Teledyne Technologies Incorporated — Q3 2013 Form 10-Q
Business context and reporting period: The filing covers the quarter and nine months ended September 29, 2013, compared with the corresponding 2012 periods. Teledyne supplies instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. Results include acquisitions from their respective closing dates; segment comparisons were restated for a reporting-structure change.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $571.6 million | $547.4 million | $1,742.0 million | $1,559.9 million |
| Income before taxes | $47.2 million | $57.0 million | $160.0 million | $165.1 million |
| Net income attributable to Teledyne | $46.8 million | $42.7 million | $130.1 million | $117.9 million |
| Diluted EPS | $1.23 | $1.14 | $3.42 | $3.16 |
| Cost of sales as a share of sales | 64.5% | 63.8% | 64.2% | 65.4% |
| Effective tax rate | 0.6% | 24.5% | 18.8% | 28.4% |
Q3 sales grew 4.4% and attributable net income rose 9.6%; nine-month sales increased 11.7% and attributable net income rose 10.3%. Q3 pretax income fell despite higher sales, while the lower tax provision lifted reported net income. The 2013 tax rates include discrete tax benefits; excluding those benefits, rates were 25.2% for Q3 and 28.3% for the first nine months.
- Cash flow: Nine-month operating cash flow was $105.6 million, versus $67.6 million. Investing used $160.2 million, including $106.4 million for acquisitions and $54.0 million for capital expenditures. Financing provided $97.5 million, including $84.0 million of net debt proceeds. Cash increased $42.9 million to $88.7 million.
- Liquidity and debt: Working capital was $436.3 million. Current assets were $842.9 million and current liabilities $406.6 million. Debt excluding capital leases was $626.1 million; the balance sheet reported $643.1 million of current and long-term debt and capital leases combined. Available borrowing capacity under the $750 million facility was $574.8 million. The company was compliant with covenants; leverage was 1.9x against a 3.25x maximum and interest coverage was 16.0x against a 3.0x minimum.
- Pension and spending: Teledyne contributed $83.0 million to its domestic pension plan during the first nine months and planned no further domestic pension contributions for 2013. Capital expenditures were expected to total approximately $80 million for 2013.
Material changes and segment trends
Instrumentation drove consolidated growth, with acquisition contributions significant. Q3 revenue from recent acquisitions was $28.9 million; nine-month acquisition revenue was $148.9 million.
| Segment | Q3 sales change | Q3 operating profit change | Nine-month sales change | Nine-month operating profit change |
|---|---|---|---|---|
| Instrumentation | +24.4% | +25.5% | +33.1% | +19.9% |
| Digital Imaging | -2.7% | +51.3% | -0.4% | +26.8% |
| Aerospace and Defense Electronics | -5.7% | -58.1% | +4.9% | -20.3% |
| Engineered Systems | -18.0% | -67.5% | -10.6% | -32.4% |
Instrumentation benefited from marine instrumentation demand and acquisitions, including RESON and LeCroy. Digital Imaging profit improved despite slightly lower sales, reflecting product mix and margins. Aerospace and Defense Electronics faced weaker Q3 microwave and interconnect sales and restructuring/environmental charges. Engineered Systems was affected by lower engineered products and services sales, including manufacturing and missile-defense work.
Outlook, commentary, risks and unusual items
- Management expects the 2013 effective tax rate to be 28.3%, excluding discrete items, and total 2013 costs for facility consolidation, relocation, severance and related reserves of approximately $22.4 million. Actions were expected to be substantially complete by year-end; $18.7 million had been charged through September 29.
- The Q3 restructuring and environmental charges were $14.3 million; nine-month charges were $18.7 million, including $5.3 million of environmental reserves. Pension expense rose to $13.0 million for nine months from $5.0 million, principally reflecting a lower domestic plan discount rate.
- Acquisitions included CETAC, RESON and Axiom in 2013; CETAC purchase accounting remained preliminary. On October 22, 2013, a subsidiary acquired C.D. Limited for $22.5 million, a subsequent event.
- Environmental remediation reserves totaled $8.7 million; remediation may continue for up to 30 years. The company also disclosed a lawsuit seeking damages exceeding CAD $20 million, which it is defending. Management did not expect pending matters to materially harm financial condition, though a resolution in a given period could materially affect results.
- Key risks include government funding and defense-spending changes, demand in energy and other end markets, acquisition integration, foreign exchange movements, pension-asset volatility and variable-rate debt. Management stated that operating cash flow and facility availability should meet cash needs for the next 12 months.
Important facts for investors to verify
- How much reported growth reflects acquisitions versus organic demand, particularly in Instrumentation.
- Whether weaker Aerospace and Defense Electronics and Engineered Systems performance improves, and whether restructuring actions deliver expected savings.
- The durability of earnings after the discrete tax benefits; the reported Q3 tax rate is not representative of the stated underlying rate.
- Cash generation after pension contributions, acquisitions and capital expenditures, alongside debt levels and variable-rate exposure.
- Final CETAC purchase accounting, the remaining restructuring costs and environmental obligations, and developments in the disclosed litigation.