Teledyne Technologies Incorporated — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; comparable periods ended July 1, 2012. Amounts are in millions except per-share data.
Business context
Teledyne supplies instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. Its strategy emphasizes organic product development, operational improvement, and targeted acquisitions. The 2013 period included RESON and Axiom acquisitions, while the prior-year comparison included acquisitions such as Optech and VariSystems; LeCroy, acquired in August 2012, also contributed to 2013 results.
Financial performance
- Second quarter: Sales were $601.0, up 15.9%; net income attributable to Teledyne was $42.9, up 8.6%; diluted EPS was $1.13, versus $1.06.
- First six months: Sales were $1,170.4, up 15.6%; net income attributable to Teledyne was $83.3, up 10.8%; diluted EPS was $2.20, versus $2.02.
- Margins: Cost of sales was 63.8% of sales in Q2 versus 66.2% a year earlier, and 64.0% for the six months versus 66.3%. SG&A rose to 25.4% of sales from 22.3% in both comparison periods. Q2 income before interest and taxes was $64.9 (10.8% of sales), versus $59.7 (11.5%).
- Segments, Q2: Instrumentation sales rose 43.5% to $257.7 and operating profit rose 33.9% to $41.1; Aerospace and Defense Electronics sales rose 11.8% to $169.5 while operating profit fell 5.5% to $20.6. Digital Imaging sales declined 6.0% to $104.3, with profit up 5.3% to $7.9. Engineered Systems sales fell 9.0% to $69.5 and profit fell 23.0% to $5.7.
- Cash flow: Six-month operating cash flow was $56.1, compared with $49.3; investing used $109.9, including $73.7 for acquisitions and $36.3 in capital expenditures. Financing provided $78.1, including $69.9 net debt proceeds. Cash increased to $70.1 from $45.8.
- Liquidity and debt: Working capital was $375.4, versus $337.5 at year-end. Long-term debt was $614.7 and capital leases were $12.9; $151.4 was outstanding under the revolving facility. The $750 facility had $584.6 of available capacity. The company reported covenant compliance, with net debt/EBITDA of 1.8x against a 3.25x maximum and interest coverage of 16.8x against a 3.0x minimum.
- Other balance-sheet items: Total assets were $2,514.1; goodwill was $1,006.8 and acquired intangibles were $270.4. The pension obligation was $10.1, compared with $57.0 at December 30, 2012, alongside a $45.0 prepaid pension asset.
Changes and notable items
- Acquisitions contributed $67.3 of Q2 revenue and $126.5 for the first six months. RESON was acquired for $69.7 net of cash acquired; Axiom’s initial net payment was $4.0, with another $1.3 expected over three years.
- Segment operating profit increased 11.7% in Q2 and 8.5% for the six months. Management cited higher sales, partly offset by acquisition amortization, severance and facility consolidation costs, and higher pension expense.
- Q2 severance and facility consolidation costs were $2.1; $4.2 had been incurred through Q2. Management expected approximately $9.1 for full-year 2013.
- Pension expense was $4.4 in Q2 and $8.7 for the six months, up from $1.6 and $3.3. The increase primarily reflected a lower domestic-plan discount rate, 4.4% versus 5.5%. Teledyne contributed $83.0 to its domestic pension plan in the first half and planned no further domestic-plan contributions for 2013.
- The effective tax rate was 27.6% for Q2 and 26.3% for the six months, including discrete tax benefits. Management expected a 29.5% full-year rate excluding discrete items.
- The company reclassified two interconnect business units from Aerospace and Defense Electronics to Instrumentation and restated prior segment comparisons. It also recorded a $4.9 purchase-accounting adjustment that increased deferred tax assets and reduced goodwill; management said it was not material to prior statements.
Outlook, risks and contingencies
- Management expected operating cash flow and available credit to cover requirements over the next 12 months; 2013 capital expenditures were estimated at approximately $90.0. Additional capital could be needed to support acquisitions.
- Risks cited include changes in defense and government funding, demand in energy and other served markets, oil and gas prices and regulation, foreign exchange movements, pension-asset market fluctuations, and acquisition integration and execution.
- Variable-rate debt creates interest-rate exposure: management estimated a 100-basis-point rate increase would add approximately $1.5 of annual interest expense on the specified $151.4 of borrowings.
- Environmental remediation reserves were $3.2; remediation could continue for many years, with completion at identified sites estimated to take up to 30 years. Management did not expect pending matters to materially harm financial condition, but a resolution in a period could materially affect that period’s results. A Canadian lawsuit seeks damages exceeding CAD $20.0 and is being defended.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of sales growth and segment performance is sustainable organic growth versus acquisition contribution, particularly from LeCroy and RESON.
- Whether higher SG&A, pension expense, and restructuring costs continue to pressure margins, and whether expected severance costs remain near the $9.1 estimate.
- Cash conversion and investment needs, including the effects of pension contributions, acquisitions, and planned capital expenditures.
- Debt levels, variable-rate exposure, covenant headroom, and the extent to which acquisition plans may require additional financing.
- Future resolution and financial impact, if any, of tax audits, environmental matters, and the disclosed litigation.