Teledyne Technologies Incorporated — 2014 Form 10-K
Business context and reporting period. Teledyne supplies specialized instrumentation, digital imaging, aerospace and defense electronics, and engineered systems for industrial, commercial, government, and international markets. This filing covers the 52-week fiscal year ended December 28, 2014; comparisons are with fiscal 2013 unless stated otherwise. Amounts are in U.S. dollars.
Financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Sales | $2,394.0 million | $2,338.6 million |
| Operating income | $294.5 million | $240.3 million |
| Net income attributable to Teledyne | $217.7 million | $185.0 million |
| Diluted EPS | $5.75 | $4.87 |
| Cash provided by operating activities | $287.9 million | $203.3 million |
| Capital expenditures | $43.5 million | $72.6 million |
| Free cash flow | $244.4 million | $130.7 million |
| Cash and cash equivalents, year-end | $141.4 million | $66.0 million |
| Total debt | $694.7 million | $540.2 million |
| Working capital, year-end | $402.7 million | $381.0 million |
Sales rose 2.4%; operating income rose 22.6%; and net income attributable to Teledyne rose 17.7%. Calculated operating margin was approximately 12.3%, versus 10.3% in 2013; cost of sales was 62.1% of sales versus 64.1%. Net income attributable to Teledyne was approximately 9.1% of sales. The effective tax rate was 23.6%, up from 17.7%; both years included discrete tax benefits ($8.9 million in 2014 and $21.3 million in 2013). Excluding those benefits, management reported effective rates of 26.7% and 27.1%, respectively.
Operating cash flow increased partly because Teledyne made no domestic pension contribution in 2014, compared with a voluntary $83.0 million pretax contribution in 2013, and received $10.0 million related to a legal settlement. Adjusted free cash flow, which excludes pension contributions on an after-tax basis, was $244.4 million versus $182.1 million. Investing activities used $238.7 million, including $195.8 million for acquisitions and investments. Financing activities included $146.6 million of share repurchases and issuance of $125.0 million in senior notes.
At year-end, current assets were $941.7 million and current liabilities were $539.0 million. Debt covenants were met; net debt/EBITDA was 1.7x against a maximum of 3.25x, and interest coverage was 19.8x against a minimum of 3.0x. Available capacity under the $750 million revolving facility was $629.7 million before the subsequent February 2015 share repurchase borrowing and payment.
Segments and changes versus prior year
| Segment | 2014 sales | Change | 2014 operating profit |
|---|---|---|---|
| Instrumentation | $1,115.5 million | +9.1% | $181.6 million |
| Digital Imaging | $403.6 million | -2.7% | $37.1 million |
| Aerospace and Defense Electronics | $603.0 million | -3.5% | $88.3 million |
| Engineered Systems | $271.9 million | -1.4% | $31.4 million |
Instrumentation drove sales growth, with higher marine and environmental instrumentation sales and acquisition contributions. Recent acquisitions contributed $53.8 million of incremental sales. Segment operating profit increased 21.8% overall. All four segments reported higher operating profit despite lower sales in three; lower restructuring costs and pension income were important contributors. Digital Imaging benefited from improved commercial machine-vision mix and cost reductions. Aerospace and Defense Electronics sales fell partly because a foreign-government microwave program was completed.
Teledyne spent $195.8 million on 2014 acquisitions and investments, led by Bolt Technology ($171.0 million), expanding marine seismic equipment and underwater robotics. The company continued shifting its mix toward commercial and international markets: approximately 75% of 2014 sales were to commercial and international customers, while U.S. Government sales were 25%, down from 32% in 2012. International sales were 45% of total sales.
Outlook, commentary, risks, and unusual items
- Management described 2014 as a year of record sales and earnings. It expected approximately $60 million in 2015 capital expenditures and about $180 million in company-funded research and development and bid-and-proposal costs.
- For 2015, management expected higher Instrumentation marine sales from acquisitions and marine interconnects, partly offset by lower geophysical sensors for oil and gas exploration. The filing does not provide consolidated revenue or EPS guidance.
- Oil-price declines and reduced marine seismic activity pose risks to Instrumentation, with Bolt increasing offshore-energy exposure. Other key risks include U.S. Government funding and defense-budget uncertainty, fixed-price contract cost overruns, international and currency exposure, acquisition integration, single-source suppliers, cybersecurity, product liability, and environmental obligations.
- 2014 included $4.4 million of severance and facility-consolidation costs, compared with $24.0 million in 2013; a $6.5 million net gain on legal settlements; and pension income in place of 2013 pension expense. A lower 2015 domestic pension discount rate was expected to increase pension expense. Revised mortality assumptions increased pension obligations and future expense.
- Environmental remediation reserves were $9.7 million at year-end. Management did not expect known matters to materially impair financial condition or liquidity, but stated that resolution or revised estimates could materially affect results in a reporting period. Management also disclosed asbestos-related and other litigation; no pending matter was believed likely to materially affect financial condition.
- Goodwill was $1,150.6 million and acquired intangible assets were $277.6 million. No goodwill impairment was identified in 2014; a $0.7 million acquired-intangible impairment was recorded.
- Subsequent events included a new 2.5-million-share repurchase authorization, a $142.0 million accelerated share repurchase in February 2015 (partly funded with $120.0 million of revolver borrowings), and the $18.4 million acquisition of Bowtech Products.
Important facts for investors to verify
- How much of 2014 earnings growth reflects sustainable operations versus lower restructuring costs, pension-accounting changes, and the legal-settlement gain; also account for the smaller discrete tax benefit than in 2013.
- Whether lower oil prices and marine seismic spending will affect 2015 orders, backlog conversion, and the expected contribution from Bolt; the company expected to fulfill 99% of its $944.6 million year-end backlog during 2015.
- Post-year-end cash, debt, and share count after the February 2015 accelerated repurchase, and the final settlement of the 2014 ASR expected in June 2015.
- Integration and final purchase-price allocation for Bolt and Atlas, and the effect of acquisition-related goodwill and intangible assets on future results.
- Pension sensitivity to discount rates, asset returns, and updated mortality assumptions; the domestic plan had $957.4 million of assets against an $878.4 million obligation at year-end, while foreign plans were underfunded.
- Environmental and legal contingencies, tax exposures, and management’s assessment of acquired-company controls. Management and the auditor excluded 2014 acquisitions from internal-control testing; the auditor otherwise issued unqualified opinions on the financial statements and internal controls.