Teledyne Technologies Incorporated — Q1 2020 Form 10-Q
Reporting period: Three months ended March 29, 2020; comparisons are with the first quarter ended March 31, 2019, unless otherwise noted. Amounts are in U.S. dollars.
Business context and results
Teledyne supplies instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. The company reported growth in consolidated sales and earnings, while commercial aerospace weakness and significant segment-specific costs pressured Aerospace and Defense Electronics.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $784.6 million | $745.2 million | +5.3% |
| Operating income | $104.0 million | $97.3 million | +6.9% |
| Net income | $82.2 million | $75.3 million | +9.2% |
| Diluted EPS | $2.17 | $2.02 | +7.4% |
| Cost of sales / sales | 62.8% | 62.3% | +0.5 percentage point |
| Operating margin | 13.3% | 13.1% | +0.2 percentage point |
Sales growth included $36.8 million of incremental sales from recent acquisitions. The effective tax rate was 18.6%, versus 18.9%; excluding discrete tax benefits, the rates were 22.8% and 22.3%, respectively.
Segments and material changes
- Instrumentation: Sales rose 11.2% to $285.1 million and operating income rose 27.3% to $50.8 million, supported by growth across product lines, including acquired gas and flame detection operations.
- Digital Imaging: Sales rose 6.2% to $246.7 million and operating income rose 19.7% to $43.8 million, reflecting higher sales in several product areas and improved margins.
- Aerospace and Defense Electronics: Sales fell 6.2% to $156.3 million and operating income fell 58.8% to $13.4 million. Lower aerospace electronics sales and $8.2 million of severance, facility consolidation, and contract-estimate-related costs weighed on results. Cost of sales increased to 70.9% of segment sales from 60.4%.
- Engineered Systems: Sales rose 7.6% to $96.5 million and operating income rose 78.1% to $11.4 million, primarily on higher sales and a more favorable manufacturing-program mix.
Company-wide, Q1 2020 included $10.4 million in severance, facility consolidation, acquisition, and certain contract-estimate-related costs, compared with $1.4 million of severance and facility consolidation costs a year earlier. Recent acquisitions contributed $4.7 million of operating income. Contract estimate changes contributed approximately $4.4 million of favorable operating income, in aggregate.
Cash flow, liquidity, and debt
- Operating cash flow was $76.4 million, down from $80.1 million; management cited collection timing, partly offset by higher operating income, lower tax payments, and acquisition cash flow.
- Investing cash outflow was $49.1 million, including $28.9 million for acquisitions and $20.2 million of capital expenditures. Financing activities provided $9.9 million. Cash increased to $231.4 million from $199.5 million at year-end 2019.
- Total debt was $849.7 million, including $100.6 million current and $749.1 million long-term. Available capacity under the $750 million credit facility was $611.0 million; the company also reported $28.6 million in letters of credit and covenant compliance.
- Current assets were $1,363.8 million and current liabilities were $759.6 million. The filing reports no dependence on off-balance-sheet financing arrangements.
Outlook, risks, and contingencies
Management said it could not accurately estimate the effects of COVID-19 on financial condition, results, or cash flows. Manufacturing sites remained operational, while some employees worked remotely. Management described the business as diversified across end markets and geographies and noted cash and credit availability.
- Management expected a 2020 annual effective tax rate of 22.8% before discrete items and approximately $70 million of capital expenditures. It anticipated operating cash flow and available credit would meet requirements over the next 12 months. No full-year sales or earnings guidance was provided in the supplied filing text.
- The company was assessing approximately $40 million of exposure involving receivables, unbilled receivables, inventories, and possible additional costs related to the bankruptcy of OneWeb. Its customer Airbus OneWeb Satellites had not declared bankruptcy; a loss was reasonably possible, but the amount and outcome were uncertain.
- Other risks cited include COVID-19-related supply, production, and customer disruptions; commercial aerospace weakness and the Boeing 737 Max delay; government spending and program changes; energy-market conditions; trade and geopolitical developments; cyber threats; and acquisition integration risks.
- Environmental remediation reserves were $6.7 million at quarter-end. Management did not believe other pending litigation would likely have a material adverse effect on the financial statements.
Key facts for investors to verify
- How COVID-19 and the OneWeb-related exposure affected subsequent collections, production, and reported results; the approximately $40 million exposure is an assessment, not a stated realized loss.
- Whether weakness in commercial aerospace persists and whether Aerospace and Defense Electronics margins recover after the quarter’s charges.
- The extent to which sales and earnings growth depended on acquisitions, favorable contract-estimate changes, and discrete tax benefits.
- Cash conversion and working-capital trends, including receivables, unbilled receivables, and inventories, alongside debt maturities and covenant headroom.
- Execution against the stated capital expenditure and tax-rate expectations; the filing provides no full-year sales or EPS guidance.