Teledyne Technologies — Q1 2017 Form 10-Q
Business context and reporting period. Teledyne provides instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. The filing covers the three months ended April 2, 2017, compared with the three months ended April 3, 2016. Amounts are in millions except per-share data.
Financial results and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $566.1 | $530.5 | +6.7% |
| Operating income | $58.1 | $60.9 | -4.6% |
| Net income | $30.5 | $39.0 | -21.8% |
| Diluted EPS | $0.84 | $1.11 | Down $0.27 |
| Operating margin | 10.3% | 11.5% | Down 1.2 percentage points |
| Cost of sales as % of sales | 62.6% | 61.2% | Up 1.4 percentage points |
| Cash from operating activities | $53.4 | $69.1 | Down $15.7 |
Revenue rose across all segments except Aerospace and Defense Electronics. Recent acquisitions contributed $19.2 of incremental sales. Digital Imaging had the strongest segment growth and operating-income increase; Instrumentation sales grew but operating income declined. The Aerospace and Defense Electronics segment’s sales were slightly lower, partly reflecting the prior divestiture of Printed Circuit Technology.
Cash at April 2, 2017 was $69.7, down from $98.6 at January 1. Current assets were $985.1 and current liabilities were $599.6. Net cash used in investing was $752.9, including $740.6 for the e2v acquisition; capital expenditures were $12.6. Financing provided $668.9, primarily from borrowings used to fund the acquisition.
Total debt was $1,305.0, plus $9.5 of capital leases. The company had $595.0 outstanding under its $750.0 credit facility and reported $140.0 of available borrowing capacity after applicable reductions. It was in compliance with debt covenants; actual leverage was 3.0x versus a maximum 3.25x, and interest coverage was 10.1x versus a minimum 3.0x. Total assets rose to $3,673.0 from $2,774.4, with goodwill increasing to $1,671.0, primarily due to e2v.
Material changes, unusual items, and outlook
Teledyne completed its acquisition of e2v technologies on March 28, 2017, for $770.7, including stock options and assumed debt, net of cash acquired. e2v’s post-acquisition results contributed $7.5 in sales and an operating loss of $1.2. The quarter included $21.2 of pretax acquisition-related charges, including transaction expenses, bridge-facility fees, foreign-currency option expense, and inventory fair-value step-up amortization. Management said lower operating income and net income also reflected higher interest and other expense. The acquisition’s purchase-price allocation remained preliminary.
Management expected operating cash flow and available credit to meet requirements over the next 12 months, and forecast 2017 capital expenditures of up to $80.0. The expected full-year 2017 effective tax rate was 28.3%, excluding discrete items. No domestic pension contributions were planned for 2017. The filing gives no specific earnings or revenue forecast.
Management expects to adopt the new revenue-recognition standard in Q1 2018. It anticipated that the change would affect certain percentage-of-completion contracts, generally accelerating revenue recognition as costs are incurred, and would change related balance-sheet presentation. The company was still evaluating the full impact and transition method.
Key risks cited include successful integration of e2v, changes in defense and government-program funding, demand fluctuations in energy, aviation and other end markets, foreign-exchange and interest-rate movements, Brexit-related impacts, cybersecurity threats, and environmental obligations. Environmental remediation reserves were $6.2; remediation at identified sites could extend for up to 30 years. Management did not expect pending litigation to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
Most important facts for investors to verify
- Whether e2v’s integration, preliminary purchase accounting, and expected contribution support the acquisition price and future performance.
- How much of sales growth and segment performance is organic versus acquisition-related, and whether margins recover after acquisition charges and higher cost of sales.
- Debt repayment plans and liquidity after the acquisition, including the effect of the April 18, 2017 euro-denominated note placement announced after quarter-end.
- The final impact and transition method for the revenue-recognition standard, and whether management’s cash-flow and capital-spending expectations are met.
- Exposure to government-program funding, energy-market weakness, foreign exchange, interest rates, environmental remediation, and other disclosed risks.