Teledyne Technologies Incorporated — Q2 2020 Form 10-Q
Business context and reporting period. The quarter ended June 28, 2020; comparisons are with the quarter ended June 30, 2019. Teledyne supplies instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. Results reflect the COVID-19 disruption and recent acquisitions, including OakGate, acquired in January 2020.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $743.3M | $782.0M | $1,527.9M | $1,527.2M |
| Operating income | $109.8M | $131.9M | $213.8M | $229.2M |
| Net income | $93.7M | $104.6M | $175.9M | $179.9M |
| Diluted EPS | $2.48 | $2.80 | $4.65 | $4.82 |
| Operating margin | 14.8% | 16.9% | 14.0% | 15.0% |
- Q2 sales fell 4.9%, operating income fell 16.8%, and net income fell 10.4%. First-half sales were essentially flat, while operating income declined 6.7% and net income 2.2%.
- Cash from operations was $232.2M for the first half, up from $163.3M. Capital expenditures were $36.8M. Cash and cash equivalents were $382.8M at June 28, 2020, compared with $199.5M at year-end 2019.
- Total debt was $851.4M, including $100.6M current and $750.8M long-term; cash less total debt was approximately $468.6M net debt. The company had $614.5M of available credit-facility capacity and was in compliance with its covenants.
- Current assets were $1,483.8M and current liabilities $752.2M. The filing reports no reliance on off-balance-sheet financing arrangements.
Material changes and segment performance
- Q2 sales declined in Instrumentation (0.4%), Digital Imaging (4.3%), and Aerospace and Defense Electronics (18.7%); Engineered Systems grew 6.4%. The aerospace and defense segment’s operating income fell 54.7%, to $17.5M.
- For the first half, Instrumentation sales rose 5.3%, Digital Imaging 0.7%, and Engineered Systems 7.0%; Aerospace and Defense Electronics sales fell 12.6%. Its operating income dropped 56.5%, to $30.9M.
- Commercial aerospace weakness and COVID-19 reduced aerospace electronics sales. Digital Imaging was affected by lower dental and medical X-ray demand, in part from deferred patient treatments. Engineered Systems benefited from marine, nuclear, manufacturing, and Harpoon missile engine programs.
- Recent acquisitions contributed $29.5M of Q2 sales and $60.2M of first-half sales. Q2 included $8.6M of severance, facility consolidation, and acquisition costs; the first half included $19.0M of these and certain contract-cost-estimate items.
Outlook, risks, and unusual items
- Management expects approximately $70M of 2020 capital expenditures and says operating cash flow plus available credit should meet requirements over the next 12 months. It expects a 22.8% annual effective tax rate before discrete tax items, and anticipates significantly fewer discrete tax items in 2020 than in 2019. No full-year earnings or sales guidance is provided in the filing.
- Reported tax rates were reduced by discrete tax benefits: $10.4M in Q2 and $14.6M for the first half of 2020, largely related to share-based compensation. Excluding discrete benefits, the corresponding 2020 effective tax rates were 22.8%.
- The company is monitoring approximately $40M of exposure involving receivables, inventory, and other costs following OneWeb’s bankruptcy. A loss is reasonably possible, but its amount and outcome depend on future events affecting Airbus OneWeb Satellites; the filing does not provide a clear estimate of any potential loss.
- Management says the COVID-19 impact remains uncertain. The company found no impairment trigger for reporting units or indefinite-lived intangibles as of June 28, but will continue monitoring. Other risks include commercial aviation weakness, government-program demand and funding, foreign exchange and interest rates, and acquisition integration.
- First-half operating income included approximately $10.2M of favorable effects from contract estimate changes, primarily in Digital Imaging. Management noted no individual contract estimate change was material.
- Remaining performance obligations were $1,806.2M; approximately 74% were expected to be recognized as revenue within 12 months. The domestic qualified pension plan had no cash contributions planned for 2020.
Important facts for investors to verify
- Whether commercial aerospace weakness and the OneWeb program continue to pressure Aerospace and Defense Electronics results.
- The recoverability of the approximately $40M OneWeb-related exposure and any subsequent developments affecting Airbus OneWeb Satellites.
- How much of earnings reflects discrete tax benefits, severance and consolidation costs, acquisitions, and favorable contract estimate revisions.
- Whether COVID-19 effects materially alter demand, collections, supply continuity, or the company’s stated liquidity and capital-spending outlook.
- Progress on realizing acquired-business contributions and converting the $1.806B remaining performance obligation balance into revenue.