Teledyne Technologies Incorporated — Q2 2015 Form 10-Q
Reporting period: Second quarter and six months ended June 28, 2015; comparisons are to the periods ended June 29, 2014. Teledyne supplies instrumentation, digital imaging, aerospace and defense electronics, and engineered systems.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $577.7 million | $597.1 million | $1,142.7 million | $1,170.6 million |
| Operating income | $68.9 million | $74.3 million | $136.2 million | $140.3 million |
| Net income attributable to Teledyne | $48.3 million | $56.1 million | $92.0 million | $101.9 million |
| Diluted EPS | $1.34 | $1.47 | $2.53 | $2.67 |
| Operating margin | 11.9% | 12.4% | 11.9% | 12.0% |
- Quarterly sales declined 3.2%, operating income 7.3%, and attributable net income 13.9%. Six-month sales declined 2.4% and attributable net income 9.7%.
- Cost of sales was 61.9% of sales in Q2 versus 61.7% a year earlier; for six months, 61.6% versus 61.5%. Lower sales and weaker segment results weighed on earnings. Net interest expense rose to $6.0 million for Q2 and $11.9 million for six months, primarily reflecting higher debt from acquisitions and share repurchases.
- Segment sales and operating income for Q2: Instrumentation $271.3 million and $45.7 million; Digital Imaging $90.8 million and $8.8 million; Aerospace and Defense Electronics $147.0 million and $20.6 million; Engineered Systems $68.6 million and $4.8 million. Instrumentation operating income increased, while the other three segments declined.
- Digital Imaging sales fell 12.4% in Q2, mainly due to lower U.S. government R&D and machine-vision demand. Aerospace and Defense Electronics sales fell 3.4%, with lower microwave/interconnect and manufacturing-services sales. Engineered Systems sales rose 6.2%, but operating income fell 29.4%, reflecting lower sales of higher-margin turbine engines and higher pension expense.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $75.7 million, down from $122.1 million. Management cited lower earnings, payment timing for accounts payable, scheduled earn-out and Bolt-related severance payments; a $3.0 million legal settlement receipt partly offset the decline.
- Investing cash outflow was $80.4 million, including $62.4 million for acquisitions and $21.3 million of capital expenditures. Financing cash outflow was $69.9 million, including $142.0 million paid under a 2015 accelerated share repurchase, partly offset by $75.0 million of net credit-facility borrowings. Cash fell to $61.3 million from $141.4 million at year-end.
- At June 28, 2015, total debt including capital leases was $765.3 million; cash was $61.3 million. The $750 million revolving facility had $180.0 million drawn and $555.4 million of available capacity, net of letters of credit. The company reported compliance with debt covenants, with leverage of 2.0x versus a maximum 3.25x and interest coverage of 17.8x versus a minimum 3.0x.
- Working capital was $388.4 million, down from $402.7 million at year-end. Current assets were $874.0 million and current liabilities $485.6 million. Inventory increased to $330.2 million from $311.8 million.
Material changes, outlook and risks
- Recent transactions included the acquisitions of Bowtech and Industrial Control Machines, and the purchase of the remaining 49% interest in Optech. Acquisitions contributed $10.0 million of Q2 revenue and $22.2 million for the first six months. Purchase accounting for certain acquisitions remained preliminary; Bowtech and ICM goodwill is not tax-deductible.
- Management expected a 29.5% full-year effective tax rate, excluding discrete items; up to $60 million of 2015 capital expenditures; and no domestic pension contribution in 2015. It expected operating cash flow and available facility borrowings to meet requirements for the next 12 months. Instrumentation commentary anticipated slightly higher marine sales from prior acquisitions and interconnect systems, partly offset by lower geophysical sensor sales.
- Q2 included $3.0 million of net gains on legal settlements, versus $8.3 million in Q2 2014; the smaller prior-period-comparable settlement gains contributed to lower other income. Q2 2015 also included $1.3 million of discrete tax benefits. A first-quarter $1.2 million gain resulted from freezing the non-qualified executive pension plan.
- Management identified risks including economic disruption; demand changes in defense, energy, aviation, semiconductor and other markets; government funding and defense-spending changes; lower oil and gas prices; foreign-exchange and interest-rate movements; cybersecurity threats; and acquisition integration and execution. A 100-basis-point interest-rate increase would raise annual interest expense by approximately $3.8 million on the stated $377.5 million of variable-rate debt.
- Environmental remediation reserves were $9.2 million, with remediation expected to extend over many years and potentially up to 30 years. Management did not expect pending litigation and claims to have a material adverse financial effect. Disclosure controls were reported effective; no material change in internal controls was reported.
Important facts for investors to verify
- Whether Digital Imaging and Aerospace and Defense Electronics sales declines continue, and whether Instrumentation’s earnings improvement is sustainable.
- Acquisition integration, realized synergies, final purchase-price allocations, and the impact of acquired-asset amortization and non-deductible goodwill.
- Cash conversion and working-capital trends, including inventory and the timing of accrued-liability payments.
- Debt and interest-rate exposure, share-repurchase settlement, remaining facility capacity, and covenant headroom.
- Assumptions behind full-year tax and capital-spending expectations, contract-estimate revisions, and environmental and other contingencies.