Teledyne Technologies Incorporated — FY 2016 Form 10-K
Reporting period: Fiscal year ended January 1, 2017 (52 weeks), compared primarily with fiscal 2015 (53 weeks, ended January 3, 2016). This is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars.
Business context and results
Teledyne supplies advanced instrumentation, digital imaging, aerospace and defense electronics, and engineered systems to commercial, international and government markets. Commercial and international customers represented about 73% of 2016 sales; U.S. Government sales represented about 27%.
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Sales | $2,149.9 million | $2,298.1 million |
| Operating income | $253.8 million | $281.7 million |
| Operating margin | 11.8% | 12.3% |
| Net income attributable to Teledyne | $190.9 million | $195.8 million |
| Diluted EPS | $5.37 | $5.44 |
| Cash provided by operations | $317.0 million | $210.2 million |
| Capital expenditures | $87.6 million | $47.0 million |
| Free cash flow* | $229.4 million | $163.2 million |
| Cash at year-end | $98.6 million | $85.1 million |
| Total debt reported | $611.7 million | $765.5 million |
Cost of sales was 61.3% of sales, implying a 38.7% gross margin, versus 62.1% and 37.9% in 2015. Net margin was approximately 8.9%, compared with 8.5%. *Company-defined free cash flow equals operating cash flow less capital expenditures; adjusted free cash flow was $248.9 million in 2016, including use of restricted cash for a facility purchase.
Year-end current assets were $846.2 million and current liabilities were $501.8 million (current ratio approximately 1.69). The company had $735.5 million of available capacity under its $750 million revolving credit facility, subject to $410 million being committed to the proposed e2v acquisition. It reported compliance with debt covenants. The $100 million of term-loan principal expected to be repaid in 2017 contributed to higher current debt.
Material changes versus the prior year
- Sales declined 6.4%; net income attributable to Teledyne declined 2.5%, and diluted EPS fell from $5.44 to $5.37. The comparison is affected by 2015 having one additional fiscal week.
- Instrumentation sales fell 16.6% and operating income fell 35.8%, largely because of weaker marine instrumentation demand tied to depressed energy markets. Marine instrumentation sales decreased $195.3 million.
- Digital Imaging sales rose 5.2% and operating income rose 14.8%, supported by life-sciences and industrial X-ray, MEMS and geospatial software.
- Aerospace and Defense Electronics sales increased 3.8%; operating income rose 32.2%, reflecting stronger avionics and relay sales, improved margins and pension effects. Engineered Systems sales declined 5.8%, while operating income increased 23.0%, principally on improved margins and pension income.
- Operating cash flow increased by $106.8 million, including lower income-tax payments, lower bonus and payroll payments, and higher customer advances. Capital spending increased, notably in Instrumentation.
Outlook, transactions and notable items
- Management expected to spend approximately $60 million on capital expenditures in 2017 and forecast company-funded R&D and bid-and-proposal costs of approximately $180.5 million, versus $167.7 million in 2016. Backlog was $916.4 million at year-end; Teledyne expected to fulfill 91% during 2017. No specific earnings or revenue guidance was provided.
- The proposed cash acquisition of e2v was valued at approximately £619.6 million for its shares and about £627.1 million enterprise value. Shareholder approval had been obtained, but German and French regulatory clearances remained outstanding as of the filing; completion was expected in the first half of 2017. Teledyne anticipated financing with cash, credit facilities, senior notes and term loans, and warned that debt would rise substantially.
- Teledyne completed five acquisitions in 2016 for $93.4 million in aggregate acquisitions and investments, including CARIS, Frontline, Quantum Data, IN USA and Hanson Research. It also sold the Printed Circuit Technology business for $9.3 million, with no gain or loss.
- Unusual items included a $17.9 million pretax gain on the sale of a former California facility, $7.9 million of pretax costs related to the proposed e2v transaction, and a $5.5 million expense on an e2v-related currency option. Reported 2016 net discrete tax benefits were $10.9 million; the effective tax rate was 20.9% (27.4% excluding specified discrete benefits and the facility-sale gain and related tax).
- Management cited continued energy-market weakness, government-budget and award uncertainty, fixed-price contract cost risk, international and foreign-exchange exposure (including Brexit), acquisition execution and integration, cybersecurity, supply-chain concentration, environmental obligations, and pension assumptions as important risks. Environmental remediation reserves were $7.0 million; management did not expect excess costs to materially affect financial condition or liquidity, though future adjustments could affect period results.
- The company did not anticipate cash dividends in the foreseeable future. No share repurchases were made in 2016. The independent auditor issued an unqualified opinion; management and the auditor reported effective internal control, while controls at the five 2016 acquisitions were excluded from the year-end assessment.
Important facts for investors to verify
- Whether e2v closed on schedule, final financing terms, post-acquisition leverage and integration results.
- Whether marine and energy-related instrumentation demand stabilized, and whether segment margins recovered.
- How 2017 operating cash flow, capital expenditures and debt repayment compared with management’s stated expectations.
- Backlog conversion, government funding and contract performance, including fixed-price contract estimates and unfavorable estimate changes.
- Acquisition accounting and integration controls, particularly for the 2016 acquisitions excluded from the internal-control assessment.
- Potential effects of foreign exchange, pension assumptions, environmental remediation and other disclosed contingencies.