Teledyne Technologies Incorporated — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended July 1, 2012; comparisons are with the periods ended July 3, 2011. Amounts are in U.S. dollars and millions unless otherwise stated. Teledyne supplies instrumentation, digital imaging products, aerospace and defense electronics, and engineered systems.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $518.5 | $502.9 | $1,012.5 | $971.0 |
| Income from continuing operations attributable to Teledyne | $39.5 | $38.7 | $75.2 | $71.2 |
| Diluted continuing-operations EPS | $1.06 | $1.04 | $2.02 | $1.91 |
| Segment operating profit | $67.4 | $71.0 | $132.4 | $135.1 |
| Operating cash flow | Not presented by quarter | $49.3 | $86.8 |
- Sales increased 3.1% in Q2 and 4.3% for the first six months. Acquisitions contributed $23.8 million and $56.7 million of revenue, respectively.
- Continuing-operations net income rose 2.1% in Q2 and 5.6% for the six months. Reported total net income fell sharply year over year because 2011 included a $113.8 million after-tax gain on the sale of the piston-engine businesses.
- Q2 cost of sales was 66.2% of sales versus 65.7% a year earlier (gross margin 33.8% versus 34.3%). For the six months, cost of sales was 66.3% in both periods. Segment operating profit declined 5.1% in Q2 and 2.0% for the six months.
- The effective tax rate was 30.5% for Q2 and 30.4% for the six months, down from 34.4% and 34.7%, respectively; management attributed the decrease mainly to the mix of domestic and international income and refinement of uncertain tax positions.
Segments and material period comparisons
- Instrumentation: Q2 sales increased 6.4% to $162.4 million, but operating profit declined 7.9% to $28.0 million. Lower environmental-instrument margins and product-development and acquisition costs weighed on results.
- Digital Imaging: Q2 sales increased 15.3% to $110.9 million, including $14.4 million from Optech; operating profit was $7.5 million, slightly lower year over year. Six-month sales rose 26.3%, primarily reflecting DALSA and Optech.
- Aerospace and Defense Electronics: Q2 sales were nearly flat at $168.8 million, while operating profit edged up to $24.5 million. VariSystems contributed sales and higher-margin products.
- Engineered Systems: Q2 sales fell 9.5% to $76.4 million and operating profit fell 14.0% to $7.4 million, reflecting lower nuclear, cruise-missile-engine, and other program sales and weaker margins in some product lines.
Cash, debt, and liquidity
- Six-month operating cash flow from continuing operations was $49.3 million, versus $86.8 million. Management cited collection timing and higher income-tax payments, partly offset by lower pension contributions. Cash decreased $23.3 million to $26.1 million.
- Investing activities used $90.8 million, including $64.2 million for business acquisitions and $27.7 million of capital expenditures. Financing activities provided $18.2 million.
- At July 1, cash was $26.1 million; working capital was $283.0 million. Current assets were $648.1 million and current liabilities $365.1 million.
- Long-term debt and capital leases were reported at $330.4 million, with $1.8 million current. The debt discussion separately lists $317.8 million of debt plus $14.4 million of capital leases. Available capacity under the $550 million credit facility was $469.4 million, after borrowings and letters of credit; Teledyne was in compliance with covenants. Net-debt/EBITDA was 1.2x against a maximum 3.25x; interest coverage was 18.1x against a minimum 3.0x.
- Borrowings under the credit facility are variable-rate. The company estimated that a 100-basis-point rate increase would add about $0.5 million to annual interest expense, assuming $52.6 million remained outstanding for a full year.
Outlook, acquisitions, risks, and contingencies
- Management expected operating cash flow and available credit to cover requirements over the next 12 months, while noting additional capital might be needed to support acquisitions. Expected 2012 capital expenditures were approximately $70 million; $27.7 million had been spent in the first half.
- Teledyne expected an additional $42.8 million voluntary pension contribution in Q3 2012, following a $50.0 million contribution in the first half. It estimated 2012 stock-option compensation expense of approximately $8.7 million, subject to assumptions and actual grants.
- After quarter-end, Teledyne acquired BlueView on July 2 for $16.4 million, and acquired LeCroy and PDM Neptec on August 3. LeCroy’s transaction value was approximately $301 million, funded primarily with credit-facility borrowings. The filing cited increased debt and a greater share of international and commercial-customer revenue as related risk considerations.
- Key risks cited include economic disruption; demand and government-program funding changes, including possible defense cuts; energy-market conditions and regulation; commercial aviation fuel costs; pension-asset market fluctuations; foreign-exchange exposure; and acquisition integration and execution. The company hedged some currency exposures but stated hedging may not fully protect it.
- Environmental remediation reserves were $3.4 million, expected to be spent over many years. A pending Ontario lawsuit involving DALSA seeks damages exceeding CAD $20 million; management said it was being vigorously defended. Management did not expect pending matters to materially affect financial condition, but an individual period’s results could be affected.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting. The filing says interim results are not necessarily indicative of full-year results; it provides no specific earnings or revenue guidance.
Important facts for investors to verify
- How much of sales growth and future earnings depends on acquisitions, and whether acquired businesses deliver expected integration benefits.
- Whether cash conversion improves given lower first-half operating cash flow, working-capital movements, and planned pension contributions.
- How segment margins develop, particularly in Instrumentation and Engineered Systems, and whether acquisition and product-development costs persist.
- The financing and leverage effects of the LeCroy, PDM Neptec, and BlueView acquisitions, including variable-rate exposure and covenant headroom.
- Updates on the DALSA litigation, environmental remediation obligations, tax audits, and other contingencies.