income levels that justify the acquisition" and warns of "impairment of goodwill or acquired intangible assets." With $8.7B in goodwill, even a modest impairment would be material.
Summary
Grade: F. Two red flags are structural — acquisition-driven goodwill and a debt-heavy capital structure — not signs of manipulation.
Teledyne's operating performance is remarkably consistent: 42.8% gross margin (stable for four years), CFFO/NI of 1.33, FCF of $1.07B, M-Score clean at -2.44, and steady revenue growth. The business is well-managed.
The F grade reflects:
This is a B-quality operating business with an F-grade capital structure inherited from a transformative acquisition. As Teledyne continues to delever (already reduced debt by $1.3B over three years), these metrics will improve mechanically. The Z-Score at 4.86 (safe zone) confirms there is no solvency risk.
**Disclaimer**: This report is based on Teledyne's FY2025 10-K (SEC EDGAR) and public financial data. This is NOT investment advice.
Data: SEC EDGAR 10-K (Fiscal Year Ended December 28, 2025, Filed 2026-02-20) + Yahoo Finance