Business context and reporting period
Teledyne Technologies Incorporated filed this Form 10-K for the 52-week fiscal year ended December 29, 2013. The company supplies advanced instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. The filing includes unaudited fourth-quarter results. Figures are in U.S. dollars unless stated otherwise.
Financial performance and liquidity
- Revenue: $2,338.6 million, up 9.9% from $2,127.3 million. The company attributed $172.0 million of the increase to recent acquisitions, alongside organic growth.
- Profit: Net income attributable to Teledyne was $185.0 million, up 12.7%; diluted EPS was $4.87, up from $4.39. Income before taxes declined to $224.0 million from $228.2 million. The effective tax rate fell to 17.7% from 28.7%, including $21.3 million of discrete tax benefits versus $5.4 million in 2012.
- Margins and segment results: Cost of sales was 64.1% of sales, compared with 64.8%. SG&A was 25.6% of sales, up from 23.7%. Aggregate segment operating profit and other segment income decreased 0.7% to $277.9 million. Instrumentation sales rose 27.1% and operating profit 11.0%; Digital Imaging sales were nearly flat while profit rose 13.7%; Aerospace and Defense Electronics profit fell 18.4%; Engineered Systems profit fell 22.8%.
- Cash flow: Cash from continuing operating activities was $204.1 million versus $189.5 million. Capital expenditures were $72.6 million; reported free cash flow was $131.5 million and adjusted free cash flow was $182.9 million, a company-defined non-GAAP measure that excludes pension contributions on a net-of-tax basis.
- Liquidity and debt: Cash was $66.0 million, working capital $381.0 million, and total debt $540.2 million. The $750 million revolving facility had $662.0 million of available capacity after borrowings and letters of credit. The company reported compliance with debt covenants; net debt/EBITDA was 1.6x versus a 3.25x maximum.
- Fourth quarter: Sales were $596.6 million; net income attributable to Teledyne was $54.9 million; diluted EPS was $1.44. The quarter included $5.3 million of pretax severance, facility-consolidation and environmental charges, a $3.6 million reversal of reserves related to a legal settlement, and $6.1 million in discrete tax benefits.
Material changes versus the prior year
- Growth was led by Instrumentation, including marine products and the full-year contribution from LeCroy. Acquisitions contributed $178.4 million of incremental Instrumentation sales; the filing separately reports $172.0 million of total incremental sales from businesses acquired in 2013 and 2012.
- The business mix shifted toward commercial and international markets: commercial customers accounted for approximately 73% of sales versus 68%; U.S. Government sales were 27% versus 32%; international sales were 44% versus 39%.
- Segment profit was pressured by $24.0 million of 2013 severance, facility-consolidation and environmental charges, compared with $1.7 million of similar charges in 2012, and by higher pension expense. The domestic pension discount rate used for 2013 obligations was 4.4%, versus 5.5% in 2012.
- Acquisition spending declined to $128.2 million from $389.2 million. The company acquired RESON, CDL, CETAC and Axiom and purchased the remaining interest in Nova Sensors.
- Net income in 2012 included $2.3 million from discontinued operations; 2011 included a substantial gain on the sale of the general aviation piston-engine businesses. Thus, continuing-operations comparisons are more informative than total net income comparisons with those years.
Outlook, risks, contingencies and unusual items
- Management expected 2014 growth in marine instrumentation for subsea oil and gas production and in industrial and medical imaging, partly offset by lower geophysical exploration sensors and certain government infrared-sensor programs. It expected lower microwave-device sales in Aerospace and Defense Electronics following completion of a foreign-government program. The filing does not provide consolidated revenue or earnings guidance.
- Planned 2014 capital expenditures were approximately $77 million; company-funded R&D and bid/proposal costs were expected to be approximately $174.2 million. Management said operating cash flow and available credit were expected to fund requirements and potentially acquisitions.
- Key risks include reduced or delayed U.S. Government appropriations and defense spending, sequestration, fixed-price contract cost overruns, cyclicality in offshore oil and gas markets, international and foreign-exchange exposure, acquisition integration, and reliance on certain limited or single-source suppliers.
- Environmental remediation reserves were $9.1 million at year-end, including $5.3 million established for soil remediation at a former leased facility. Management did not expect future environmental costs beyond accrued amounts to materially affect financial condition or liquidity, but period earnings could be affected by resolution or reserve adjustments.
- A DALSA-related lawsuit was settled for $5.5 million; the company recorded a $3.6 million reversal of previously established reserves. Management stated pending legal matters were not likely to materially affect financial condition or liquidity, though a resolution in a particular period could materially affect results.
- Goodwill was $1,037.8 million. The annual review found no goodwill impairment, but recorded a $1.2 million acquired-intangible impairment. The 2013 internal-control assessment excluded RESON, CETAC, CDL and Axiom; management and the auditor otherwise reported effective controls and the auditor issued unqualified opinions.
Important facts for investors to verify
- How much reported growth and future profitability depend on acquired businesses versus organic demand, particularly in marine instrumentation and test-and-measurement products.
- Whether segment margins recover after the 2013 restructuring charges and higher pension expense, especially in Aerospace and Defense Electronics and Engineered Systems.
- The sustainability of the low 2013 effective tax rate: discrete tax benefits were $21.3 million, and management identified potential reductions in unrecognized tax benefits in the next 12 months.
- Cash generation after pension funding and planned capital expenditures; assess adjusted free cash flow alongside GAAP operating cash flow and the company’s non-GAAP definition.
- Debt, variable-rate exposure, covenant headroom, and the company’s ability to fund acquisitions and repurchases while maintaining liquidity.
- Integration and control risks at the 2013 acquisitions, as those acquired entities were excluded from the year-end internal-control assessment.