Teledyne Technologies Incorporated — Q1 2014 Form 10-Q
Reporting period: Three months ended March 30, 2014; comparisons are with the three months ended March 31, 2013, unless noted. Figures are unaudited and in millions of dollars except per-share data.
Business context and results
Teledyne supplies instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. Management’s strategy emphasizes core-market growth through product development and targeted acquisitions, alongside operational improvements.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $573.5 | $569.4 | +0.7% |
| Income before income taxes | $61.9 | $53.0 | +16.8% |
| Net income attributable to Teledyne | $45.8 | $40.4 | +13.4% |
| Diluted EPS | $1.20 | $1.07 | +12.1% |
| Operating cash flow | $26.4 | $(56.7) | Improved $83.1 |
| Capital expenditures | $11.7 | $16.3 | Down $4.6 |
Cost of sales fell to $351.7 from $365.4; as a share of sales, it improved to 61.3% from 64.2%. SG&A rose to $155.8 from $145.1, or 27.2% of sales versus 25.5%, primarily reflecting higher research and development spending. Net margin was approximately 8.0%, compared with 7.1%.
Segments and material changes
| Segment | Sales 2014 / 2013 | Operating profit 2014 / 2013 |
|---|---|---|
| Instrumentation | $258.9 / $232.7 (+11.3%) | $37.5 / $36.6 |
| Digital Imaging | $101.9 / $102.4 (−0.5%) | $9.7 / $5.2 |
| Aerospace and Defense Electronics | $153.3 / $163.1 (−6.0%) | $23.8 / $20.2 |
| Engineered Systems | $59.4 / $71.2 (−16.6%) | $6.1 / $6.4 |
Instrumentation growth reflected higher organic sales and $20.6 of incremental revenue from recent acquisitions, including RESON, CDL and CETAC. Digital Imaging profit benefited from improved margins, commercial-sales mix and prior-year cost reductions. Aerospace and Defense Electronics profit increased despite lower sales, helped by cost reductions and more favorable pension results; lower sales included the completion of a foreign-government program. Engineered Systems sales and profit declined, mainly because of lower defense systems sales.
Total segment operating profit increased 12.7% to $77.1. Company-wide pretax income also benefited from lower costs following 2013 severance and facility consolidation actions, pension income of $0.3 versus pension expense of $4.3, and lower net interest expense. Higher R&D and corporate expense partly offset these factors.
Cash, debt and liquidity
Cash was $73.7 at March 30, 2014, versus $66.0 at December 29, 2013. Operating cash flow improved chiefly because the prior-year period included an $83.0 voluntary domestic pension contribution; no domestic pension contribution was planned for 2014. Investing cash use was $11.7, compared with $86.0 a year earlier, which included $69.7 for the RESON acquisition. Financing used $7.0, including $23.6 to repurchase 243,492 shares. Working capital was $424.8, up from $381.0 at year-end.
Total debt, including capital leases, was $559.9; the debt table separately reports $547.9 of debt, excluding leases. The company had $654.1 of available borrowing capacity under its $750.0 credit facility and was in compliance with its covenants. Reported leverage was 1.6x against a maximum of 3.25x; interest coverage was 18.3x against a minimum of 3.0x. Management said operating cash flow and available borrowing capacity should meet requirements over the next 12 months. It expected 2014 capital expenditures of approximately $70.0 and noted additional capital might be needed for acquisitions.
Outlook, risks and unusual items
- Management expected a 2014 effective tax rate of 29.5%, excluding discrete items; Q1’s reported rate was 25.8%, including $2.3 of net discrete tax benefits.
- No full-year sales or earnings guidance is provided in the filing. Results for the quarter are not necessarily indicative of the full year.
- In Q2 2014, a subsidiary acquired Photon Machines for an initial $3.3, with an additional $0.7 expected in equal installments over three years.
- Environmental remediation reserves were $8.9, including $5.6 in current liabilities; remediation at identified sites may take up to 30 years. Management did not expect pending lawsuits and claims to materially affect financial condition, though resolutions could materially affect results in a given period.
- Key disclosed risks include changes in defense and government-program funding, demand in energy and other served markets, oil and gas prices and regulation, foreign exchange, pension-asset performance, acquisition integration, and interest rates. A 100-basis-point increase in rates was estimated to add about $2.8 of annual interest expense, assuming $281.1 of variable-rate credit-facility and term-loan debt remained outstanding for a full year.
- Percentage-of-completion contract estimate changes included $5.5 of favorable and $7.1 of unfavorable operating-income effects in Q1 2014. The filing also reports $2.3 of short-term reserves remaining for 2013 consolidation and relocation actions.
Important facts for investors to verify
- Whether Instrumentation growth and improved Digital Imaging and Aerospace and Defense Electronics profitability persist, and whether Engineered Systems weakness continues.
- How much earnings improvement reflects sustainable cost reductions versus pension accounting, tax benefits, acquisition contributions and contract-estimate changes.
- Cash conversion through the year, planned capital spending, share repurchases, and any acquisition-related borrowing or capital needs.
- Debt and variable-rate exposure, covenant headroom, and the eventual cost and timing of environmental remediation and other contingencies.
- Management’s disclosures in subsequent filings about demand, government programs, energy markets, acquisition integration and the full-year outlook.