Teledyne Technologies Incorporated — Q2 2011 Form 10-Q
Business context and period. This unaudited filing covers the second quarter and six months ended July 3, 2011; comparisons are with the periods ended July 4, 2010, unless otherwise noted. Teledyne operates in Instrumentation, Digital Imaging, Aerospace and Defense Electronics, and Engineered Systems. The company acquired DALSA in February and sold its general aviation piston-engine businesses on April 19, 2011.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $502.9 million | $408.0 million | $971.0 million | $812.9 million |
| Continuing-operations income attributable to Teledyne | $38.7 million | $28.0 million | $71.2 million | $53.0 million |
| Diluted EPS from continuing operations | $1.04 | $0.76 | $1.91 | $1.44 |
| Net income attributable to Teledyne, including discontinued operations | $152.3 million | $28.6 million | $184.3 million | $53.6 million |
| Diluted EPS, including discontinued operations | $4.08 | $0.78 | $4.94 | $1.46 |
Q2 sales increased 23.3%; continuing-operations income rose 38.2%. For the first six months, sales rose 19.4% and continuing-operations income rose 34.3%. Q2 and six-month total earnings include after-tax sale gains of $113.8 million and $113.8 million, respectively, and should not be read as recurring operating performance.
- Margins: Q2 cost of sales was 65.7% of sales versus 70.4% a year earlier; six-month cost of sales was 66.3% versus 70.8%. SG&A was 22.0% of Q2 sales versus 18.8%, and 21.7% of six-month sales versus 18.9%. Income before other items and taxes equaled 12.3% of Q2 sales versus 10.7% in 2010.
- Cash flow: Six-month cash from continuing operations was $86.8 million versus $49.4 million; total operating cash flow was $83.9 million versus $50.1 million. Capital expenditures were $17.9 million. Investing used $194.0 million, including acquisitions, partly offset by $187.9 million net proceeds from the business sale. Financing provided $68.2 million, including $59.7 million net debt proceeds. Cash ended at $33.2 million, down from $75.1 million at fiscal year-end.
- Balance sheet and liquidity: July 3 current assets were $593.2 million and current liabilities $396.4 million; working capital was $196.8 million, down from $306.8 million at January 2. Long-term debt was $310.0 million, with $1.7 million current debt and $16.5 million in capital leases and other debt. The $550 million revolving facility had $478.3 million available; the company reported covenant compliance and substantial headroom.
- Segment results: Q2 sales and operating profit were Instrumentation $152.7 million and $30.4 million; Digital Imaging $96.2 million and $7.6 million; Aerospace and Defense Electronics $169.6 million and $24.4 million; Engineered Systems $84.4 million and $8.6 million. Digital Imaging growth primarily reflects DALSA and other acquisitions. Engineered Systems six-month sales fell 5.3%, while operating profit increased 7.8%.
Material changes, outlook and risks
- DALSA was acquired for $339.5 million cash; its results are included from the acquisition date. Acquisitions added $77.7 million of Q2 revenue and $125.3 million for the first six months. Purchase accounting, including certain liabilities and goodwill, remained preliminary.
- The piston-engine sale generated $187.9 million net cash proceeds and a $113.8 million after-tax gain. Teledyne expected to pay $51.3 million of related income taxes before year-end 2011 and paid a further $3.8 million working-capital adjustment in Q3.
- Interest expense increased to $4.3 million in Q2 and $8.7 million for six months, mainly due to higher debt and borrowing costs. The February refinancing established a $550 million facility maturing in 2016; $60 million was drawn at July 3. A 100-basis-point rate increase was estimated to add about $0.6 million in annual interest expense at that borrowing level.
- Management expected operating cash flow and available credit to meet requirements over the next 12 months; it anticipated 2011 capital expenditures of $50–55 million and no further 2011 pension contributions. A $69.0 million voluntary pension contribution was made in the first half.
- Management cited demand, government-program funding and awards, acquisition integration, global economic conditions, oil and gas prices, pension-asset returns, foreign exchange, and Japan-related demand as risks. Forward guidance for revenue or earnings was not provided.
- Environmental remediation reserves were $5.9 million, with remediation at identified sites potentially extending up to 30 years. A lawsuit involving acquired DALSA entities seeks damages exceeding CAD $20 million; management said it was being defended. Management did not expect pending matters overall to materially harm financial condition, though a period’s results could be affected.
- The company reported effective disclosure controls and no material change in internal controls during the quarter. It also noted that acquisitions and the divestiture changed its risk profile.
Investor verification points
- Separate recurring continuing-operations earnings from the one-time $113.8 million after-tax disposal gain.
- Assess DALSA’s organic growth, contribution to margins, integration progress, and final purchase-price allocation.
- Monitor cash conversion, working capital, the planned sale-related tax payment, and whether acquisition spending is sustained.
- Review debt levels, variable-rate exposure, facility availability, and covenant headroom as borrowing needs change.
- Track Engineered Systems demand, particularly space and defense programs, and the reported weakness in marine geophysical instrumentation.
- Follow pension funding and actuarial assumptions, environmental obligations, and the DALSA-related litigation.