Teledyne Technologies Incorporated — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 27, 2015; comparisons are with the periods ended September 28, 2014. Teledyne supplies instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $555.4 | $601.1 | $1,698.1 | $1,771.7 |
| Operating income | $69.5 | $74.3 | $205.7 | $214.6 |
| Net income attributable to Teledyne | $48.3 | $55.6 | $140.3 | $157.5 |
| Diluted EPS | $1.34 | $1.47 | $3.88 | $4.13 |
| Operating margin | 12.5% | 12.4% | 12.1% | 12.1% |
Q3 sales fell 7.6%, operating income 6.5%, and diluted EPS 8.8%. For the first nine months, sales declined 4.2%, operating income 4.1%, and diluted EPS 6.1%. Cost of sales was 62.3% of sales in Q3 versus 62.5%; the nine-month ratio was 61.8% in both years. SG&A was 25.2% of Q3 sales and 26.1% of nine-month sales, unchanged from the comparable periods.
Cash flow and liquidity: Nine-month operating cash flow was $149.2, down from $202.3; capital expenditures were $31.6. Investing used $91.9, including $63.7 for acquisitions; financing used $118.2, including $142.0 of treasury-stock purchases. Cash decreased $69.9 to $71.5. Working capital was $455.1, and current assets of $866.5 compared with current liabilities of $411.4. Management said operating cash flow and available facility borrowings should meet requirements over the next 12 months.
Debt: Debt was $703.5, plus $9.2 of capital leases, for total debt and leases of $712.7. The $750.0 revolving facility had $205.0 outstanding and $531.1 of available capacity, net of letters of credit. Covenant measures were within limits: net debt/EBITDA of 1.9x versus a maximum 3.25x, and interest coverage of 16.7x versus a minimum 3.0x. Cash was lower partly because foreign subsidiaries funded acquisitions. A $125.0 private placement of notes was scheduled for November 5, 2015, subject to customary conditions.
Segment trends and material changes
- Instrumentation: Q3 sales fell 13.3% to $243.2 and operating income fell 17.7% to $38.6, mainly due to lower marine instrumentation sales tied to offshore oil exploration and lower test-and-measurement sales. Nine-month sales declined 3.8%.
- Digital Imaging: Q3 sales were essentially flat at $95.7, while operating income rose 31.6% to $10.4, reflecting improved margins and cost reductions. Nine-month sales declined 8.1% and operating income 2.7%, including weaker government R&D and product demand.
- Aerospace and Defense Electronics: Q3 sales were nearly flat at $151.3, with operating income up 8.8% to $23.5 on improved margins and product mix. Nine-month sales declined 3.9% and operating income 7.0%.
- Engineered Systems: Q3 sales fell 11.1% to $65.2 and operating income fell 30.6% to $5.9, reflecting lower sales, including higher-margin turbine engines. Nine-month sales were nearly flat, but operating income declined 18.7%.
Recent acquisitions contributed $13.5 of Q3 revenue and $35.7 for the first nine months. Acquisitions included Bowtech, ICM, and the purchase of the remaining 49% interest in Optech; purchase-price allocations for certain acquisitions remained preliminary.
Outlook, commentary, risks and unusual items
- Management expected a 30.8% full-year 2015 effective tax rate excluding discrete items; the filing gave no specific sales or earnings guidance. Capital spending was expected to be up to $55.0 for 2015, with $31.6 spent through Q3. No domestic pension contribution was planned for 2015.
- The company planned a new approximately $100.0 accelerated share repurchase. In August it agreed to issue $125.0 of senior notes, with proceeds intended for general corporate purposes, including debt refinancing, acquisitions, and repurchases.
- Q3 and nine-month 2015 results included discrete tax benefits of $7.4 and $8.5, respectively. Excluding discrete tax items, effective tax rates were 33.5% for Q3 and 30.8% for nine months. Nine-month 2015 and 2014 other income included legal-settlement gains of $3.0 and $7.0, respectively.
- Percentage-of-completion contract estimate changes produced both favorable and unfavorable operating-income effects; for nine months, these were $19.3 favorable and $33.3 unfavorable in 2015, versus $14.8 favorable and $21.5 unfavorable in 2014. No individual contract estimate change was material.
- Key exposures include weaker oil and gas markets, shifts in defense and government spending, commercial aviation demand and fuel costs, foreign exchange, interest rates, cyber threats, and acquisition integration. The company reported $9.1 of environmental remediation reserves and said remediation could extend up to 30 years; management did not expect pending litigation to materially adversely affect the financial statements.
- Foreign currency translation reduced nine-month comprehensive income: other comprehensive loss was $50.5, including a $62.3 translation adjustment. A 100-basis-point increase in interest rates was estimated to add about $4.0 to annual interest expense on the specified $400.0 of variable-rate debt.
Important facts for investors to verify
- Whether demand weakness in marine instrumentation and energy-related markets persisted, and how much acquisition revenue contributed to subsequent growth.
- Completion and final terms of the $125.0 note issuance and planned approximately $100.0 share repurchase, including effects on debt, cash, and share count.
- Underlying earnings and tax-rate trends after discrete tax benefits and legal-settlement gains, as well as the effect of contract-estimate adjustments.
- Acquisition integration, final purchase-price allocations, and the performance of acquired businesses relative to their reported operating losses and amortization costs.
- Liquidity, variable-rate debt exposure, environmental remediation obligations, and the company’s sensitivity to oil-and-gas, government-program, and foreign-exchange conditions.