Teledyne Technologies Incorporated — Q3 2014 Form 10-Q
Reporting period: Third quarter ended September 28, 2014; nine-month figures cover the period from December 30, 2013 through September 28, 2014. Financial statements are unaudited; amounts are in millions except per-share data.
Business context
Teledyne supplies instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. Its customers include government agencies, aerospace contractors, energy companies, industrial businesses, and airlines. The company says its strategy centers on strengthening these markets through product development, operational improvements, and targeted acquisitions.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $601.1 | $571.6 | $1,771.7 | $1,742.0 |
| Operating income | $74.3 | $53.0 | $214.6 | $176.8 |
| Net income attributable to Teledyne | $55.6 | $46.8 | $157.5 | $130.1 |
| Diluted earnings per share | $1.47 | $1.23 | $4.13 | $3.42 |
- Sales grew 5.2% in the quarter and 1.7% in the first nine months. Operating income increased 40.2% and 21.4%, respectively; attributable net income rose 18.8% and 21.1%.
- Operating margin was approximately 12.4% for Q3, versus 9.3% a year earlier; nine-month operating margin was approximately 12.1%, versus 10.2%.
- Cost of sales was 62.5% of sales in Q3, compared with 64.5% in the comparable 2013 quarter; for nine months it was 61.8%, compared with 64.2%. Management attributed improvement mainly to 2013 cost reductions, pension income, and lower severance and facility-consolidation costs.
- Operating cash flow was $199.6 for nine months, versus $105.6 in 2013. The comparison benefited from no domestic pension contribution in 2014 (versus an $83.0 contribution in 2013), higher net income, and a $10.0 legal-settlement receipt; higher tax payments partly offset these factors.
- Investing cash outflow was $37.6, including $29.7 of capital expenditures and $8.1 for acquisitions. Financing cash outflow was $102.2, including $146.6 spent on share repurchases. Cash increased to $125.8 from $66.0 at year-end 2013.
- At September 28, current assets were $877.7 and current liabilities $501.8; working capital was $375.9, compared with $381.0 at year-end. The filing attributes the working-capital decrease mainly to an $81.6 increase in current maturities of long-term debt, partly offset by higher cash.
- Total debt and capital leases on the balance sheet were $577.8, including $85.0 current and $492.8 long-term. The debt note separately reports $566.7 of total debt before capital leases. Available borrowing capacity under the $750.0 credit facility was $634.5; the company reported covenant compliance and substantial covenant headroom.
Changes and segment results
- Instrumentation: Q3 sales rose 9.3% to $280.4 and operating profit rose 17.5% to $46.9, led by marine and environmental instrumentation. Nine-month sales increased 9.2% to $815.9.
- Digital Imaging: Q3 sales fell 9.1% to $95.6 and operating profit fell 31.3% to $7.9, reflecting weaker infrared imaging sensor sales, lower margins, and $0.7 of asset write-downs. Nine-month sales declined 3.4%, although operating profit rose 19.1% to $29.3.
- Aerospace and Defense Electronics: Q3 sales grew 6.1% and operating profit increased to $21.6 from $9.3. Nine-month sales fell 3.9%, partly due to completion of a foreign-government program, while operating profit rose 36.3% to $68.3.
- Engineered Systems: Q3 sales rose 9.9% and operating profit increased to $8.5 from $2.7. Nine-month sales declined 4.9%, while operating profit rose 44.6% to $21.4.
- Recent acquisitions contributed $10.2 of Q3 revenue and $40.1 of nine-month revenue. 2014 results also benefited from significantly lower restructuring costs: $1.2 in Q3 versus $14.3, and $2.0 for nine months versus $18.7.
Outlook, transactions, risks, and unusual items
- Management expected a 28.5% full-year 2014 effective tax rate excluding discrete items, and capital expenditures of up to $50.0 for the year. It planned no domestic pension contributions in 2014. Management stated operating cash flow and available credit were expected to meet requirements over the next 12 months; additional capital might be needed to support acquisitions.
- Teledyne agreed to acquire Bolt Technology for approximately $171.1 in cash, subject to customary conditions, with closing expected in November 2014. On October 23, 2014, after quarter-end, it acquired Oceanscience for $15.0.
- In September, Teledyne entered a $101.6 accelerated share repurchase agreement (ASR), initially receiving 927,000 shares. Final share delivery or settlement was expected by June 2015, subject to the agreement’s terms. During the first nine months, it repurchased 1,396,290 shares at an average $97.70 per share.
- Q3 included $6.1 of discrete tax benefits; the effective tax rate was 19.2%, versus 0.6% in the prior-year quarter, which included $11.6 of discrete tax benefits. Excluding discrete items, the respective rates were 28.1% and 25.2%. Nine-month discrete tax benefits were $8.2 versus $15.2.
- Nine-month other income included a $7.0 net gain on legal settlements; Q3 other expense included $1.6 of legal-matter accruals. Q3 comprehensive income attributable to Teledyne was $21.0, down from $75.2, with the quarter including a $35.8 foreign-currency translation loss.
- Environmental remediation reserves were $8.9, including $5.7 current; remediation at identified sites may extend up to 30 years. Management did not expect pending litigation to materially affect financial condition, but noted that resolution of one or more matters could materially affect results in a period.
- Key stated risks include changes in demand across defense, energy, aviation, and other markets; government funding and defense spending; oil and gas prices and regulation; foreign exchange and pension-asset fluctuations; and acquisition integration and execution. The company used currency forwards for hedging and reported that a hypothetical 100-basis-point rate increase would add approximately $3.0 to annual interest expense on $300.0 of variable-rate debt.
Important facts for investors to verify
- How much earnings growth reflects durable operating improvements versus pension-accounting effects, lower restructuring costs, discrete tax benefits, and legal settlements.
- Whether Digital Imaging weakness and declines in nine-month sales at Aerospace and Defense Electronics and Engineered Systems persist, and how segment margins develop.
- The final ASR share count and settlement, remaining repurchase authorization, and effects of the Bolt and Oceanscience transactions on debt and cash.
- Debt maturity and refinancing requirements, including the $125.0 of senior notes priced for expected issuance in December 2014 and the rise in current debt maturities.
- Future cash needs for acquisitions, environmental remediation, pensions, and capital expenditures, as well as the outcome and timing of legal and tax matters.