Teledyne Technologies Incorporated — FY2018 Form 10-K
Reporting period: Fiscal year ended December 30, 2018 (52 weeks). The filing is an annual report, not a standalone fourth-quarter filing. Teledyne supplies instrumentation, digital imaging, aerospace and defense electronics, and engineered systems.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $2,901.8 million | $2,603.8 million |
| Operating income | $416.6 million | $321.7 million |
| Operating margin | 14.4% | 12.4% |
| Net income | $333.8 million | $227.2 million |
| Diluted EPS | $9.01 | $6.26 |
| Operating cash flow | $446.9 million | $374.7 million |
| Free cash flow | $360.1 million | $316.2 million |
- Sales increased 11.4%; operating income rose 29.5% and net income rose 46.9%. Cost of sales was 61.7% of sales, down from 62.4%; SG&A was 23.9% of sales, down from 25.3%.
- FY2018 fourth-quarter sales were $748.4 million, operating income $111.2 million, net income $91.1 million and diluted EPS $2.45. FY2017 fourth-quarter comparables were $704.4 million, $94.6 million, $67.6 million and $1.84, respectively.
- Net discrete tax benefits were $23.8 million in FY2018; excluding those benefits, the effective tax rate was 21.3%, versus 26.8% in FY2017. Reported effective tax rates were 15.3% and 20.8%, respectively.
- Cash was $142.5 million at year-end. Current assets were $1,114.4 million and current liabilities $720.8 million. Total debt was $748.8 million, down from $1,068.2 million; available capacity under the $750 million credit facility was $686.3 million. The company reported compliance with debt covenants.
- Capital expenditures were $86.8 million. Cash used in investing activities was $88.6 million, compared with $831.2 million in FY2017, when the e2v acquisition drove substantial spending.
Material changes and business developments
- All four segments grew in FY2018. Digital Imaging sales rose 23.3% and operating income 42.5%; Instrumentation sales rose 7.1%, Aerospace and Defense Electronics 7.8%, and Engineered Systems 4.4%.
- Growth included $182.9 million of revenue growth and $115.1 million of incremental sales from recent acquisitions, principally e2v. Teledyne reported no material acquisitions during FY2018.
- On February 5, 2019, after year-end, Teledyne acquired Roper Technologies’ scientific imaging businesses for $225 million in cash; they will be included in Digital Imaging.
- FY2018 results included $7.8 million of severance and facility consolidation charges. FY2017 included $27.0 million of e2v acquisition-related pretax charges.
- Teledyne adopted ASC 606 in 2018 using the modified retrospective method; prior-year figures were not restated. The filing’s comparison indicates FY2018 reported sales were $52.3 million and net income $12.3 million higher than they would have been without the new standard.
Outlook, risks and contingencies
- No formal earnings or revenue guidance is provided. Management planned approximately $90 million in FY2019 capital expenditures and expected to fulfill the majority of its $1,568.8 million funded backlog during 2019.
- Management cited disciplined investment, targeted acquisitions, product development, cost containment and operational improvement as strategic priorities. The credit facility was expected to be amended in early 2019 to extend maturity from December 2020 to March 2024.
- The OSF follow-on program was not awarded to Teledyne in November 2018 and was put on hold pending a government investigation; performance under the existing contract continued. The filing identifies government funding, award timing, contract termination and fixed-price cost overruns as risks. Fifteen government contracts were terminated for convenience in 2018, versus nine in 2017; none were terminated for default during 2016–2018.
- Other material risk exposures include trade tariffs and international markets, oil-and-gas cyclicality, supplier concentration and disruption, cybersecurity, acquisition integration, foreign exchange and LIBOR transition. International customers accounted for approximately 47% of FY2018 sales.
- Environmental remediation reserves were $6.0 million. Management did not expect future environmental costs beyond accruals to materially affect financial condition or liquidity, but stated that potential excess losses could not be reasonably estimated. Management did not believe pending litigation was likely to materially affect financial condition.
- Goodwill was $1,735.2 million and acquired intangible assets were $344.3 million. Annual impairment testing found no impairment in 2018; future impairment remains a risk if estimates or business conditions change.
Important facts for investors to verify
- How much of reported growth and margin improvement is organic, and how much reflects e2v and other acquisitions?
- How does the ASC 606 adoption affect revenue, earnings, contract assets and comparability with prior periods?
- What is the status and financial exposure of the OSF investigation and follow-on program, and of other government contract awards and terminations?
- Can Teledyne sustain operating cash flow and reduce debt while funding the Roper acquisition, planned capital spending and potential future acquisitions?
- What are the latest developments in supplier constraints, tariffs, foreign exchange exposure and the LIBOR-related credit-facility transition?