Business context and reporting period
Teledyne Technologies Incorporated filed this unaudited Form 10-Q for the three months ended March 31, 2013, comparing results with the three months ended April 1, 2012. The company supplies instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. It acquired marine-instrumentation supplier RESON A/S on March 1, 2013, for $69.7 million net of cash acquired.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $569.4 million | $494.0 million | +15.3% |
| Income before income taxes | $53.0 million | $51.1 million | +3.7% |
| Net income attributable to Teledyne | $40.4 million | $35.7 million | +13.2% |
| Diluted EPS | $1.07 | $0.96 | +11.5% |
| Operating cash flow | $(56.7) million | $(19.7) million | More cash used |
| Capital expenditures | $16.3 million | $10.6 million | — |
Cost of sales was 64.2% of sales, down from 66.4%; SG&A was 25.5% of sales, up from 22.3%. The filing attributes the lower cost-of-sales ratio partly to the LeCroy acquisition, while LeCroy’s higher SG&A ratio, increased R&D, and acquisition costs raised SG&A. Income before other expense and taxes was $58.9 million, or approximately 10.3% of sales, versus $55.5 million, or 11.2%.
The effective tax rate was 24.9% versus 30.3%, reflecting $2.7 million of discrete tax benefits, primarily related to the American Taxpayer Relief Act; excluding discrete items, the rates were 30.0% and 32.5%. Comprehensive income attributable to Teledyne fell to $21.9 million from $49.1 million, primarily reflecting a foreign-currency translation loss.
Cash and equivalents were $49.0 million at March 31, 2013, compared with $45.8 million at December 30, 2012. Working capital was $397.2 million, up from $337.5 million. Operating cash use included an $83.0 million voluntary domestic pension contribution, versus $50.0 million a year earlier; management said no further domestic-plan contribution was planned for 2013. Investing cash use was $86.0 million, including the RESON acquisition. Financing provided $145.9 million, including $140.1 million in net debt proceeds.
Long-term debt was $683.2 million, and capital leases totaled $13.2 million; cash was $49.0 million. The company had $516.5 million of available capacity under its $750 million revolving facility and was in compliance with its covenants. Reported covenant ratios were 2.0x net debt/EBITDA against a 3.25x maximum, and 15.1x EBITDA/interest against a 3.0x minimum.
Material changes and segment performance
Sales growth included $65.0 million of incremental revenue from recent acquisitions, as well as higher organic sales. Total segment operating profit rose 5.2% to $68.4 million, slower than sales growth. Interest and debt expense increased to $5.4 million from $4.0 million, primarily due to higher debt. Pension expense increased to $4.3 million from $1.7 million, primarily reflecting a lower domestic-plan discount rate.
| Segment | Sales, Q1 2013 | Sales change | Operating profit, Q1 2013 | Operating profit change |
|---|---|---|---|---|
| Instrumentation | $221.2 million | +37.7% | $35.0 million | +10.8% |
| Digital Imaging | $102.4 million | +8.7% | $5.2 million | +20.9% |
| Aerospace and Defense Electronics | $174.6 million | +5.9% | $21.8 million | −4.8% |
| Engineered Systems | $71.2 million | −4.3% | $6.4 million | +3.2% |
Instrumentation growth benefited from LeCroy and RESON, plus stronger marine-instrumentation sales; Environmental Instrumentation sales declined. Aerospace and Defense Electronics profit was affected by $1.7 million in severance and relocation costs, and the company expected additional such costs in Q2 and full-year 2013. Engineered Systems sales declined, mainly due to lower energy-systems and turbine-engine sales.
Outlook, risks, contingencies and unusual items
- Management expected 2013 capital expenditures of approximately $90 million and a 30.0% effective tax rate, excluding discrete items. It said operating cash flow and available credit were expected to meet requirements over the next 12 months; additional capital might be needed to support acquisitions.
- The amended revolving credit facility increased borrowing capacity from $550 million to $750 million and extended maturity to March 1, 2018. Borrowings under the facility and term loans carry variable rates. A 100-basis-point rate increase was estimated to add about $4.2 million in annual interest expense on the $419.4 million outstanding under those arrangements.
- Management cited risks from economic conditions, demand in defense, energy, aviation and other end markets, government program funding and defense-spending reductions, oil and gas prices and regulation, pension-asset market fluctuations, foreign exchange, and acquisition integration.
- Environmental remediation reserves were $3.2 million; remediation may continue for up to 30 years. A defended Ontario lawsuit seeks damages exceeding CAD $20 million. Management did not believe pending matters were likely to materially affect financial condition, but resolution of one or more matters could materially affect a particular period’s results.
- Other notable items included $0.4 million of acquisition-related transaction costs, $0.9 million of additional acquired-intangible amortization, and $1.7 million of severance and relocation costs. Favorable and unfavorable contract-estimate changes under percentage-of-completion accounting were $5.1 million and $6.2 million, respectively.
Most important facts for investors to verify
- How much of reported growth and future performance reflects acquisitions versus organic demand, particularly in Instrumentation.
- Whether segment profitability improves as acquisition-related costs and Aerospace and Defense Electronics severance and relocation costs evolve.
- The sustainability of cash generation after the unusually large pension contribution, and the company’s planned capital spending and acquisition funding.
- Exposure to variable interest rates, debt covenant headroom, and the effect of further borrowing on leverage and interest expense.
- Potential outcomes and timing of the Ontario litigation and environmental remediation, plus the impact of foreign exchange and pension assumptions.