Business context and reporting period
Teledyne Technologies Incorporated filed this unaudited Form 10-Q for the quarter ended September 30, 2018. It supplies instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. Comparisons are with the third quarter and first nine months of 2017; 2018 results reflect the adoption of ASC 606, with prior periods not restated.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $725.3M | $662.2M | $2,153.4M | $1,899.4M |
| Operating income | $105.5M | $89.5M | $305.4M | $227.1M |
| Net income | $90.3M | $69.0M | $242.7M | $159.6M |
| Diluted EPS | $2.43 | $1.90 | $6.56 | $4.41 |
| Operating margin | 14.5% | 13.5% | 14.2% | 12.0% |
- Third-quarter sales grew 9.5%, operating income 17.9%, and net income 30.9%. Nine-month sales grew 13.4%, operating income 34.5%, and net income 52.1%.
- Gross margin was approximately 38.5% in Q3, versus 38.3% a year earlier; for the nine months it was 38.2%, versus 37.5%.
- Nine-month operating cash flow was $321.4M, up from $248.3M. Capital expenditures were $68.1M; operating cash flow less capital expenditures was $253.3M.
- At September 30, cash was $126.1M. Total debt including capital leases was $837.3M; debt excluding capital leases was $834.5M. The $750M revolving facility had no borrowings and $714.8M of available capacity after letters of credit. The company reported covenant compliance.
- Current assets were $1,109.6M and current liabilities $588.0M. Stockholders’ equity was $2,216.8M.
Material changes and segment performance
- Third-quarter sales increased in all segments. Digital Imaging led growth, with sales up 13.2% and operating income up 34.7%, reflecting higher sales and favorable mix. Aerospace and Defense Electronics sales rose 7.2% and operating income 18.1%; Instrumentation sales rose 10.2% and operating income 3.2%; Engineered Systems sales rose 2.6% and operating income 8.1%.
- For the first nine months, Digital Imaging sales rose 29.0%, including $86.9M of incremental e2v sales; segment operating income included $32.8M of incremental profit from e2v. Total company nine-month growth included $144.9M of organic growth and $109.1M of incremental sales from recent acquisitions, primarily e2v.
- Debt declined from $1,068.2M at year-end 2017 to $834.5M at September 30, 2018, excluding capital leases. The company made $165.0M of net payments on its credit facility during the first nine months.
- 2017 comparisons include e2v acquisition costs: $28.1M pretax for the first nine months. 2018 included severance and facility-consolidation costs of $4.1M in Q3 and $5.3M for the nine months.
Outlook, management commentary, and risks
- Management expects the 2018 annual effective tax rate to be 21.3%, excluding discrete items; it reported $11.4M of discrete tax benefits in Q3 and $16.9M for the nine months. Reported effective rates were 9.9% and 15.4%, respectively.
- Management expects approximately $90M of 2018 capital expenditures, with $68.1M spent through September, and says operating cash flow plus available credit should meet requirements over the next 12 months. No domestic qualified pension contributions were planned for 2018.
- Remaining performance obligations were $1,706.6M at September 30; the company expects approximately 83% to be recognized as revenue within 12 months. This is not a full-year sales forecast.
- ASC 606 adoption affected reported nine-month results: the filing’s comparison indicates that without adoption, sales would have been $44.6M lower and net income $11.4M lower. Management describes the opening retained-earnings adjustment as immaterial.
- Other notable items include early adoption of an accounting standard that reclassified $47.6M of stranded tax effects from accumulated other comprehensive income to retained earnings, and a third-quarter reversal of a $0.6M provisional Tax Act charge adjustment.
- Risks cited include shifts in government and defense spending, demand changes across served markets, energy prices and regulation, commercial aviation fuel costs, Brexit, trade measures, cybersecurity threats, foreign exchange and interest-rate movements, and acquisition integration. Environmental remediation reserves were $5.1M; management does not expect pending litigation to have a material adverse effect, while noting outcomes are uncertain.
Important facts for investors to verify
- How much of sales and earnings growth reflects organic performance versus acquisition contributions, particularly e2v.
- The sustainability of margin improvement, especially in Digital Imaging, and the weaker relative operating-income growth in Instrumentation.
- The effect of ASC 606 on period-to-period comparability and contract assets: unbilled receivables were $164.4M, up $45.6M from the start of the year.
- The extent to which discrete tax benefits boosted reported earnings and whether the expected 21.3% annual effective tax rate is achieved.
- Debt maturity and interest-rate exposure, foreign-exchange hedge effectiveness, and the timing and cost of environmental remediation and facility-consolidation actions.