Teledyne Technologies Incorporated — Q1 2012 Form 10-Q
Business context and period: Unaudited results for the three months ended April 1, 2012, compared with the three months ended April 3, 2011. Teledyne operates in Instrumentation, Digital Imaging, Aerospace and Defense Electronics, and Engineered Systems.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $494.0 million | $468.1 million | +5.5% |
| Income from continuing operations attributable to Teledyne | $35.7 million | $32.5 million | +9.8% |
| Net income attributable to Teledyne | $35.7 million | $32.0 million | +11.6% |
| Diluted EPS | $0.96 | $0.86 | Up $0.10 |
| Cash from operating activities | $(19.7) million | $3.6 million | Down $23.3 million |
| Cash and cash equivalents at period end | $84.9 million | $29.9 million | Up $55.0 million |
Gross profit was $165.9 million, or 33.6% of sales, versus $155.0 million, or 33.1%. Income before other expense, interest and taxes was $55.5 million (11.2% of sales), versus $54.7 million (11.7%). The effective tax rate was 30.3%, compared with 35.0%; management attributed the reduction mainly to the domestic/international income mix and quarterly adjustments. Excluding tax credits and other adjustments, the 2012 rate was 32.5%.
Segment results: Digital Imaging sales rose 42.3% to $94.2 million, while operating profit increased 10.3% to $4.3 million. Instrumentation sales increased 1.7% to $160.6 million, but operating profit declined 1.3% to $31.6 million. Aerospace and Defense Electronics sales fell 1.3% to $164.8 million, while operating profit rose 6.0% to $22.9 million. Engineered Systems sales fell 3.5% to $74.4 million and operating profit fell 6.1% to $6.2 million.
Liquidity and debt: Working capital was $332.1 million at April 1, 2012, versus $268.5 million at January 1, 2012. Current assets were $674.3 million and current liabilities $342.2 million. Long-term debt was $386.6 million, including $136.6 million drawn on the revolving credit facility; capital leases totaled $14.8 million, of which $1.4 million was current. The $550 million facility had $399.5 million of available capacity, net of borrowings and letters of credit. The company was compliant with its debt covenants; reported leverage and interest-coverage ratios were 1.0x and 26.6x, respectively.
Material changes and notable items
- Sales growth included $32.3 million of incremental revenue from recent acquisitions. Digital Imaging benefited principally from DALSA and Nova; Aerospace and Defense Electronics included $5.1 million of VariSystems sales.
- Teledyne acquired VariSystems on February 25, 2012, for $34.9 million net of acquired cash and expected a further $1.4 million purchase-price adjustment. Preliminary purchase accounting included $14.2 million of goodwill and $11.9 million of acquired intangible assets.
- On April 2, 2012, after quarter-end, Teledyne acquired a 51% interest in Optech’s parent for $32.7 million, increasing its stake from 19%. Optech will be included in Digital Imaging.
- Operating cash flow was negative, primarily reflecting a $50.0 million voluntary pension contribution and higher accrued-liability payments. Investing cash outflow was $45.5 million, including the VariSystems acquisition; financing provided $100.7 million, including $88.1 million of net debt proceeds.
- The company made a $50.0 million voluntary pension contribution in Q1 and expected an additional $42.8 million contribution in Q3 2012. It expected 2012 capital expenditures of approximately $65.0 million; $10.6 million had been spent through Q1.
- Q1 2011 included a $0.5 million after-tax loss from discontinued operations following the 2011 sale of the piston-engine businesses; Q1 2012 reported no discontinued-operation loss.
Outlook, risks and contingencies
Management stated that operating cash flow and available credit were expected to be sufficient for anticipated requirements over the next 12 months, while noting that additional capital might be needed to support acquisitions. The company emphasized core-market growth, targeted acquisitions, operational excellence, and integration of acquired businesses. No specific earnings or revenue guidance was provided.
Risks highlighted include changes in global demand, government program funding and potential defense-spending cuts, energy-market conditions and regulation, commercial aviation fuel costs, pension-asset market fluctuations, foreign-exchange movements, and acquisition integration and international operating risks. A 100-basis-point increase in interest rates was estimated to increase annual interest expense by about $1.4 million, assuming the current $136.6 million facility borrowing remained outstanding for a full year. The filing also estimated that a hypothetical 10% U.S. dollar move would change the fair value of cash-flow hedge contracts by $7.4 million in either direction.
Environmental remediation reserves were $3.4 million; remediation at identified sites may extend up to 30 years. A lawsuit against DALSA-related entities seeks damages exceeding CAD $20 million and is being defended. Management did not expect pending matters to materially affect financial condition, but noted that resolution of one or more matters could materially affect results in a reporting period. Disclosure controls were judged effective, with no material change in internal controls or identified material weakness reported.
Investor verification points
- Confirm the sustainability of earnings growth, particularly Digital Imaging’s sales increase and the higher research-and-development and bid-and-proposal spending that constrained its profit growth.
- Track operating cash conversion, working-capital movements, and the effect of the planned pension contribution and capital spending.
- Verify post-quarter Optech acquisition accounting, funding, and subsequent segment contribution, along with final purchase-price allocation for VariSystems.
- Monitor debt levels, variable-rate exposure, covenant headroom, and capacity for further acquisitions.
- Follow the CAD $20 million-plus DALSA-related claim, environmental remediation obligations, and the stated market and government-funding risks.