Teledyne Technologies Incorporated — Q3 2016 Form 10-Q
Reporting period: Third quarter ended October 2, 2016; year-to-date results cover the nine months ended October 2, 2016. Comparisons are with the third quarter and nine months ended September 27, 2015. Amounts are in U.S. dollars.
Business context and results
Teledyne supplies instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. Its markets include energy exploration, environmental monitoring, industrial applications, aerospace and government programs. The company says it is pursuing targeted acquisitions and operational improvements, including facility consolidation and headcount reductions.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $526.8m | $551.7m | $1,586.9m | $1,686.8m |
| Operating income | $70.5m | $71.8m | $185.8m | $208.5m |
| Net income from continuing operations | $53.1m | $49.8m | $139.5m | $141.8m |
| Net income attributable to Teledyne | $52.0m | $48.3m | $137.9m | $140.3m |
| Diluted EPS attributable to Teledyne | $1.46 | $1.34 | $3.90 | $3.88 |
| Cost of sales as a percentage of sales | 60.2% | 61.7% | 61.1% | 61.4% |
Q3 sales fell 4.5%, while operating income declined 1.8%; higher continuing-operations income and diluted EPS reflected lower tax expense and other factors despite the operating-income decline. Nine-month sales declined 5.9% and operating income declined 10.9%, while diluted EPS was slightly higher. Q3 and year-to-date results included losses from discontinued operations of $1.1m and $1.6m, respectively.
Segment changes
- Instrumentation: Sales fell 14.4% in Q3 and 16.9% year to date; operating income fell 27.2% and 37.0%. The main pressure was weak energy markets reducing marine instrumentation demand. Test and measurement sales increased, including contributions from acquisitions.
- Digital Imaging: Sales rose 2.9% in Q3 and 3.9% year to date; operating income rose 12.5% and 7.4%, supported by higher sales and product mix.
- Aerospace and Defense Electronics: Sales rose 4.0% in Q3 and 6.0% year to date; operating income rose 28.7% and 29.9%, reflecting higher sales, improved margins and favorable mix.
- Engineered Systems: Q3 sales rose 2.0% and operating income rose 45.8%; year-to-date sales declined 2.0% while operating income rose 27.6%, with improved margins contributing.
Cash flow, debt and liquidity
Cash from continuing operations was $252.3m for the first nine months, versus $146.4m a year earlier; total operating cash flow was $250.7m. Management attributed the increase mainly to lower bonus, payroll and income-tax payments and higher customer advances, partly offset by higher restructuring payments and lower operating income. Investing activities used $93.3m, including $44.9m of capital expenditure and $58.5m for acquisitions and other investments. Financing activities used $141.5m, principally reflecting net debt repayments. Cash was $99.5m at October 2, 2016, including $19.5m classified as restricted cash.
Total debt, including capital leases, was $613.0m. The company reported no borrowings under its $750m revolving credit facility and $738.8m of available capacity after letters of credit. It was in compliance with debt covenants; reported leverage was 1.7x against a maximum of 3.25x, and interest coverage was 16.3x against a minimum of 3.0x. Current liabilities were $529.0m and current assets were $851.2m.
Outlook, risks and unusual items
- Management expected operating cash flow and available credit to cover anticipated needs over the next 12 months. It expected 2016 capital expenditure of up to $60m, excluding the facility purchase funded with restricted cash, and no domestic pension contributions for 2016.
- Management estimated a 27.6% full-year 2016 effective tax rate, excluding discrete tax items. The filing does not provide earnings or revenue guidance.
- Q3 tax results included $6.6m of net discrete tax benefits, including $4.0m from early adoption of share-based compensation accounting guidance. The nine-month period included $5.8m of related tax benefits.
- Year-to-date other income included a $17.9m gain on sale of a former California facility; the $19.5m proceeds were placed in escrow and used in a like-kind exchange in October. Teledyne sold the PCT business for $9.3m with no gain or loss and classified it as discontinued operations.
- The company recorded $12.7m of year-to-date severance and facility-consolidation charges and said additional such costs were expected during the rest of 2016. It also completed three acquisitions during the period; purchase-price allocations were preliminary.
- Key stated risks include weak energy markets, changes in government and defense spending, demand shifts in served markets, foreign-exchange and interest-rate movements, cybersecurity threats, and acquisition-integration risks. Environmental remediation reserves were $7.8m, with remediation expected to extend over many years; management did not expect pending litigation to have a material adverse effect.
Investor verification priorities
- Track whether marine instrumentation demand and Instrumentation profitability recover as energy-market conditions evolve.
- Separate recurring performance from the facility-sale gain, discrete tax benefits, restructuring charges and discontinued-operation losses.
- Assess whether stronger operating cash flow is sustainable after the reported timing benefits from payroll, bonuses, taxes and customer advances.
- Review acquisition integration, preliminary purchase accounting and the performance of acquired businesses.
- Monitor debt maturities, covenant headroom, environmental obligations and the stated market risks.