Business context and reporting period
Teledyne Technologies Incorporated’s Form 10-K covers fiscal 2010, the 52 weeks ended January 2, 2011; fiscal 2009 had 53 weeks. Teledyne supplies specialized instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. Results are presented with its general aviation piston-engine businesses classified as discontinued operations following a December 2010 sale agreement.
In 2010, the company reorganized its reporting into four segments. It also acquired Optimum Optical Systems, Intelek and Gavia for a combined $60.0 million. After year-end, Teledyne completed its acquisition of DALSA for approximately CAD $337 million, funded with credit-facility borrowings and cash.
Financial performance and liquidity
| Metric | 2010 | 2009 |
|---|---|---|
| Sales | $1,644.2 million | $1,652.1 million |
| Gross profit / gross margin | $496.1 million / 30.2% | $474.8 million / 28.7% |
| Income from continuing operations before tax | $173.6 million | $166.4 million |
| Net income attributable to Teledyne | $120.5 million | $113.3 million |
| Diluted EPS, continuing operations | $3.25 | $3.17 |
| Diluted EPS, including discontinued operations | $3.27 | $3.10 |
| Cash from continuing operating activities | $127.1 million | $160.4 million |
| Capital expenditures | $31.0 million | $33.5 million |
| Cash and cash equivalents at year-end | $75.1 million | $26.1 million |
| Working capital at year-end | $306.8 million | $242.6 million |
Cost of sales was 69.8% of sales versus 71.3% in 2009; SG&A was 19.3% versus 18.4%. Segment operating profit and other segment income rose 4.3% to $207.3 million. The filing’s defined free cash flow (operating cash flow from continuing operations less capital expenditures) was $96.1 million; adjusted free cash flow, excluding the after-tax effect of voluntary pension contributions, was $124.2 million.
At January 2, 2011, Teledyne had $250.0 million of senior notes outstanding and no borrowings under its then-current revolving facility; capital lease obligations were $17.3 million. Long-term debt and capital lease obligations, net of current portion, were $265.3 million. Current assets were $648.0 million and current liabilities $341.2 million. On February 25, 2011, the company refinanced its facility with a $550.0 million facility maturing in 2016; $273.0 million was outstanding on it at that date. The company reported compliance with debt covenants at fiscal year-end.
Material changes versus the prior comparable period
- Sales decreased 0.5%, while net income attributable to Teledyne rose 6.4%; continuing-operations net income increased 3.4% to $119.9 million.
- Instrumentation sales rose 6.5% to $573.2 million and operating profit increased 19.3% to $113.9 million, benefiting from marine and environmental product demand.
- Aerospace and Defense Electronics sales increased 6.1% to $614.7 million, but operating profit declined 3.8% to $57.8 million. A $8.2 million charge corrected prior-period inventory valuations.
- Engineered Systems sales fell 18.0% to $333.8 million as missile-defense engineering, NASA, gas-centrifuge and JASSM turbine-engine sales declined. Operating profit decreased 2.9% to $30.4 million.
- Digital Imaging sales declined 3.8% to $122.5 million and operating profit fell 55.9% to $5.2 million, reflecting lower licensing and government-subcontract sales and acquisition-related costs.
- Operating cash flow fell from $160.4 million to $127.1 million, principally because of higher tax payments and receivables, partly offset by lower pension contributions. Fiscal 2010 pension contributions were $37.0 million versus $117.0 million in 2009.
- U.S. Government sales were $727.4 million, or about 44% of total sales, down from $777.8 million and 47% in 2009. International sales increased to 29% of total sales from 26%.
Outlook, risks, contingencies and unusual items
- Management expected Engineered Systems not to contract as sharply in 2011: missile-defense and NASA sales were expected to decline, while gas-centrifuge modules, JASSM engines and other manufacturing programs were expected to increase. Management anticipated capital expenditures of $50–$55 million and company-funded R&D and bid/proposal spending of approximately $99.9 million in 2011.
- Management expected approximately $37 million of voluntary pension contributions in 2011, plus another $32 million if the piston-engine divestiture closed. The $186 million cash sale to Technify/AVIC was expected to close in Q1 2011, subject to closing conditions; proceeds were expected initially to repay the new credit facility.
- Key exposures include U.S. Government appropriations and contract awards, defense/NASA program changes, fixed-price contract cost overruns, cyclicality in energy, commercial aerospace and semiconductors, acquisition integration and international currency/regulatory risks. USEC’s American Centrifuge Project funding and loan-guarantee decision could affect Teledyne’s expected 2011 module sales.
- Other notable items: 2010 tax credits were $12.5 million, primarily R&D credits, including $9.0 million recorded in Q4; the effective tax rate was 30.9% (38.1% excluding those credits). Environmental reserves were $5.2 million. The filing identifies a DALSA-related Ontario lawsuit seeking damages exceeding CAD $20 million, which the company is defending.
- The SEC had an unresolved comment on Teledyne’s segment-reporting approach and stated that it might require amended segment disclosures. Management disagreed with the staff’s view and said it would continue discussions. The auditor issued unqualified opinions; management’s and the auditor’s internal-control assessments excluded the 2010 acquisitions of Intelek, Optimum and Gavia.
- The filing reports no anticipated cash dividends in the foreseeable future. The 2010 fourth quarter recorded continuing-operations sales of $421.5 million, earnings of $37.0 million and diluted continuing-operations EPS of $1.00; total diluted EPS was $0.99 after a $0.4 million discontinued-operations loss.
Important facts for investors to verify
- Completion and final proceeds from the $186 million piston-engine sale, and the treatment of any remaining liabilities or product-liability exposure.
- DALSA’s post-acquisition performance, integration costs, funding needs and contribution to Digital Imaging; the acquisition was completed after the reporting date.
- Whether the new credit-facility borrowing, variable-rate exposure and acquisition financing remain consistent with covenant headroom and cash-generation plans.
- Recovery in Engineered Systems programs and the funding status of USEC, NASA and missile-defense work, alongside the durability of Instrumentation growth.
- Potential effect of the SEC segment-reporting comment, and the outcome or exposure associated with the DALSA litigation and environmental matters.