Teledyne Technologies Incorporated — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017 (52 weeks). This is an annual report, not a standalone fourth-quarter filing; quarterly figures are unaudited. Teledyne supplies advanced instrumentation, imaging, aerospace and defense electronics, and engineered systems.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $2,603.8 million | $2,149.9 million |
| Operating income | $335.6 million | $253.8 million |
| Operating margin | 12.9% | 11.8% |
| Net income attributable to Teledyne | $227.2 million | $190.9 million |
| Diluted EPS | $6.26 | $5.37 |
| Cash from operating activities | $374.7 million | $317.0 million |
| Capital expenditures | $58.5 million | $87.6 million |
| Free cash flow, as defined by the company | $316.2 million | $229.4 million |
- Cost of sales was 61.9% of sales, versus 61.3% in 2016; gross margin was therefore approximately 38.1%, versus 38.7%.
- At year-end, cash was $70.9 million, total debt was $1,068.2 million, and total stockholders’ equity was $1,947.3 million. The $750 million revolving facility had $558.7 million of available capacity. The company reported covenant compliance, with net debt/EBITDA of 2.3x and interest coverage of 12.0x.
- Backlog was $1,250.2 million, up from $916.4 million; the company expected to fulfill 93% during 2018.
Fourth-quarter results
FY2017 Q4 sales were $704.4 million, operating income was $98.4 million, net income attributable to Teledyne was $67.6 million, and diluted EPS was $1.84. In FY2016 Q4, sales were $552.9 million, operating income $70.5 million, net income $53.0 million, and diluted EPS $1.48.
Material changes versus prior year
- Sales rose 21.1% and operating income rose 32.2%; net income increased 19.0%. Growth included $273.7 million of sales from e2v, acquired in March 2017. Management also cited $155.9 million in revenue growth apart from incremental acquisition sales.
- Digital Imaging sales increased 73.9% to $693.5 million and segment operating income rose to $108.4 million, principally reflecting e2v and higher sales in several product areas. Other segments also reported higher sales and operating income.
- Teledyne paid $774.1 million, net of cash acquired, for 2017 acquisitions and investments, chiefly e2v ($740.6 million) and SSI ($31.3 million). Goodwill increased to $1,776.7 million; acquired intangible assets rose to $398.9 million.
- Debt increased substantially to finance the e2v acquisition. Interest and debt expense, net, rose to $33.1 million from $23.2 million. Investing cash outflow was $831.2 million, mostly acquisition spending.
- Company-wide cost of sales as a percentage of sales increased, while SG&A as a percentage of sales declined to 25.2% from 26.9%. FY2017 included $27.0 million of e2v-related pretax charges and $4.2 million of severance and facility-consolidation charges.
Outlook, commentary and risks
- No formal earnings or revenue guidance is provided in the filing. Teledyne planned approximately $80 million in 2018 capital expenditures and expected company-funded R&D and bid/proposal costs of approximately $180 million. Management said operating cash flow and available credit were expected to meet requirements and could support acquisitions.
- The Tax Cuts and Jobs Act resulted in provisional net charges of $4.7 million; management expected to complete related calculations by no later than Q4 2018. The 2017 effective tax rate was 20.8%, including $21.9 million of net discrete tax benefits; excluding discrete benefits and the 2016 facility-sale effects, the company reported an adjusted effective rate of 26.8% for 2017.
- Key risks include acquisition integration and realization of expected benefits; higher leverage and variable-rate borrowing; foreign-exchange exposure following e2v; cyclical oil-and-gas and other end markets; government funding, contract termination and fixed-price cost overruns; supply constraints; cybersecurity and export-control compliance; and potential goodwill impairment. Goodwill impairment testing identified no impairment in 2017.
- Government customers accounted for approximately 24% of sales, and 58% of U.S. Government prime and subcontracts were fixed-price. Environmental remediation reserves were $5.1 million; management said excess future costs were not expected to materially harm financial condition or liquidity, though amounts beyond accruals were not reasonably estimable.
- The financial statements received an unqualified audit opinion. Management and the auditor excluded the 2017 acquisitions from internal-control assessments; those acquisitions represented approximately 26% of assets, 11% of revenue and 12% of net income. Controls over the remainder were reported effective.
Important facts for investors to verify
- How much of future growth and margin performance is organic versus attributable to e2v and other acquisitions, and whether integration benefits are realized.
- Debt reduction, interest costs, covenant headroom and the effect of currency and interest-rate movements.
- The final tax effects of the Tax Act and whether discrete tax benefits affected comparisons with underlying earnings.
- Backlog conversion, government-program funding and fixed-price contract performance, including the assumptions behind long-term contract estimates.
- Whether acquired-business internal controls are assessed and integrated successfully, and whether goodwill and intangible-asset valuations remain supportable.