Teledyne Technologies Incorporated — Q1 2018 Form 10-Q
Reporting period: First quarter ended April 1, 2018; comparisons are with the first quarter ended April 2, 2017. Teledyne provides instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. Amounts below are in millions of dollars except per-share data and percentages.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $695.6 | $566.1 | +22.9% |
| Operating income | $88.4 | $54.8 | +61.3% |
| Operating margin | 12.7% | 9.7% | +3.0 percentage points |
| Net income | $66.5 | $30.5 | +118.0% |
| Diluted EPS | $1.81 | $0.84 | +$0.97 |
| Operating cash flow | $71.6 | $53.4 | +$18.2 |
| Capital expenditures | $19.8 | $12.6 | +$7.2 |
- Cost of sales was 63.0% of sales, versus 63.1%; gross margin was approximately 37.0%, versus 36.9%. SG&A was 24.3% of sales, versus 27.2%.
- Effective tax rate was 19.1%, versus 24.9%. Q1 2018 included $2.1 million in net discrete tax benefits; excluding discrete benefits and Tax Act effects, the company reported rates of 21.7% and 28.3%, respectively.
- Cash was $79.9 million at quarter-end. Total current assets were $1,060.2 million and current liabilities were $555.2 million.
- Debt was $1,023.6 million, with $9.2 million of current debt and $1,019.2 million of long-term debt and capital lease obligations reported on the balance sheet. Including capital leases, total debt was $1,028.4 million. Credit-facility availability was $614.1 million; the company was covenant-compliant.
Segments and material comparisons
| Segment | Sales | Sales change | Operating income | Operating income change |
|---|---|---|---|---|
| Instrumentation | $239.0 | +2.7% | $27.8 | -7.9% |
| Digital Imaging | $206.4 | +81.4% | $34.6 | +129.1% |
| Aerospace and Defense Electronics | $178.2 | +17.3% | $31.7 | +27.8% |
| Engineered Systems | $72.0 | +6.5% | $7.2 | -2.7% |
Management attributed the sales increase to $44.0 million of organic growth and $85.5 million of incremental sales from recent acquisitions, primarily e2v. Digital Imaging included $69.5 million of incremental e2v sales. Recent acquisitions contributed $17.6 million of operating income, including $3.9 million of additional intangible-asset amortization. Instrumentation results were affected by weaker marine sales and facility relocation costs; Engineered Systems operating income declined slightly.
The 2017 comparison included $21.2 million of pretax e2v acquisition-related charges: $11.5 million in transaction costs, $1.4 million in inventory step-up amortization, $2.3 million in financing costs, and $6.0 million related to a foreign-currency option. These prior-year charges make the year-over-year profit increase less directly comparable.
Cash flow, accounting, and outlook
- Operating cash flow increased to $71.6 million, which management attributed to higher operating income and cash flow from e2v. Investing cash use was $19.6 million, compared with $752.9 million in Q1 2017, when e2v acquisition spending was $740.6 million. Financing used $42.6 million, including $54.5 million of net credit-facility repayments.
- Teledyne adopted ASC 606 on January 1, 2018 using the modified retrospective method; prior-year figures were not restated. Adoption increased reported Q1 sales by $32.4 million and net income by $7.0 million compared with the amounts that would have been reported without adoption. On that basis, Q1 sales would have been $663.2 million and net income $59.5 million. The opening retained-earnings adjustment was an immaterial $3.3 million.
- Remaining performance obligations were $1,492.9 million; management expects approximately 85% to be recognized as revenue within 12 months. About 60% of revenue was recognized at a point in time and 40% over time.
- Management expected a 21.4% full-year 2018 effective tax rate, excluding discrete items, and capital expenditures of approximately $80–$90 million for 2018. It stated operating cash flow and available credit were expected to cover requirements over the next 12 months. No domestic qualified pension contributions were planned for 2018.
- Management’s strategy emphasizes core-market growth, targeted acquisitions, product development, operational improvement, and balanced deployment among capital expenditures, acquisitions, and share repurchases. No specific earnings or sales guidance was provided in the filing.
Risks, contingencies, and notable items
- Risks cited include changes in defense and government-program funding, demand across commercial and industrial markets, oil and gas prices and regulation, commercial aviation fuel costs, Brexit and other government-policy changes, foreign-exchange movements, cyber threats, pension-asset fluctuations, and acquisition integration and execution.
- A 100-basis-point increase in interest rates was estimated to raise annual interest expense by approximately $3.9 million, assuming $386.0 million of variable-rate debt remained outstanding for a full year. The company also disclosed sensitivity of derivative fair values to currency movements and cautioned that hedges may not fully protect against exchange-rate changes.
- Environmental remediation reserves were $4.8 million; remediation at identified sites may take up to 30 years. Management did not believe pending lawsuits and claims were likely to have a material adverse effect, while noting litigation outcomes are uncertain.
- The company reported that employee stock purchase plan participants may have purchased more shares than were registered. It said it received no consideration for those purchases and filed a Form S-8 on April 27, 2018 to register future plan transactions.
- On April 24, 2018, Chief Operating Officer Al Pichelli assumed the title of President; Robert Mehrabian remained Chairman and CEO. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much of reported growth and margin improvement is organic versus attributable to e2v and the accounting change under ASC 606.
- Whether acquisition-related contributions, integration, and amortization develop as expected, and whether Instrumentation and Engineered Systems performance improves.
- Cash conversion, working-capital movements (including increased unbilled receivables), and progress toward the stated capital-expenditure range.
- The assumptions behind the 21.4% full-year tax-rate estimate and any further Tax Act adjustments or discrete tax items.
- Debt repayment, variable-rate exposure, covenant headroom, and resolution of the employee stock-plan registration matter and other contingencies.