Teledyne Technologies Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended April 4, 2021; comparable period ended March 29, 2020. Teledyne supplies instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. The interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $805.7 million | $784.6 million | +2.7% |
| Operating income | $135.2 million | $104.0 million | +30.0% |
| Operating margin | 16.8% | 13.3% | +3.5 percentage points |
| Net income | $84.7 million | $82.2 million | +3.0% |
| Diluted EPS | $2.23 | $2.17 | +2.8% |
| Operating cash flow | $124.9 million | $76.4 million | +$48.5 million |
| Capital expenditures | $17.6 million | $20.2 million | -$2.6 million |
Cost of sales was 61.1% of sales, down from 62.8%; SG&A was $178.0 million, down $10.0 million, and 22.1% of sales versus 24.0%. Net income growth was much slower than operating income growth, principally because net interest and debt expense rose to $35.7 million from $4.1 million.
Segments
- Instrumentation: Sales $286.5 million (+0.5%); operating income $59.4 million (+16.9%). Environmental and test-and-measurement growth offset weaker marine sales.
- Digital Imaging: Sales $263.3 million (+6.7%); operating income $52.0 million (+18.7%), supported by higher sales and improved margins.
- Aerospace and Defense Electronics: Sales $151.2 million (-3.3%); operating income $28.3 million versus $13.4 million. Commercial aerospace remained weak; lower costs and restructuring expenses helped profitability.
- Engineered Systems: Sales $104.7 million (+8.5%); operating income $14.9 million (+30.7%), with higher sales and a better mix of fixed-price programs.
Cash, debt and liquidity
Cash and cash equivalents were $3,234.2 million at April 4, 2021, up from $673.1 million at January 3, 2021. Total debt was $3,243.3 million, versus $778.5 million at year-end; cash was therefore approximately $9 million below reported debt, before considering lease liabilities. Financing cash flow of $2,454.0 million included approximately $3.0 billion of proceeds from notes issued to fund the pending FLIR acquisition, partly offset by debt repayments. Investing cash use was $17.6 million.
Available borrowing capacity under the $750 million credit facility was $616.0 million; $125.0 million was drawn, and letters of credit totaled $26.5 million. The company reported compliance with its financial covenants. Management said cash, operating cash flow, and available borrowing capacity were expected to meet requirements, including funding the FLIR transaction. Planned 2021 capital expenditures were approximately $80 million.
Material changes, transaction and outlook
The principal unusual item was financing for the pending approximately $8.0 billion FLIR acquisition. Teledyne recorded $33.1 million of related interest and debt expense, including bridge-facility and debt-extinguishment charges, and $5.9 million of corporate transaction costs. Total pretax charges related to the transaction were $39.0 million. The $4.5 billion bridge facility was terminated after permanent financing was completed. Teledyne expected to use the notes, a $1.0 billion term loan expected to be drawn at closing, and cash on hand to fund the cash consideration and refinance certain debt. At the filing date, closing was expected May 14, 2021, subject to remaining regulatory and stockholder approvals and other conditions; specified antitrust clearances had been received. Management expected a weighted-average borrowing cost below 2% after closing.
The company expected a 2021 effective tax rate of 22.6% before discrete tax items and said it expected fewer discrete tax items than in 2020. Q1 effective tax rates were 16.4% in 2021 and 18.6% in 2020, including discrete benefits of $6.3 million and $4.2 million, respectively. Remaining performance obligations were $1,987.4 million, of which approximately 78% was expected to be recognized within 12 months. No broader full-year revenue or earnings guidance was provided in the supplied filing text.
Risks, contingencies and other notable items
- Management said COVID-19’s effects remained uncertain despite operating sites remaining open; potential impacts included production, supply, customer, and economic disruption.
- Continued commercial aerospace weakness affected Aerospace and Defense Electronics sales. Other cited risks included government spending and program awards, market demand, acquisition completion and integration, competition, foreign exchange, interest rates, and cybersecurity.
- Environmental remediation reserves were $6.4 million; remediation spending may extend over many years. Management did not believe pending litigation and claims were likely to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- Favorable changes in contract estimates contributed approximately $7.7 million to Q1 2021 operating income. Q1 also included $1.0 million of severance and facility-consolidation costs, compared with $10.4 million of specified costs in Q1 2020.
- Management reported effective disclosure controls and no material change in internal controls over financial reporting during the quarter.
Important facts for investors to verify
- Whether the FLIR transaction closed on the expected terms and timing, and the resulting acquisition accounting, share dilution, debt, and integration performance.
- Whether operating cash generation and liquidity remain adequate after acquisition funding, refinancing, and debt service.
- Whether margin gains persist, particularly in Aerospace and Defense Electronics, where improved earnings reflected lower costs despite declining sales.
- How COVID-19, commercial aerospace conditions, government program funding, and contract-estimate revisions affect future results.
- Whether the expected 22.6% pre-discrete tax rate and approximately $80 million of 2021 capital expenditures remain appropriate.