Teledyne Technologies Incorporated — FY2011 Form 10-K
Reporting period: Fiscal year ended January 1, 2012 (52 weeks). The filing is an annual report, not a standalone fourth-quarter filing; quarterly results are included. Amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
Teledyne supplies instrumentation, digital imaging products, aerospace and defense electronics, and engineered systems to commercial and government markets. FY2011 results reflect the February acquisition of DALSA and other acquisitions, and the April sale of its general aviation piston-engine businesses. Those businesses are reported as discontinued operations. Segment reporting was realigned; comparative segment figures are presented on the revised basis.
Financial performance and position
| Metric | FY2011 | FY2010 |
|---|---|---|
| Sales | $1,941.9 million | $1,644.2 million |
| Income from continuing operations | $142.1 million | $119.9 million |
| Diluted EPS from continuing operations | $3.81 | $3.25 |
| Net income attributable to Teledyne | $255.2 million | $120.5 million |
| Diluted EPS | $6.84 | $3.27 |
| Operating cash flow from continuing operations | $219.5 million | $127.1 million |
| Capital expenditures | $41.7 million | $31.0 million |
| Free cash flow, as defined by the company | $177.8 million | $96.1 million |
| Cash and cash equivalents at year-end | $49.4 million | $75.1 million |
| Working capital at year-end | $268.5 million | $306.8 million |
| Long-term debt outstanding | $298.0 million | $250.0 million |
FY2011 net income included a $113.8 million after-tax gain on the piston-engine business sale; continuing-operations income is the more comparable indicator of ongoing earnings. Sales rose 18.1%, including $249.6 million of incremental sales from acquired businesses. Cost of sales was 66.5% of sales versus 69.8% in FY2010; SG&A, including R&D and bid-and-proposal costs, rose to 21.8% of sales from 19.3%.
Segment sales and operating profit were: Instrumentation $616.6 million and $122.8 million; Digital Imaging $349.9 million and $16.1 million; Aerospace and Defense Electronics $670.8 million and $93.9 million; Engineered Systems $304.6 million and $28.1 million. Digital Imaging sales growth largely reflected DALSA; Engineered Systems sales declined 8.7% as space and defense program revenue weakened.
Fourth-quarter FY2011 sales were $474.5 million versus $421.5 million in the comparable FY2010 quarter. Continuing-operations earnings were $36.7 million versus $37.0 million. The reported quarterly table shows a $113.8 million sale gain in FY2011’s second quarter, not the fourth.
Material changes versus the prior comparable period
- DALSA, acquired for approximately $339.5 million in cash, materially expanded Digital Imaging and increased international and commercial exposure. Acquisitions contributed $214.0 million of Digital Imaging revenue.
- The piston-engine divestiture generated $187.9 million pretax cash proceeds before transaction costs; $51.3 million of tax was paid on the sale.
- All segments except Engineered Systems reported higher sales. Aerospace and Defense Electronics operating profit increased to $93.9 million from $57.8 million; FY2010 had included an $8.2 million inventory charge.
- U.S. Government sales fell to 36% of total sales from 44%; international sales rose to 36% from 29%. Commercial customers accounted for approximately 64% of FY2011 sales.
- Interest and debt expense increased to $16.2 million from $6.5 million, primarily reflecting higher debt and interest rates. Cash used for acquisitions increased to $366.7 million from $67.9 million.
- The company repurchased 658,562 shares for $34.9 million under a new authorization for up to 2.5 million shares.
Liquidity, debt and cash commitments
Teledyne reported $298.0 million of debt: $250.0 million of fixed-rate senior notes and $48.0 million drawn on its $550.0 million revolving facility, which matures in February 2016. Available borrowing capacity, after borrowings and letters of credit, was $488.5 million at year-end. The company said it was in compliance with covenants, with actual leverage of 0.8x against a maximum 3.25x and interest coverage of 25.4x against a minimum 3.0x. Capital lease obligations were $14.8 million, including $1.4 million current.
Teledyne made $69.0 million of pretax pension contributions in 2011 and reported no required domestic qualified-plan contribution for 2012. It nevertheless contributed $50.0 million in January 2012 and expected to contribute a further $42.8 million in the third quarter, before government-contract recoveries. The domestic pension plan remained underfunded. The filing reports a $339.9 million long-term additional pension liability and a $208.2 million noncash reduction to equity related to pension plans.
Guidance, outlook, risks and unusual items
- Management expected operating cash flow and available credit to fund 2012 working capital, capital expenditures, pension contributions, debt service and acquisitions. Planned 2012 capital expenditures were approximately $60 million; company-funded R&D and bid-and-proposal costs were expected to be approximately $110.1 million.
- Backlog was $944.6 million at January 1, 2012; the company expected to fulfill 98% during 2012. These are management expectations, not guarantees.
- In February 2012, after year-end, Teledyne acquired VariSystems for $34.3 million in cash. The filing also reports $105.6 million drawn on the credit facility as of February 27, 2012, following cash flows, pension contributions and that acquisition.
- Management highlighted potential pressure from U.S. defense-budget reductions and program delays, including impacts on missile defense and NASA work; fixed-price contract cost overruns; acquisition integration and DALSA manufacturing concentration; economic and cyclical demand; international and currency exposure; and single-source suppliers.
- Other disclosed exposures include pension-asset and actuarial risk, product liability and recalls, environmental obligations, export-control and compliance risks, and goodwill impairment risk. The company reported no goodwill or indefinite-lived intangible impairment in its FY2011 annual test.
- Environmental remediation reserves were $3.2 million. Management did not expect excess environmental costs to materially affect financial condition or liquidity based on current information, but said resolution or reserve changes could materially affect results in a period. A DALSA-related Ontario lawsuit seeks damages exceeding CAD $20 million and is being defended.
- FY2011 other income included a $2.3 million environmental-reserve release and a $4.5 million pretax write-off of a minority investment. The sale gain, acquisition spending, higher acquired-intangible amortization and pension effects are also relevant to assessing recurring performance.
Important facts for investors to verify
- Reconcile reported net income and EPS to continuing operations, excluding the divestiture gain, and assess recurring earnings after acquisition-related costs and amortization.
- Track DALSA integration, organic growth and margins separately from acquired revenue; assess the capital intensity and manufacturing-concentration risks described by management.
- Monitor Engineered Systems order trends and exposure to defense, NASA, JASSM and other program funding, as well as the conversion and timing of the reported backlog.
- Verify post-year-end borrowing, acquisition funding and pension contributions against cash generation and remaining facility availability.
- Review pension funding assumptions and asset returns, environmental and legal contingencies, and the potential effects of tax developments; the filing estimated unrecognized tax benefits could decline by $6.4 million over the following 12 months.
- Note that the financial statements received an unqualified audit opinion; management and the auditor excluded Nova Sensors from the FY2011 internal-control assessment because of the timing of its acquisition.