Teledyne Technologies Incorporated — Q2 2016 Form 10-Q
Business context and reporting period. The quarter ended July 3, 2016; comparisons are with the quarter ended June 28, 2015. Teledyne operates in instrumentation, digital imaging, aerospace and defense electronics, and engineered systems. The filing also reports six-month results.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $534.9 million | $573.6 million | $1,060.1 million | $1,135.1 million |
| Operating income | $54.3 million | $69.1 million | $115.4 million | $136.7 million |
| Net income from continuing operations | $46.1 million | $48.1 million | $84.6 million | $92.0 million |
| Net income attributable to Teledyne | $45.7 million | $48.3 million | $84.1 million | $92.0 million |
| Diluted EPS attributable to Teledyne | $1.31 | $1.34 | $2.41 | $2.53 |
| Operating margin | 10.2% | 12.0% | 10.9% | 12.0% |
- Q2 sales fell 6.7% and operating income declined 21.4%; six-month sales fell 6.6% and operating income fell 15.6%. Q2 continuing-operations diluted EPS was $1.32 versus $1.34; six-month continuing-operations diluted EPS was $2.42 versus $2.54.
- Q2 cost of sales was 62.0% of sales, versus 61.7%; SG&A was 27.8% of sales, versus 26.3%. Six-month cost of sales was 61.5%, versus 61.4%; SG&A was 27.6%, versus 26.6%.
- Segment trends in Q2: Instrumentation sales fell 18.9% and operating income fell 56.0%; Digital Imaging sales rose 9.5% and operating income rose 21.6%; Aerospace and Defense Electronics sales rose 7.2% and operating income rose 38.0%; Engineered Systems sales fell 9.3% while operating income rose 16.7%.
- Operating cash flow was $152.7 million for the first six months, including $152.2 million from continuing operations, versus $75.7 million and $74.1 million, respectively, in 2015. Investing activities used $88.6 million; financing activities used $77.9 million. Cash declined $13.4 million to $71.7 million; restricted cash was $19.5 million.
- At July 3, cash was $71.7 million and total current assets and liabilities were $830.5 million and $402.3 million. Debt and capital leases were $693.0 million, including $678.2 million long-term and current obligations. Available borrowing capacity under the credit facility was $636.6 million; the company reported covenant compliance and substantial covenant headroom.
Material changes and unusual items
- Instrumentation was the main source of weakness, particularly marine instrumentation, reflecting weak energy exploration and production markets. Marine instrumentation sales declined $58.0 million in Q2 and $104.6 million for the six-month period. Management also cited lower Engineered Systems sales. Growth in Digital Imaging and Aerospace and Defense Electronics partly offset declines.
- Q2 included $10.8 million of pretax severance, facility consolidation/relocation, and asset impairment charges; $11.3 million was recorded year to date. Management said most actions were completed but additional severance and consolidation expenses were expected during the rest of 2016.
- A $17.9 million pretax gain on the sale of a former California facility was included in Q2 and six-month other income. The $19.5 million proceeds were placed in escrow as restricted cash under a like-kind exchange arrangement. Q2 2015 other income included a $3.0 million legal settlement gain.
- Q2 and six-month effective tax rates were 29.7% and 29.3%. Both periods included $6.9 million of net discrete tax expense, including $6.7 million related to the facility-sale gain. Excluding specified discrete items and that gain and related tax, management reported adjusted effective rates of 26.4% for Q2 and 27.7% for the six months.
- Teledyne acquired CARIS, Quantum Data, and Frontline during the quarter for initial payments totaling approximately $58.3 million. The acquisitions contributed $8.4 million of Q2 sales and $9.3 million of six-month sales; purchase-price allocations remained preliminary.
- The Printed Circuit Technology business was classified as discontinued operations in Q2 and sold in Q3 2016 for $9.3 million cash. It reported Q2 sales of $4.8 million and a $0.4 million after-tax loss. A transition-services arrangement was expected to continue through year-end.
Outlook, risks and contingencies
- Management expected a 27.6% effective tax rate for fiscal 2016, excluding discrete items, and capital expenditures of up to $60 million; $30.5 million had been spent in the first half. It planned no domestic pension contributions for 2016.
- Management said operating cash flow and credit-facility availability were expected to meet requirements over the next 12 months. The filing provides no specific revenue or earnings guidance.
- Risks highlighted include demand exposure to energy, defense, commercial aviation, semiconductor and communications markets; government funding and program changes; foreign-exchange and interest-rate movements; acquisition integration; cybersecurity; and global economic conditions. A 100-basis-point rate increase was estimated to raise annual interest expense by about $2.6 million on the specified $260.6 million of variable-rate debt.
- Environmental remediation reserves were $7.9 million; remediation at identified sites could extend up to 30 years. Management did not expect pending lawsuits and claims, including product liability, patent, contract, environmental, employment and benefits matters, to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Whether weakness in marine instrumentation and energy-related demand persists, and whether segment margins recover after restructuring charges.
- The recurring earnings impact of the $17.9 million facility-sale gain, discrete tax items, and restructuring costs.
- Integration progress and final purchase-price allocations for the three acquisitions, along with expected returns on the acquired businesses.
- Cash conversion, planned capital expenditures, debt reduction, and any future share repurchases; the new authorization covered up to 3 million shares, with no repurchases under it in the first half.
- The status of the Printed Circuit Technology disposition and transition-services arrangement, and any developments in environmental or other contingencies.